Sandbox: Use by Central Banks in Arab Countries
BY DR SOHA MAAD
Introduction
This article presents an overview of sandbox and its use in various Arab countries in the banking and finance sector. The overview covers the financial products tested in a sandbox including digital currencies, the benefits and challenges of using regulatory sandbox by central banks, best practices of using sandboxes by central banks whilst ensuring consumer protection, the technology needed to use sandboxes by central banks, and examples of sandbox tools and technologies. The article briefly overviews the use of sandbox in banking and finance around the world, and the use of sandbox by central banks in eight Arab countries including Saudi Arabia, United Arab Emirates (UAE), Egypt, Bahrain, Qatar, Oman, Kuwait, and Lebanon. The article concludes with a future outlook of the use of sandbox in banking and finance and in developing digital currencies.
Sandbox Use in Banking and Finance
A sandbox is a controlled environment where companies can test and develop innovative products and business models free from many major regulatory barriers, but under regulators’ surveillance. In the financial industry, regulatory sandboxes are used to test new financial products and services in a controlled environment with real consumers. The Regulatory Sandbox, for example, allows firms to test innovative propositions in the market with real consumers. The Sandbox provides innovators, both incumbents and new players, with access to regulatory expertise. It is open to applications from all sectors of the financial services market and gives firms the ability to test products and services in a controlled environment, the opportunity to find out whether a business model is attractive to consumers and how a particular technology works in the market.
Examples of Financial Products Tested In a Sandbox
Examples of financial products that can be tested in regulatory sandboxes include:
- Digital identity verification: A digital identity verification service was tested in the United Kingdom UK’s Financial Conduct Authority (FCA) sandbox. The service allowed customers to verify their identity using a mobile app, which was then checked against government databases.
- Peer-to-peer lending: Peer-to-peer lending platforms have been tested in several regulatory sandboxes. For example, the Monetary Authority of Singapore (MAS) sandbox has tested several peer-to-peer lending platforms, including one that uses blockchain technology.
- Robo-advisory services: Robo-advisory services, which use algorithms to provide investment advice, have also been tested in regulatory sandboxes. The Australian Securities and Investments Commission (ASIC) sandbox has tested several robo-advisory services.
- Open banking: Open banking, which allows customers to share their financial data with third-party providers, has been tested in several regulatory sandboxes. The UK’s FCA sandbox has tested several open banking initiatives.
Sandbox Use in The Context Of Digital Currencies
Regulatory sandboxes are used to test Central Bank Digital Currencies (CBDCs). CBDCs are digital versions of fiat currencies that are issued and backed by central banks. Regulatory sandboxes provide a safe space for central banks to test the viability of CBDCs and other digital currencies before they are launched into the market.
R3 Sandbox for Digital Currencies is a platform that allows central banks to experiment with CBDCs and interact with diverse participants in an R3-managed learning and development environment. The platform combines distributed ledger technology (DLT), guided learning paths from industry experts, and a ready-made global payments network in a single environment to enable the issuance, management, and distribution of CBDCs.
Benefits of Using Regulatory Sandboxes
Sandboxes can help banks and other financial institutions to identify and mitigate potential risks before they become real problems, comply with regulatory frameworks, and accelerate their time to market for new products and services, gaining a competitive edge over peers who are slower to adopt new technologies.
Benefits of using regulatory sandboxes include:
- Lower cost of innovation: Regulatory sandboxes can lower the cost of innovation by providing a safe space for businesses to test and refine their ideas without concerns about regulatory limitations stifling innovation.
- Open access to regulator: Regulatory sandboxes can help businesses navigate the regulatory environment and comply with relevant regulations.
- Creation of formal framework for safe, live testing: Regulatory sandboxes create a formal framework for safe, live testing of new financial products and services, which can help businesses identify and mitigate risks early in the development process.
- Market monitoring: Regulatory sandboxes allow regulators to monitor the market and gather evidence about how new financial products and services work and the outcomes they produce.
- Openness to innovation: Regulatory sandboxes signal that regulators are open to innovation and willing to work with businesses to promote innovation while ensuring regulatory compliance.
Challenges Faced In Using Sandbox by Central Banks
Challenges faced in using regulatory sandboxes by central banks include:
- Competition issues: Regulatory sandboxes can create competition issues by giving some firms an unfair advantage over others.
- Limited capacity of regulators to run sandboxes: Regulators may not have the capacity to run sandboxes effectively.
- Liability issues in case of failed testing: Regulators may face liability issues if a product or service tested in the sandbox fails and causes harm to consumers.
- Intra and inter-agency coordination issues: Coordination between different agencies involved in the sandbox can be challenging, especially if they have different mandates and objectives.
Best Practices in Using Sandboxes By Central Banks
While there is no one-size-fits-all approach to implementing regulatory sandboxes, below are some best practices that central banks may consider:
- Defining the objectives of the sandbox: Clearly defining the objectives of the sandbox and ensuring that they align with the central bank’s overall strategy and goals.
- Establishing a clear governance structure: Establishing a clear governance structure for the sandbox, including roles and responsibilities of all stakeholders involved.
- Allocating sufficient resources: Allocating sufficient resources to the sandbox to ensure that it is adequately staffed and funded.
- Ensuring coordination with external stakeholders: Ensuring coordination with external stakeholders, including other regulators, industry associations, and consumer groups.
- Running external and internal stakeholder consultations: Running external and internal stakeholder consultations to ensure that the sandbox is meeting the needs of all stakeholders.
- Providing guidance and support to sandbox participants: Providing guidance and support to sandbox participants to ensure that they are able to navigate the regulatory environment and comply with relevant regulations.
These best practices can be adapted to suit the specific needs of each central bank and its regulatory sandbox.
How Central Banks Ensure Consumer Protection Using Sandbox
To ensure consumer protection in using sandboxes, central banks have implemented various measures. For instance, the Central Bank of Nigeria (CBN) has established a regulatory sandbox framework that includes provisions for customer safeguards. The CBN’s framework requires sandbox participants to position customer safeguards as a priority, including protecting the confidentiality of customer information, promoting the safety, reliability, and efficiency of payment systems and payment instruments, and encouraging healthy competition for financial products and services.
In addition, the Consumer Financial Protection Bureau’s (CFPB) Office of Innovation has proposed a “Disclosure Sandbox” to give companies the opportunity to test new disclosures or delivery methods that may better serve consumers. The Disclosure Sandbox would allow companies to test new disclosures or delivery methods that may better serve consumers, while still providing the CFPB with data to evaluate the effectiveness of the new approaches.
Technology Needed To Use Sandbox By Central Banks
The technology needed to use a regulatory sandbox may vary depending on the central bank and the sandbox. However, some common technologies that may be required include:
- Cloud computing: Cloud computing can provide a scalable and cost-effective way to host the sandbox environment and the applications being tested.
- Blockchain: Blockchain technology can be used to create a secure and transparent environment for testing new financial products and services.
- Artificial intelligence: Artificial intelligence can be used to analyze the data generated by the sandbox and provide insights into how new financial products and services are performing.
- Application Programming Interfaces (APIs): APIs can be used to integrate the sandbox environment with other systems and applications.
- Data analytics: Data analytics can be used to monitor the performance of new financial products and services being tested in the sandbox.
Examples of Sandbox Tools and Technologies
A sandbox is a testing environment that isolates untested code changes and outright experimentation from the production environment or repository, in the context of software development including web development, automation and revision control. Sandbox software enables information technology (IT) professionals and developers to create a sandbox on their machine, or a virtual sandbox in the cloud, in order to isolate potentially dangerous programs and applications for testing and development.
Examples of sandbox software tools include:
- VMware Fusion: VMware Fusion gives Mac users the power to run Windows on Mac along with hundreds of other operating systems (OS) side by side with Mac applications, without rebooting. Fusion makes it simple to test nearly any OS and app on a Mac. It also helps building and test apps while securely sharing local source files and folders.
- Thinfinity Workspace: Thinfinity® Workspace 7 is a comprehensive, secure platform that offers a zero-trust approach, enabling secure and contextual access to corporate virtual desktops, virtual applications, internal web apps, Software as a Service (SaaS), and files, whether they are on Windows, Linux, or mainframes. It supports various deployment models, including cloud, on-premise, and hybrid settings, and can be deployed on any cloud provider of your choice.
- Kasm Workspaces: Kasm Workspaces streams workplace environment directly to web browser on any device and from any location. Kasm uses high-performance streaming and secure isolation technology to provide web-native Desktop as a Service (DaaS), application streaming, and secure private web browsing. Kasm is a highly configurable platform with a robust developer Application Programming Interface (API).
Sandboxe Use Around The World
The World Bank Group has published a report that highlights the benefits, challenges, and lessons learned from the implementation experiences of 73 unique fintech sandboxes around the world. The report includes case studies from sandboxes across the globe, including Estonia, the Philippines, Thailand, Hong Kong, India, Rwanda, Australia, Morocco, Mexico, Colombia, Jordan, Bahrain, Sierra Leone, Brazil, Singapore, and the United Kingdom, among others. The report also provides insights into the impact of regulatory sandboxes on policy-making decisions, regulatory change, financial inclusion, private sector firms, partnerships in the market, market competition, and fintech market development.
Sandbox Use By Central Banks In Arab Countries
Below is an overview of the use of sandbox by central banks in Arab countries.
Use of Sandbox In Saudi Arabia
Saudi Arabia was one of the first Arab countries to regulate the sandbox. The Saudi FinTech initiative was launched in collaboration between the two official institutions regulating the financial sector (the Central Bank and the Capital Market Authority). Both institutions have built a sandbox regulatory environment to stimulate FinTech innovation.
The Saudi Arabian Monetary Agency (SAMA) has created a Regulatory Sandbox to allow for the live testing of innovative financial products, services and business models in a controlled environment.
According to a report by Arab News, the Saudi Capital Market Authority (CMA) has launched its fifth round of fintech sandbox licenses, allowing fintech startups and other firms to conduct live experiments under its supervision.
Use of Sandbox By Central Bank Of United Arab Emirates
The Central Bank of the United Arab Emirates (CBUAE) has signed two separate MOUs with Abu Dhabi Global Market (ADGM) and Dubai International Financial Centre (DIFC) to introduce a co-sandbox programme to enable FinTech companies to test their innovative solutions under the existing sandbox programme. The CBUAE’s sandbox provides a live testing environment for FinTech innovators who are developing new business models that are currently hindered by stringent authorization requirements and regulatory uncertainty. The sandbox offers a controlled environment for FinTech startups and financial institutions to apply to test their innovative applications under the guidance and supervision of the sandbox team in the CBUAE. The sandbox provides innovators with access to regulatory expertise and support in identifying consumer protection safeguards that can be built into new products and services.
According to the CBUAE’s website, the CBUAE’s FinTech & Digital Transformation department is responsible for driving the development of the FinTech ecosystem in the UAE, and has launched several initiatives to support the growth of the sector, including the Regulatory Sandbox, the Innovation Hub, the Regional Dialogue, and Industry Surveys.
Use of Sandbox By Central Bank Of Egypt
The Central Bank of Egypt has created a Regulatory Sandbox to allow for the live testing of innovative financial products, services and business models in a controlled environment, under the supervision of the relevant regulators. The purpose of the Regulatory Sandbox is to pave the way for faster and easier access to new financial solutions and embedding compliance within the FinTech ecosystem at an early stage. The sandbox offers a live testing environment for FinTech innovators who are developing new business models that are currently hindered by stringent authorization requirements and regulatory uncertainty. FinTech startups and financial institutions can apply to test their innovative applications in a live environment under the guidance and supervision of the sandbox team in the Central Bank of Egypt. The sandbox provides innovators with access to regulatory expertise and support in identifying consumer protection safeguards that can be built into new products and services. The Central Bank of Egypt’s Regulatory Sandbox is cohort-based. Cohort 1 of the Regulatory Sandbox was launched in July 2019, as a thematic pilot cohort on electronic Know Your Customer (E-KYC) for the digital onboarding of mobile wallet customers. Cohort 2 of the Regulatory Sandbox was launched in November 2020, as an open-themed cohort for different FinTech trends.
Use of Sandbox By Central Bank Of Bahrain
The Central Bank of Bahrain (CBB) has established a dedicated Fintech & Innovation Unit to ensure that best services are provided to individual and corporate customers in the financial services sector by encouraging an agile regulatory framework that fosters FinTech and innovation. The CBB has introduced a Regulatory Sandbox that allows startups, FinTech firms and licensees to provide innovative banking and financial solutions. The Regulatory Sandbox Framework sets out the CBB’s approach to participation in the Sandbox of the Kingdom of Bahrain. The CBB’s FinTech & Innovation Unit is also responsible for the approval process to participate in the Regulatory Sandbox, supervision of authorized Sandbox companies’ testing progress, monitoring technical and regulatory developments in the FinTech field, both regionally and internationally, to lead on strategic FinTech initiatives and to work closely with all stakeholders within the FinTech ecosystem in the Kingdom.
The sandbox will help enhance the competitiveness of the financial services sector in Bahrain in line with the Kingdom’s overall strategy to transition towards a diverse and digital economy.
Use of Sandbox By Central Bank Of Qatar
The Central Bank of Qatar has launched a Regulatory Sandbox that offers a safe and controlled space for entities to test out their fintech solutions under relaxed regulatory requirements.
Qatar’s Sandbox had a soft launch in 2021, and now has three fintech companies currently operating in the payments sector, testing their solutions with the Central Bank of Qatar. More companies are currently being evaluated to enter the sandbox.
Use of Sandbox By Central Bank Of Oman
The Central Bank of Oman (CBO) has launched a Regulatory Sandbox. The CBO’s FinTech & Digital Transformation department is responsible for driving the development of the FinTech ecosystem in Oman, and has launched several initiatives to support the growth of the sector.
Use of Sandbox By Central Bank Of Kuwait
The Central Bank of Kuwait (CBK) has created a Regulatory Sandbox to encourage and develop FinTech in the State of Kuwait. The Sandbox is a safe environment for testing FinTech products without exposing the financial and banking system to risks. The CBK held a workshop on the Regulatory Sandbox for digital transformation and innovation specialists in local banks.
Use of Sandbox In Lebanon
According to a report by the World Bank Group, Lebanon does not have a regulatory sandbox for fintech yet. However, the Lebanese financial sector is the pillar of the Lebanese economy and will soon be threatened by border-less fintech disruptors and later on by cryptoassets ventures. The absence of a regulatory sandbox in Lebanon could hinder the growth of the fintech industry in the country.
According to a report by Arabnet, there has been a surge in fintech companies in Lebanon that are competing on a global scale. However, the limited awareness in the market on the importance of Fintech, especially in banks and the Central Bank of Lebanon, has hindered growth opportunities.
A regulatory sandbox could help drive the growth and transformation of the financial industry in Lebanon by providing a safe space for businesses to test and refine their ideas without concerns about regulatory limitations stifling innovation.
Future Outlook of the Use of Sandbox
The use of regulatory sandboxes is expected to grow in the future as more central banks recognize the benefits of using them to drive innovation in the financial industry. According to a report by the World Bank Group, more than half of all relevant sandboxes, or about 56 percent, were created between 2018 and 2019, and about a fifth were created in the first half of 2020 alone, suggesting rapid growth around the world in the use of sandboxes to test fintech innovations and regulation.
The future of regulatory sandboxes in digital currencies is promising. The use of Central Bank Digital Currencies (CBDCs) is gaining momentum around the world. According to a report by the Bank for International Settlements (BIS), more than 60 central banks are currently exploring the potential of CBDCs, with some already in the advanced stages of development.