Rebuilding the Cryptoasset Industry, One Sandbox at a Time
Ian Wittkopp, COO and head of investment, delves into why sandboxes are crucial for emerging technologies to succeed.
by Ian Wittkopp, COO and Head of Investment
Introduction
Regulatory sandboxes in forward-thinking jurisdictions are vital to rebuilding trust in the cryptoasset industry and building compliant use cases that have mass appeal.
These sandboxes are the laboratory for common-sense regulation that will eventually serve as the bedrock of legislation and regulation in key jurisdictions.
Market participants with deep expertise, like venture capitalists, should serve as a bridge between the regulator and the project to push the industry forward.
Industry at a crossroads
Entering 2023, the regulatory path forward for crypto and blockchain technologies is murky.
Key jurisdictions, like the United States, have moved away from forward-thinking legislation and licensing and instead defaulted to “regulation by enforcement”. The hard work done by cryptoasset companies post 2017 to access traditional banking rails is slowly being rolled back. The industry continues to struggle with distribution and value propositions that appeal to non-crypto natives.
While crypto will certainly have siloed bubbles, mass appeal use cases will require regulatory approvals of some kind.
Technology isn’t the only thing driving new use cases.
Regulation is too.
Thus, in order to regain trust and momentum with regulators, the fight for the future of crypto shifts to regulatory sandboxes.
Adoption of Regulatory Sandboxes
World Bank data from late 2020 stipulated there were 73 regulatory sandboxes covering 57 jurisdictions. Sandboxes are a relatively new concept with 56% of the fintech-related sandboxes created between 2018 and 2019. We can extrapolate this trend to surmise the number of active sandboxes is now significantly higher in 2023. Blockchain and crypto often fit under a wider fintech mandate.
Do Sandboxes work?
In 2020, I worked for a small InsurTech in Hong Kong. Regulatory, capital, and oversight requirements for insurance entrants were robust, given the need for safety. However, the HK Insurance Authority created an insurtech sandbox in 2017 with the goal of promoting digital distribution.
By 2021, a digital-only insurtech had risen to number two in the digital health insurance sales channel with pricing that beat multibillion dollar incumbents. Without a sandbox, this innovation would have been stifled.
For every sandbox success, there are also stories of failures. Sometimes the goal is not always good faith promotion of innovation. However, sandboxes are a net positive and are particularly important for crypto.
Why are they important for blockchain and crypto?
Crypto and blockchain are often caught in a catch 22, with many saying “don’t regulate it because we don’t understand it” or “don’t allow it until we regulate it.”
Many countries have taken advantage of sandboxes to observe business models closely before requiring regulation. These are some notable cryptoasset sandboxes:
UAE - Abu Dhabi Global Market (ADGM) RegLab – ADGM is now in their 5th cohort in their FinTech RegLab with key projects graduating from the sandbox to deploy marketplace solutions.
Thailand – The Thai SEC runs a sandbox that has championed “electronic Letter of Guarantee (e-LG)” on the blockchain. They have also been forward-thinking about blockchain-based remittance protocols.
Singapore – Monetary Authority of Singapore sandbox for fintech, including blockchain and digital currencies.
Mission of Sandboxes
The mission of regulatory sandboxes is to promote innovation in a safe and controlled environment. This is done by:
Allowing product launch without full licensing: Allows business models to be refined before capital outlays for licensing. Runway is preserved. Optionality for pivots is maintained.
Reducing legal uncertainties: In the early days of crypto, founders took on immense personal risk in launching products into regulatory grey zones. Sandboxes reduce personal legal risk for well-intentioned entrepreneurs.
Increasing collaboration: Regulatory agencies and entrepreneurs can work together to design a business model and process flows from the beginning that suit the needs of both parties as well as customers.
Reducing friction and allowing time for both founder and regulator to work together often means a collaborative and common-sense regulatory framework can be formed.
How to help
Forward-thinking jurisdictions often have different goals and pain points than larger jurisdictions. To accomplish strategic goals, they are willing to partner with the cryptoasset community.
As venture capitalists, we have been given a broad view of the industry. Within one firm we have specialties across financial infra, gaming, defi, etc.
This expertise is essential to:
Develop sandbox parameters
Source best-in-class projects
Support sandbox projects
Bring regulators and projects together to find a path to sandbox graduation
Sandboxes have been overlooked while, as a collective industry, we’ve prayed for breakthrough legislation in key jurisdictions.
It’s time for us to embrace the jurisdictions that support our industry and devote resources to ensuring they’re the true winners of the crypto winter.
It is surely what we’ll be doing at Sino Global Capital. We hope to see you there.