The government, technology and the sandbox.

There is a disconnect between the speed of government and the speed of new technology. Sandboxes may be the answer.

Governments are not designed to be fast. They are designed to be deliberative and take account of a wide range of stakeholders.? The parliamentary process is slow and methodical, and the process is full of checks and balances. The consequences of mistakes by government can be very large, so there is a lot of pressure to be slow and deliberate.? When a government faces a situation where it doesn’t know what to do it can set up a variety of advisory bodies to make recommendations. These can be small or as large as a Royal Commission that can take years to reach a conclusion.

In the past the speed of government more or less matched the speed of technological change.? The Model T Ford was introduced in 1908 and by 1960 only about a half of potential car owners in Canada had a car.? So, there was plenty of time to develop regulations and policies for cars – speed limits, safety belts, roads, insurance, etc.

However, times have changed, and technology is now moving at lightning speed. It took Amazon and Google only 5 years to reach $1 billion in sales. ChatGPT had a million users in five days, and a hundred million active users in two months. Financial innovations are also moving quickly with the rise of cryptocurrencies, for example.

Governments are not equipped or set up to respond in a timely fashion to fast-changing technologies.

Private sector role.

The private sector is faced with ambiguity and uncertainty all the time and has developed many ways to address that problem, for example:

·?????? All chemical companies have pilot plants where they test new products before committing to commercial scale production.

·?????? Consumer product companies routinely test-market possible new products on a small scale to determine customer acceptance.

·?????? New drugs go through extensive clinical trials to test their effectiveness before widespread use.

·?????? Software companies routinely issue a Beta version of a new product to find any bugs before full commercialization.

These approaches all have similar characteristics:

·?????? They are relatively low cost.

·?????? They are time limited.

·?????? They are small scale.

·?????? Failure is an acceptable outcome.

The sandbox.

The government has had no equivalent approach to test market new regulations or policies.? That is where the sandbox comes in, that allows governments to test market new regulations and policies on a small scale before deciding whether to implement them more widely.

The OECD defines a regulatory sandbox as follows:? A regulatory sandbox refers to a limited form of regulatory waiver or flexibility for firms, enabling them to test new business models with reduced regulatory requirements. Sandboxes often include mechanisms intended to ensure overarching regulatory objectives, including consumer protection. Regulatory sandboxes are typically organised and administered on a case-by-case basis by the relevant regulatory authorities. Regulatory sandboxes have emerged in a range of sectors across the OECD and beyond, notably in finance but also in health, transport, legal services, aviation and energy.

Regulatory sandboxes were first used in the fintech sector in the UK in 2016 driven by the rise of the fintech sector, and this approach was rapidly copied in many other countries. Most countries now have regulatory sandboxes, and there are likely 100 or more in the world today.

In Alberta fintech sandboxes are permitted under the Financial Innovation Act, and that program started in 2022. Alberta was the first province to pass legislation to permit sandboxes for the financial and fintech sectors.

There are a few federal government supported sandboxes, including one on “Remotely Piloted Aircraft Systems”.? The Canadian Securities Administrators have created a CSA Regulatory Sandbox. The Canadian government is exploring the possibility granting all federal regulatory organizations the authority to set up regulatory sandboxes.

Most sandboxes so far have been regulatory sandboxes, but a new aspect is the rise of policy sandboxes that can test new policy ideas on a small scale. One current area where sandboxes are starting to be used is artificial intelligence. Sandboxes can be implemented in Special Economic Zones (SEZs). One difference between a SEZ and a sandbox is that a SEZ is intended to be permanent while a sandbox is time limited.

Benefits of the sandbox approach.

According to the OECD there are a number of benefits to the sandbox approach.

Conclusion.

Fast changing new technologies pose a problem for governments as they are not set up to respond in a timely fashion. The sandbox approach represents a way for governments to test new approaches on a small scale for a defined period of time. This experimentation can result in better policy making and benefits to firms and consumers.

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Peter Josty