Crypto Regulatory Sandbox?

China iTech Ghana
Wednesday, September 29, 2021 | views Last Updated 2021-09-29T21:49:03Z

What Is a Crypto Regulatory Sandbox?

A crypto regulatory sandbox is a live-like testing environment used to ensure regulatory compliance and security checks for financial operations, including cryptocurrencies and blockchain networks.

How Crypto Regulatory Sandboxes Work

A sandbox is a commonly used term in the field of software development. A sandbox refers to an isolated—but fully functional—testing environment where software, applications (apps), and programs can be tested. 

If a programmer writes a new piece of code, they may use a sandbox to test it. For example, if a programmer working on updating the Uber ride-sharing app adds a new feature to more accurately locate the passenger using GPS, or a team of developers at Facebook enhances the site's functionality, before such updates and features are launched, they may be tested in an isolated and controlled environment called the sandbox.

Regulatory Sandboxes

Regulatory sandboxes involve a coordinated effort to create and improve existing regulations for a particular industry by working with all of the regulatory agencies and companies involved in that industry. Regulatory sandboxes can help companies understand the regulatory requirements in a country. 

Sandboxes can also be used in the early stages of writing regulations when there isn't an existing framework in place. In other words, regulations can be tested in an environment to determine how best to regulate a particular industry and build a network of cooperation from the regulated companies.

Some sandboxes can be broad in nature—a focus on the financial services sector—while other sandboxes can be more targeted. Targeted sandboxes can include creating testing environments for improving payment systems and developing digital authentication to prevent fraud, system hacking, and cyber attacks. Beyond testing features and functionality, a sandbox also allows security aspects of new code to be verified.

Blockchain Sandboxes

Regulatory sandboxes have also been used to test blockchain technology and how to effectively introduce and implement cryptocurrencies within a financial system. Blockchain is a distributed-ledger system similar to a shared database in which financial transactions are verified before being added to the publicly-viewed ledger as a permanent record.

Transactions in a blockchain must be approved and validated by its participants and once a transaction has been completed, a new block is added to the network. Although blockchain technology is typically used as a shared ledger for public use, private blockchains can also be created, which would only allow access for certain participants that meet the authentication requirements.

The interest in blockchain technology by governments and regulators is on the rise. For example, in 2018, the European Commission announced that more than 21 member states of the European Union signed a declaration creating the European Blockchain Partnership (EBP) to develop the European Blockchain Services Infrastructure (EBSI). 

The blockchain initiative is designed to provide access to digital public services such as regulatory reporting, energy, and logistics to benefit companies and citizens.1

Regulatory Sandboxes in the Financial Sector

Sandboxes can help regulators learn about new technologies, such as financial technologies (or fintech), which offer financial products online and through mobile devices. Many banks and financial technology firms are using digital products to improve their customer's experience. The digitization of financial services includes the following services:

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