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1.INTRODUCTION - THE FINTECH REGULATORY SANDBOX PHENOMENON
In the past several years, an increasing number of countries have implemented fintech regulatory sandboxes.1 In the technological world, the term sandbox refers to an isolated testing environment used to examine and try out a new process or product. Carried over to the world of fintech, a sandbox refers to a regulatory strategy that provides innovators with a testing environment for developing their new product, under the regulator's supervision, but with tailored regulatory relief for the duration of the testing.2
Sandboxes may have many advantages. They encourage and incentivise entrepreneurs to develop new products and services, reduce the time-to-marketRuth cycle and promote innovation.3 The regulatory relief enables new players to enter the field and may increase competition.4 Sandboxes may also enhance competition at the global level, among financial centres seeking to become the world's preeminent fintech hub.5 They may attract entrepreneurs and businesses from other countries, and contribute to the development of the local economy.6
Another important benefit of the sandbox was termed "bidirectional education."7 Working in the framework of the sandbox creates enhanced communication between the regulator and the innovators for their mutual benefit: the innovators learn the regulator's approach during the development of the product and can adapt it to the regulatory requirements. At the same time, the regulator becomes familiar with the new products already in the preliminary stages of their development and can assess in advance the nature and extent of the regulation necessary.8 In addition, a regulatory sandbox signals a regulator's propensity to support innovation. It sends a clear message to the industry that the regulator is flexible, open to innovation and approachable.9
The State of Israel has recently joined the trend and is working to establish fintech sandboxes in its jurisdiction. In January 2021, it published the Bill to Encourage Technology Development in the Financial Field in Israel, 5781-2021 (the bill).10 The prospective law will enable fintech companies to operate in an experimental environment while enjoying regulatory relief, in order to test and implement innovative fintech developments.
This article offers an analysis of the bill, focusing on its unique principles and mechanisms against the backdrop of the Israeli financial market. The article argues that, while the bill offers a good foundation for...