By Alexis Furgal
A regulatory sandbox is a “controlled environment” in which companies reward innovative contributions regulatory freedom with.[1] Essentially, companies enjoy (temporarily) fewer regulatory hurdles to overcome during the sprint to bring novel technologies and services to market.[2] On one hand, regulatory sandboxes foster innovation and promote advancement because companies are free to “trial run” the efficacy of–and consumer response to–their product in the marketplace.[3] On the other hand, regulatory sandboxes allow regulators to closely observe company activity and consumer response, in order to more closely tailor new regulations to the nuances revealed through the simulated market. [4]
In North Carolina, the banking and insurance industries are “major economic driver[s].”[5] Due to its technological and financial prestige, growing job opportunities, and affordability, North Carolina is uniquely poised to become a national leader in the financial technology and insurance industries. [6] As such, North Carolina joined the ranks as one of only a few states driving innovation by implementing a regulatory sandbox.[7] The first iteration of its sandbox—introduced in 2019—failed because it prioritized “innovation at the expense of consumer protection.”[8] However, two years later, the idea was revisited by the N.C. General Assembly, with increased consumer protections built in, and this time proved fruitful.[9] In October 2021, the North Carolina Regulatory Sandbox Act of 2021 (the “Act”) was signed into effect.[10] At the time, North Carolina was one of only ten states that took such a bold approach. [11]
The Act created a framework for pioneering companies to make a case for their product or service and specify which regulations would prevent their ideas from becoming a reality. [12] The applicable State agency is then authorized, under the Act, to temporarily waive the requested requirements as they see fit, to allow the applying company a greater chance of success. [13] The Act also created the Innovation Council—a panel of 11 statutorily-designated members of various, but relevant, backgrounds—to both manage day-to-day operations and promulgate permanent sandbox rules.[14] In order to participate in the sandbox, companies must submit an application to the Council, detailing the ins and outs of their product, business model, consumer protections, risk-management strategies, and more.[15] If accepted, the company is entitled to 24 months sans (approved) regulations to offer their product to the public and strengthen their company’s continued viability before being re-subject to all applicable regulations. [16]
Unlike some of the other states that implemented comparable regulatory sandboxes, North Carolina’s sandbox does not have a statutory end date. [17] For example, Hawaii’s regulatory sandbox recently—and right on schedule—came to an end,[18] and Utah is now in second phase of its own sandbox. [19] Although the end-date and ultimate impact of North Carolina’s regulatory sandbox is largely still inconclusive, one thing is clear: the Innovation Council remains diligently committed to furthering the goals of the Act.
Pursuant to the authority vested in it by N.C.G.S. 169, the Innovation Council has released notice of proposed permanent rules (Council Rules).[20] These Council Rules are scheduled to take effect in March 2025.[21]
While the Act left much of the application, review, and waiver process up to the Innovation Council’s discretion,[22] the Council Rules clearly delineate the sandbox application process, including voting mechanisms, mandatory opportunity for public comment, and optional company presentation of products and service to the Innovation Council for review.[23]
Interestingly, the Council Rules also incorporate an additional dimension to the application process: an “expression of interest” opportunity for companies to receive a preliminary review of their proposed product and waived requirements.[24]
Under the Act, company applications must be submitted to the Innovation Council, which then selects and refers applicants to the relevant State agencies.[25] If accepted into the program, the company is eligible to be granted a waiver of applicable statutory or regulatory requirements, provided such waiver is not broader than necessary, as determined by the applicable State agency.[26] However, per the Council Rules, it appears the Council may have increased its discretion in the review process relative to the State agencies. Under section .0106 of the Council Rules, State agencies will be provided with an opportunity to review company applications and provide recommendations, but, if the review is not provided within 45 days, the Council, “in its discretion, may deem the [] application acceptable.”[27]
Moving forward, both the content of the proposed Council Rules and responses to calls for the expansion of North Carolina’s regulatory sandbox to other industries[28] will be critical to watch.
[1] Matthew C. Christoph, Note: Criminal Justice Technology and the Regulatory Sandbox: Toward Balancing Justice, Accountability, and Innovation, 84 U. Pitt. L. Rev. 971, 975 (2023).
[2] Id.
[3] Kyle A. Conway, Comment: Blockchain Technology: Limited Liability Companies and the Need for North Carolina Legislation, 45 Campbell L. Rev. 127, 139 (2022).
[4] Id.
[5] N.C. Gen. Stat. § 169-2 (2021).
[6] Kristen Smithberg, Recent College Grads Could Fare Well in These Four Markets, Globest.com (Jul. 31, 2024), https://www.globest.com/2024/07/31/recent-college-grads-could-fare-well-in-these-four-markets/.
[7] Conway, supra note 3, at 139.
[8] North Carolina’s Proposed Regulatory Sandbox Needs Work, The FinReg Blog (May 28, 2019), https://sites.duke.edu/thefinregblog/2019/05/28/north-carolinas-proposed-regulatory-sandbox-needs-work/.
[9] Conway, supra note 3, at 139.
[10] Id. at 138.
[11] Id. at 139.
[12] N.C. Gen. Stat. § 169 (2021).
[13] Bill Patterson, N.C. Legislative Analysis Division, Analysis of: House Bill 624: North Carolina Regulatory Sandbox Act (2021), https://dashboard.ncleg.gov/api/Services/BillSummary/2021/H624-SMTG-122(e4)-v-2.
[14] Id.
[15] N.C. Gen. Stat. § 169 (2021).
[16] Id.
[17] Manjeet Mane, Hawaii’s Regulatory Sandbox for Crypto Companies Concludes Today, Cryptometer.io (Jul. 1, 2024), https://www.cryptometer.io/news/hawaiis-regulatory-sandbox-for-crypto-companies-concludes-today/#:~:text=A%20total%20of%2011%20companies%20were%20approved%20to,period%20from%20July%201%20to%20December%2030%2C%202024.
[18] Hilary R. Sledge-Sarnor et al., Hawaii’s Money Transmitters Modernization Act Will No Longer Apply To Cryptocurrency Activities, Mondaq (Feb. 22, 2024), https://www.mondaq.com/unitedstates/fin-tech/1427532/hawaiis-money-transmitters-modernization-act-will-no-longer-apply-to-cryptocurrency-activities#authors.
[19] Sandbox Phase 2, Utah Office of Legal Services Innovation, https://utahinnovationoffice.org/sandbox-phase-2/#:~:text=The%20Utah%20Supreme%20Court%E2%80%99s%20legal%20regulatory%20Sandbox%20is,narrow%20the%20access-to-justice%20gap%20without%20increasing%20consumer%20harm.
[20] N.C. Innovation Council: Financial and Insurance Regulatory Sandbox (proposed effective date Mar. 1, 2025) (to be codified at 04 N.C. Admin. Code 25C.0100-.0111) [hereinafter Council Rules].
[21] Id.
[22] N.C. Gen. Stat. § 169 (2021).
[23] Council Rules, supra note 20.
[24] Id.
[25] N.C. Gen. Stat. § 169-6(a) (2021).
[26] N.C. Gen. Stat. § 169-3 (2021).
[27] Council Rules, supra note 20.
[28] Jon Sanders, Let’s Broaden North Carolina’s Regulatory Sandbox, Locke (Feb. 12, 2024), https://www.johnlocke.org/lets-broaden-north-carolinas-regulatory-sandbox/.
