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The Case for Regulatory Sandboxes

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The Case for Regulatory Sandboxes

State legislatures can give innovative businesses a reprieve from onerous rules. April 1, 2022
Politics and law
Economy, finance, and budgets

In a December interview, Elon Musk challenged government leaders to take out the regulatory trash. Outdated rules and regulations strip society of its dynamism and “harden the arteries of civilization,” he said. Though governments invest great effort in creating new rules, they don’t make a corresponding effort to eliminate old ones. Elected leaders can step up to the challenge. Legislatures should enact regulatory “sandboxes”—policies that allow businesses to operate without regulatory strictures for a limited period—to protect innovative companies from outdated rules while determining which regulations should be eliminated permanently.

Regulatory sandboxes operate from the principle that innovation evolves more rapidly than government rules can be updated. They allow businesses and regulators to cooperate, creating a safe testing ground, usually for a 12–24-month period, during which a product or service is trialed in the state’s market. Participating businesses can petition for specific regulations (such as requirements related to money transmitters) to be lifted for the trial period, or regulators can accept participating businesses with unique models not clearly addressed under existing regulations.

But regulatory sandboxes can also be leveraged for a broader cleanup of unnecessary rules, creating a proactive process for removing regulations. Sandbox managers are well-positioned to receive feedback from participating businesses and regulatory experts to determine which outdated and harmful mandates should be repealed. This information can be compiled and presented to the governor and legislature with specific recommendations.

Industry-specific regulatory sandboxes have achieved success in states such as Arizona, Florida, and North Carolina. They are tailored to industries such as financial technologies and insurance. In 2021, Utah extended the frontier of policy innovation by creating an all-industries regulatory sandbox. And entrepreneurs can expect good news in 2022, with universal sandbox bills advancing through legislatures in Arizona and Missouri. Regulations should not be immortal. Rather, rules should be promptly improved or cycled out when they have outlived their usefulness.

Federal policymakers should take notice, too. The national regulatory maze can stifle entrepreneurs more acutely than state-level regulations. Federal regulatory bodies could use the sandbox concept to unlock greater national growth and innovation, especially in areas of cutting-edge technologies.

The regulatory sandbox is not a new idea. In fact, University of Illinois law professor Jacob Sherkow argues that the coronavirus vaccines were expedited, tested, and approved to save countless lives because the federal government adopted a sandbox-style approach through the FDA’s Emergency Use Authorization program. Imagine the innovation and economic growth that would result if regulators cultivated other emerging technologies with such urgency.

Economic dynamism makes American life the envy of the world. Creating regulatory sandboxes will ensure innovation can flourish. Leaner, more sensible government rules and a flexible regulatory framework will allow more Americans to achieve their dreams and drive economic growth.

Photo: tormentor3/iStock

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