A Fintech Leader’s Thoughts on the North Carolina Regulatory Sandbox Act

Bradley Arant Boult Cummings LLP
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Bradley Arant Boult Cummings LLP

As part of Bradley’s continuing coverage of the North Carolina Sandbox Act, we wanted to know what community members and NC fintech aficionados thought about this proposed legislation. We posed six questions to Tariq Bokhari, an influential leader in the financial technology (fintech) industry, who serves as the executive director of the Carolina Fintech Hub (CFH). Read more of our conversation below on how this regulatory sandbox will impact North Carolina’s fintech industry.

Bradley: How will the NC Regulatory Sandbox Act affect fintech companies generally?

Bokhari: The premise behind the NC Regulatory Sandbox Act (Innovation Sandbox) is that innovators and startups in tech 1) have difficulty piloting new ideas in a fail-fast manner due to a regulatory system not designed for that, and 2) are viewed and set up as disruptive forces to incumbent stakeholders, rather than opportunities to partner with those incumbents in a win-win scenario. The Innovation Sandbox is designed to create tools that decrease both of those headwinds that are pervasive across the country, and in doing so create a competitive advantage for our region and all that reside within it. The Carolina Fintech Hub has championed this effort for several years now, and found like-minded partners like the NC Blockchain Initiative, because we strongly believe being the most entrepreneurial and nimble of the 50 states will position us as global leaders in technology and innovation.

Bradley: What products and services are applicable for this program?

Bokhari: Its scope can truly be anything that touches technology, although the initial focus will be on fintech, insurtech and blockchain. I envision this program being expanded after one or two years to include other areas, like possibly securities, thus making the program more comprehensive.

Bradley: With regulatory sandboxes already being set up for other states’ finance and insurance economies, do you see a possible playbook for North Carolina’s fintech industry?

Bokhari: There are a few unique differences with NC’s Innovation Sandbox, including our unique focus on promoting the partnership between our incumbents and startups rather than disruptive friction between them.

Bradley: Can you elaborate on what makes NC’s Innovation Sandbox unique?

Bokhari: With its unique sandbox approach, North Carolina decided to start simple while allowing for natural evolution, namely by embedding formalized accountability around innovation across NC via an Innovation Commission.

This Innovation Commission is designed to be centralized (not embedded in any one state agency), cross-representative (to maximize collaboration), lightweight in its design (very simple in its mandate) and serve as a clearing house of innovation requests and ideas (sourced from the industry with the help of established non-governmental organizations (NGOs)).

The Innovation Commission is really envisioned to have only two major tasks: 1) review the requests of those who apply to participate in any of the sandbox’s available tools, and if it deems the requests to have merit, route them to the appropriate regulating agency or agencies for ultimate decisioning; and 2) review requests to create new tools that enable further innovation, and if it deems the requests to have merit, route them to the appropriate regulating agency or agencies for ultimate decisioning.

Bradley: How will this proposed legislation change economic development in North Carolina?

Bokhari: In its simplest form, this legislation will create an Innovation Commission that will give North Carolina a significant advantage over every other state in recruiting and retaining tech companies. These companies will be able to perform certain activities with reduced governmental red tape here.

Bradley: How does Carolina Fintech Hub plan to help their fintech partners strike that balance between protecting consumers while promoting emerging fintech technologies and innovations in the field?

Bokhari: Defining the tools is the most challenging task for any state to address, so the “secret sauce” in our approach is not trying to assume what set of tools is needed up front. Instead of assuming, we use a platform that can react to the market demands for tools as they are recognized in this formal Innovation Commission structure, while still operating within the confines of the existing regulatory agency construct to avoid unneeded or complicated friction.

The proposed legislation envisions a tool that has also been incorporated in other states’ sandbox efforts to date. This tool would enable small-scale piloting of innovations without having to apply for what may otherwise be cumbersome licenses or having to build out large-scale compliance programs for certain regulatory frameworks.

In addition to the tool described above, there are two additional tools that are in the hopper for near term exploration when the Innovation Commission is established: 1) after successful completion of the centralized sandbox program, a startup receives a limited scope “stamp of recognition” that can provide additional confidence to incumbent banks and institutions and their vendor risk management processes when they contemplate engaging the startup; and 2) a blockchain Innovation Sandbox use case. This still requires significant design and vetting. And the goals here are aspirational: I envision, not only startups that are freestanding entities taking advantage of the Innovation Sandbox, but also startups acquired or established as affiliates or subsidiaries by big financial institutions utilizing the sandbox as well, as the model matures.

Bradley: Do you anticipate the Regulatory Sandbox Act will slow the pace of companies integrating emerging technology, including blockchain technology, in North Carolina’s fintech space? And will the act attract companies to relocate to NC?

Bokhari: I am highly confident this legislation will multiply the pace of innovative, emerging technology across NC, as well as our ability to recruit nationally and internationally, for a simple reason: Companies will be able to operate with less friction, and capitalize on more partnerships with our incumbents in NC, more so than in any other state. I am most interested in the blockchain aspects of the regulation. I am seeing a spike in smart contract and crypto activity lately, but most places across the country don’t even know this activity is happening, let alone have a sophisticated system to champion it statewide.

Bradley is closely monitoring this legislation and will provide continuing coverage of the proposed bill in the coming weeks and months. If passed, the legislation could become effective October 1, 2021.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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