EUROPEAN REGULATORS: CRYPTO SKEPTICS: Even With Digital Asset ‘Sandboxes’ Established EU Lags On Regulatory Front

Four European Union (EU) member states- Denmark, Lithuania, the Netherlands and the UK-have a formal regulatory sandbox in place.Several other EU member states will also begin operating sandboxes in 2019. While this is an encouraging sign for the FinTech industry as a whole, digital asset firms may not benefit from the greater number of EU member states offering FinTech firms access to sandboxes.

Based on our review of the reporting by the regulatory agencies that have established sandboxes, the UK is the only country that tested digital asset firms in its sandbox. The limited acceptance of digital asset firms into sandboxes will likely continue in the near-term. 

UK: A Sandbox Innovator that Accepts Few Digital Asset Firms

Since mid-2016, the Financial Conduct Authority (FCA) has tested four cohorts in its regulatory sandbox.  The application process for the fifth cohort closed on 30 November 2018. The 89 firms that are undergoing or completed testing include many blockchain businesses, but only six firms that had “propositions relating to cryptoassets.” This represents less than seven percent of the FinTech firms tested by the FCA.

Digital Asset Firms Accepted into the UK’s Regulatory Sandbox

FCA Cohort Firm Description
One BitX
A cross-border money transfer service powered by digital currencies/blockchain technology.
Two ZipZap A cross-border money remittance platform that chooses the most efficient means for a payment to reach its destination, including via digital currencies.
Two Oraclize A DLT technology based e-money platform which turns digital identity cards into secure digital wallets through the use of smart contracts and fiat-backed tokens.
Three Solidi A blockchain based payments platform that uses cryptocurrencies to facilitate money remittance at a faster speed and with lower transaction costs.
Four Fineqia A Blockchain based digital platform that enables companies to issue and administer debt and equity securities, including bonds backed by cryptoassets.
Four World Reserve Trust Service that facilitates cheaper and faster global trade payments and settlement using the Silubi, an asset-linked smart token that utilizes a permissioned DLT network. 

No Other EU Member State Has Accepted a Digital Asset Firm into its Regulatory Sandbox

The three other EU member states – Denmark, Lithuania and the Netherlands – with sandboxes have not accepted any digital asset businesses into their cohorts for testing. 

Denmark’s Financial Supervisory Authority (FSA) completed its first application process for its “FT Lab” at the end of March.  The FSA stated that it will only accept five applicants in the first cohort, as this is a new initiative. According to documents on the FSA website, only two companies have been accepted into the sandbox. Neither company is a digital asset firm.

In mid-October, Lithuania began accepting applications for its regulatory sandbox, which allows potential and existing market participants to test financial innovations under the supervision of the Bank of Lithuania.  The sandbox is expected to be fully launched in 2019. To date, the Bank of Lithuania has not selected any firms to participate in the sandbox. 

The Netherlands established a sandbox in January 2017 that is governed by the Authority for the Financial Market (AFM) and De Nederlandsche Bank (DNB).  There is no official data on the number of FinTech firms tested in the Dutch sandbox, as the Netherlands does not have a transparent reporting process like Denmark and the UK.  Based on our review of government data, media reporting, and professional and academic publications, it does not appear that the Netherlands has tested any digital assets in its sandbox. 

EU Member States Establishing Regulatory Sandboxes in 2019

Poland is scheduled to launch a regulatory sandbox in 2019. The Financial Supervision Authority (KNF) selected eight sandbox operators: PKO Bank Polski, Huge Thing, D-RAFT/The Heart, Alior Bank, BusinessCaddy Foundation for Enterprise Development, Bank Pekao, Bank Handlowy w Warszawie, and Bank BGŻ BNP Paribas. 

Poland most likely will not accept any digital asset firms into its sandbox, as the government has taken a negative stance towards digital assets and the operators of the sandbox are largely Polish banks, which routinely deny services to digital asset firms. 

At least two other EU member states will establish sandboxes in 2019. In mid-November, the Norwegian Ministry of Finance stated that the Financial Supervisory Authority (FSA) will launch a regulatory sandbox.  The Spanish Ministry of Economy also issued a public consultation on a regulatory sandbox that closed in early September. Like other sandboxes, the Norwegian and Spanish sandbox will allow for a controlled and secure space where innovative companies and entrepreneurs can test their ideas, without threat of regulatory penalty.

Norway and Spain, however, will likely institute sandbox programs with modest budgets, which will limit the number of firms that can participate in the sandbox framework. 

Forthcoming European Banking Authority Guidelines

This month, the European Banking Authority(EBA) is scheduled to release guidelines for the core design of sandboxes and innovation hubs.  The EBA report will compare existing sandboxes and innovation hubs, and provide recommendations for the design of a cross-border regulatory sandbox.  The issuance of guidelines by regional authorities, however, may not provide digital asset firms with better access to regulatory sandboxes.

Some member states, such as Germany, will not fully embrace the sandbox concept. In other cases, such as Poland, a member state has taken an adverse position towards digital assets. 

Other member states have limited funding available or lack the funding to establish and maintain a regulatory sandbox. Regulators in other member states may also limit the number of firms accepted into a sandbox to ensure FinTech start-ups are not applying just to obtain free marketing.