By Angelina Alyabyeva, Lawyer *
The financial services sector is undergoing a period of rapid
transformation driven by technological advancements. Regulatory bodies face the
challenge of fostering innovation while ensuring investor protection and market
integrity. One approach to address this challenge is the creation of a
regulatory sandbox.
A regulatory sandbox is a controlled testing environment established by a
regulatory body to facilitate the testing of innovative financial products,
services, and business models. It allows firms, both regulated and unregulated,
to test their innovations in a real-world setting with a limited number of
participants under the supervision of the regulator. This enables firms to
gather valuable feedback and refine their offerings before a full-scale launch.
The CySEC Regulatory
Sandbox: Fostering Innovation in Cyprus
The Cyprus Securities and Exchange Commission (CySEC) launched its Regulatory
Sandbox officially on 11th of June 2024, following a period
of dialogue with market participants and experts. This initiative, unveiled
during a virtual event, represents a significant step forward for the financial
services sector in Cyprus, aiming to strike a balance between technological
innovation, investor protection, and market integrity.
Nonetheless,
it is important to note that theCySEC Regulatory Sandbox is not an isolated
initiative. Several other European Union (EU) member states have established
similar programs to foster innovation in their financial sectors, which include
but are not limited to:
The
FCA Regulatory Sandbox in the United Kingdom (UK): Launched in 2016, this pioneering
sandbox program has become a model for others. It focuses on a broad range of
financial innovations, including fintech, regtech, and insurtech solutions.
The
French Autorité de ContrôlePrudentiel et de Résolution (ACPR) Sandbox: Established in 2018, the ACPR
sandbox caters to a wider audience, including not only financial institutions
but also startups and non-financial companies developing innovative solutions
for the financial sector.
The
Spanish Regulatory Sandbox for Artificial Intelligence (AI): This recently launched pilot
program focuses specifically on AI technologies in the financial sector. It
aims to facilitate the testing and development of AI-powered solutions while
ensuring compliance with upcoming EU regulations on AI
The CySEC Regulatory Sandbox offers a unique opportunity for firms to test
and refine their innovative financial technology solutions in a supportive
environment. This initiative fosters a win-win situation for both regulators and
innovators.
Transparency and Collaboration: The Sandbox
acts as a bridge between CySEC and financial technology firms. This open
communication channel allows CySEC to gain valuable insights into emerging
technologies and adapt its regulatory framework to stay relevant in a rapidly
evolving landscape. Firms benefit from clear guidance and feedback on how their
solutions align with existing regulations.
Controlled Testing Environment: The Sandbox
provides a safe space for firms to test their innovative solutions with a
limited number of participants. This controlled environment mitigates potential
risks associated with new technologies, allowing for adjustments and
refinements before broader adoption. Firms gain valuable real-world data and
user feedback to ensure their solutions are robust and user-friendly.
Facilitating Regulatory Adaptation: By
observing the testing process within the Sandbox, CySEC can identify areas
where regulations might need to be updated to accommodate new technologies and
business models. This proactive approach ensures that regulations remain
effective and do not hinder innovation in the financial sector.
Eligibility and Participation: The CySEC
Regulatory Sandbox welcomes both regulated entities (already licensed by CySEC)
and unregulated entities with innovative financial technology solutions.
Unregulated entities have various pathways for participation, including
obtaining prior CySEC authorization for specific services, testing within their
corporate group, participating in limited-scope demonstrations, or
collaborating with a CySEC-regulated entity. It is important to remember that
the Sandbox does not bypass existing regulations. Unregulated entities offering
regulated services must still obtain CySEC authorization before full-scale
deployment.
Criteria for Participation: To be
eligible for the CySEC Regulatory Sandbox, the proposed solution must demonstrably benefit the financial
services industry as a whole. The solution should be a genuine
innovation, introducing a novel element in terms of product, service, or
business model. Furthermore, the solution must be sufficiently developed for
testing in a real-world environment and directly or indirectly facilitate
activities that fall under CySEC's supervisory mandate.
The CySEC Regulatory Sandbox represents a significant step forward in
fostering responsible innovation within the Cyprus financial sector. By
providing a controlled environment for testing new technologies and business
models, the Sandbox creates a win-win situation for both innovators and
regulators. Firms can refine their offerings and gain valuable regulatory
insights, while CySEC can ensure that the regulatory framework remains relevant
and adaptable in the face of rapid technological change.
*Angelina Alyabyeva is Legal Associate, CySEC, AML Officer, LLB (Hons), LLM, Commercial Mediator KEBE, law firm: Symeon Pogosian LLC
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FOOTNOTES
Cyprus Securities and Exchange Commission, ‘Regulatory Sandbox Existing Entities’ (CySEC) https://www.cysec.gov.cy/en-GB/entities/regulatory-sandbox-existing/ accessed 13 June 2024.
European Parliamentary Research Service, ‘Economic and Budgetary Outlook for the European Union 2022’ (European Parliament, January 2022) https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/733544/EPRS_BRI(2022)733544_EN.pdf accessed 13 June 2024.
Financial Conduct Authority, ‘Regulatory Sandbox’ (FCA) https://www.fca.org.uk/firms/innovation/regulatory-sandbox accessed 13 June 2024.
Autorité de Contrôle Prudentiel et de Résolution, ‘About the ACPR’ (Banque de France) https://acpr.banque-france.fr/en/page-sommaire/about-acpr accessed 13 June 2024.
European Commission, ‘First Regulatory Sandbox on Artificial Intelligence Presented’ (Digital Strategy, 19 April 2023) https://digital-strategy.ec.europa.eu/en/news/first-regulatory-sandbox-artificial-intelligence-presented accessed 13 June 2024.
David Engstrom, ‘A Few Thoughts on Regulatory Sandboxes’ (Stanford PACS, 1 October 2019) https://pacscenter.stanford.edu/a-few-thoughts-on-regulatory-sandboxes/ accessed 13 June 2024.
Giulio Cornelli, Sebastian Doerr, Leonardo Gambacorta and Ouarda Merrouche, 'Regulatory sandboxes and fintech funding: evidence from the UK' (BIS Working Papers No 901, 2021) https://www.bis.org/publ/work901.htm accessed 13 June 2024.
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