Regulatory Sandboxes: How Federal Agencies Can Take Part in Cooperative Federalism and Catalyze Innovation and Economic Growth through Exercise of Their Exemptive Authority

Arizona’s position as a leader in economic freedom has made it one of the United States’ most business-friendly states, resulting in a relatively sustained economic boom over the last 30 years. Post-recession success is at least partially due to the state’s deregulation and pro-technology development policies. Unfortunately, technology development in Arizona and across the country is often still stunted by a complicated, laborious web of federal regulations. Federal and state leaders can work cooperatively to lower regulatory barriers to innovation and supercharge the economy. Current Arizona Governor Doug Ducey’s administration has done an admirable job of encouraging legislation that addresses both these needs. One notable example is the Regulatory Sandbox—a pro-growth, pro-technology, and pro-competition program aimed at attracting increased out-of-state investment and high-paying technology jobs. The Sandbox enables an approved business limited access to the Arizona consumer market to test innovative FinTech and RegTech products and services without first having to obtain otherwise applicable authorizations to operate, such as a business license. This program promises to be an unparalleled opportunity for Arizona to help secure the state’s technological and financial future, while strengthening consumer safeguards and economic liberty. However, for the benefits of sandbox-like programs to be fully realized, federal agencies will need to participate in regulatory coordination with state agencies. This will require federal agencies to exercise their exemptive authority, to ensure Sandbox participants are not burdened by federal regulations that are redundant of exempted state regulations. If such coordination is achieved, innovation should truly flourish. This article describes how the Sandbox works, the reasons for its creation, why regulatory coordination is imperative to unlocking the Sandbox’s full innovation-generating potential, and the ways in which federal agencies can exercise their exemptive authority to facilitate this increased innovation and economic growth.