The Sandbox Paradox: Balancing the Need to Facilitate Innovation with the Risk of Regulatory Privilege

32 Pages Posted: 21 Apr 2020 Last revised: 27 Jan 2021

See all articles by Brian Knight

Brian Knight

George Mason University - Mercatus Center

Trace Mitchell

NetChoice; affiliation not provided to SSRN

Multiple version iconThere are 2 versions of this paper

Date Written: March 26, 2020


In recent years, “regulatory sandboxes” have gained a great deal of attention from policymakers, regulators, and regulatory scholars. Regulatory sandboxes are closed testing environments in which specific firms are able to experiment with new and innovative business models or products with reduced regulatory burden or expedited regulatory decisions. Sandbox advocates support or defend regulatory sandboxes as a way to promote entrepreneurialism and innovation within the financial sector while still maintaining mechanisms for consumer protection and regulatory oversight. Opponents of sandboxes tend to focus on the potential risk to the consumers who use the services being tested in the sandbox. However, there is a third group affected by regulatory sandboxes: the competitors of firms in the sandbox. By definition, regulatory sandboxes grant certain advantages to specific firms without extending those same privileges to other firms. The goal of this paper is to examine the potential regulatory advantages sandboxes offer, consider the possible risks and costs associated with those advantages—including the potential to distort the market and incentivize cronyism—and propose best practices that policymakers could use to mitigate those costs.

Keywords: regulatory sandbox, financial regulation, financial markets, financial services, public finance, state and local government, regulation and business law, regulatory policy, innovation

JEL Classification: G2, H1, H7, K2, L5, O3

Suggested Citation

Knight, Brian and Mitchell, Trace and Mitchell, Trace, The Sandbox Paradox: Balancing the Need to Facilitate Innovation with the Risk of Regulatory Privilege (March 26, 2020). 72 South Carolina Law Review 445 (2020) , Mercatus Research Paper, 2020, C. Boyden Gray Center for the Study of the Administrative State Research Paper No. 19-36, Available at SSRN: or

Brian Knight (Contact Author)

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States

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Trace Mitchell

affiliation not provided to SSRN

NetChoice ( email )

WA 20005
United States

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