Written by Eamonn K. MoranOn August 3, 2018, Arizona began accepting applications for its regulatory sandbox that “enables a participant to obtain limited access to Arizona’s market to test innovative financial products or services without first obtaining full state licensure or other authorization that otherwise may be required.” As we previously reported, Arizona Governor Doug Ducey signed House Bill 2434 into law in March, which makes Arizona the first state in the United States to enact a fintech regulatory “sandbox.” The sandbox enables a participant to obtain limited access to Arizona’s market to test innovative financial products or services without first obtaining full state licensure or other authorization that otherwise may be required. Arizona’s sandbox will allow startups, entrepreneurs, and even established companies to launch products on a limited, temporary scale to consumers to test innovative products, services, business models, and delivery mechanisms in the real market without incurring the regulatory costs and burdens that would otherwise be imposed. The Arizona Attorney General also is permitted to enter into agreements that would allow Arizona sandbox participants to operate in other jurisdictions that establish similar programs. The Arizona Attorney General’s Office is responsible for the admission process into and oversight of the sandbox. Both existing Arizona licensees and non-licensed businesses may apply. Each application must be for an innovative financial product or service, which means the product or service will incorporate new or emerging technology or reimagine uses for existing technology to address a problem, provide a benefit or otherwise offer a product, service, business model, or delivery mechanism that is not known by the Arizona Attorney General to have a comparable widespread offering in Arizona. Products or services regarding most types of credit extending services, such as peer-to-peer lending and online marketplace lending, are eligible to apply. Additionally, innovative products and services for money transmission and investment management also are eligible. Certain blockchain or cyptocurrency products or services also may be eligible. Securities trading, insurance products, or services that provide solely deposit-taking functions are not eligible to enter the sandbox. Applicants must provide details regarding the innovative financial product or service, the testing plan, a “Consumer Protection Plan,” and exit plan. The Consumer Protection Plan requires applicants to identify the targeted consumers; how the applicants plan to market to those consumers and disclose their participation in the sandbox; the key risks to consumers; the plan to address the risks; and how the applicants will monitor and assess the testing of the product or service to protect consumers in the event the test fails. To be considered for admission to the sandbox, applicants must complete the application form and pay the $500 application fee. The Arizona Attorney General’s Office will review sandbox applications on a rolling, as-received basis and will notify applicants of a decision regarding entry into the sandbox within 90 days of receiving a complete application and payment of the application fee. This 90-day period may be extended if the applicant and Arizona Attorney General’s Office mutually agree. Additionally, the Arizona Attorney General’s Office may request supplementary information after reviewing the initial application submission. Pursuant to Arizona Revised Statutes § 41-5610, information and records submitted with the application are not public records and will be disclosed by the Arizona Attorney General’s Office only with the applicant’s permission or as authorized by § 41-5610. The sandbox period lasts two years. Businesses may seek an extension of up to one year to obtain proper licensing and authorization to launch the product or service more widely. As we also previously reported, the Consumer Financial Protection Bureau (CFPB or Bureau) selected Paul Watkins to lead the Bureau’s new Office of Innovation last month. Watkins was most recently at the Arizona Attorney General’s Office, where he led the office’s fintech initiatives and managed the sandbox.
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