This year has been a banner year for Utah when it comes to innovation. In March, the federal government designated Salt Lake City as a hub for 5G implementation, just after the Legislature created a new regulatory approach for financial technologies. And in August, the courts announced a pilot program to explore innovative changes to legal services.
These changes to our current regulatory approach, often called “regulatory sandboxes,” were created with the intention of helping improve the quality of life for Utahns in a variety of ways. Enabling companies to more easily enter the market without heavy compliance costs means that their new products and services can be made available to Utahns at a lower cost, and more quickly.
What are regulatory sandboxes? They are unique legal classifications that create space for regulators to temporarily freeze regulations and criminal penalties for a defined time period. This allows private companies to develop or introduce an innovative product or service where current standards poorly apply or haven’t yet been created.
While regulation is typically justified as a means of consumer protection, it can often become a very costly and time consuming process for businesses without a real reward of protection in exchange. Federal regulations, for example, cause small business owners to spend more than $12,000 and more than 40 hours per year just to maintain compliance. Many businesses find themselves spending just as much time dealing with state and local regulations. A startup company can find itself spending as much as $83,009 just to become compliant in its first year of operation. Those costs get passed onto consumers in the form of higher prices.
Further, some companies are prohibited from operating at all. New business models that don’t fit into antiquated regulatory structures are told to cease and desist, depriving consumers of new approaches to improve their lives. This anti-innovation approach needs to be flipped on its head.
For example, in the early days, many fintech companies were getting slapped with regulations associated with the typical banking industry. Trying to fit a square peg in a round hole didn’t actually solve the issue at hand, exacerbating the problem with this top-down regulatory approach. It attempts to place a one-size-fits-all model on a product it does not understand.
A sandbox provides an opportunity to change the narrative by adopting regulations that are more emergent and flexible in nature, working with these innovative companies to craft guidance for their enterprises from the ground up. Because the company is experimenting in a semi-controlled environment, this enables the regulator to satisfy its responsibilities of protecting Utahns from harm.
As 2019 closes and Utah kicks off a new decade, policymakers should look to position the state as a leader in regulatory sandboxes. So far, the state is pursuing two industry-specific sandboxes, but part of the issue lies in the known unknowns. Legislators and regulators do not know where innovation will come next.
In order to account for the unknown, the state should soon support a broad, industry-agnostic sandbox — welcoming innovation come where it may. Figuring out where we can reform our regulatory climate does not have to be an exercise in guessing and checking. This is the beauty of creating a broad, innovation-focused sandbox: As entrepreneurs enter, legislators and regulators can monitor progress and respond dynamically.
Data and real world applications can better inform policymakers on what kind of new regulatory framework is needed, if at all, because they would be getting real-time information about where regulations do and don’t make sense in real world scenarios. This innovation-friendly approach to regulation would position Utah as a leader in the country over the next decade.
James Czerniawski is the tech and innovation policy analyst at Libertas Institute.