A ‘regulatory sandbox’ model would keep fintech innovation in the US

When big banks like JPMorganChase pilot deposit tokens for institutional payments, it leaves no doubt that digital assets are taking root in mainstream finance. That’s hardly surprising in the case of large banks, which already have the relationships, lawyers and time to meet regulatory demands.

But for smaller fintechs, that same regulatory structure turns from a bridge into a barrier. Processes are slow, licensing is fragmented, approval criteria are opaque, and compliance reviews are identical regardless of company size or risk, so startups carry the burden of systemic institutions without their resources. As a result, capital often leaves before the product ever reaches the market.

Simply put, the core problem is that today’s regulatory playbook was built for systemic banks, not experimental fintechs, and by treating both the same, regulators unintentionally push innovation out of the system. That’s why slow and uncertain regulation can be fatal for small firms. If regulators want innovation to prosper, they have to make the rules flexible enough to keep pace with the market.

Financial regulation was never designed for fast experimentation. Large banks have long been the foundation of the financial system and naturally maintain direct access to supervisors, often hiring former regulators and building entire compliance departments to meet supervisory expectations.

Over time, this proximity has affected the way rules are written, as consultation cycles, reporting standards and supervisory language all developed around institutions with scale. By contrast, new participants rarely get the same early engagement, and, as a result, innovation ends up outside the regulatory conversation.

So, what we have formally is that most rules apply equally to everyone, but in practice, they hit smaller fintechs harder. Licensing is fragmented across jurisdictions, so companies are literally forced to file multiple applications before launching a single product. In addition, access to core payment and settlement rails is usually reserved for deposit-taking banks, which leaves others dependent on intermediaries. Compliance obligations have a fixed cost that can eat a third of a startup’s operating budget. At the same time, capital requirements often ignore risk maturity and “no-objection” approvals for new activities can take months with scarce feedback.

In short, what began as a framework for stability has become a drag on agility. That’s exactly why fintechs are heading to jurisdictions like the U.K., Singapore, or Abu Dhabi, where structured sandboxes and tiered licensing regimes that help to tackle these gaps already exist. 

The obvious question, then, is how regulators can prevent this tendency from being a new reality, and what tools they have to bring innovation back into the system. The answer lies in smarter tools.

As a matter of fact, regulators just need to design a smarter framework that protects stability without stalling or pushing progress overseas. The first step is a national, coordinated fintech sandbox or pilot-license regime, designed, as an example, according to the U.K.’s Financial Conduct Authority’s blueprint.

According to the regulator’s data, companies in the FCA sandbox have raised more capital and reached the market faster because they can test products under regulatory supervision instead of waiting years for full authorization. So, a similar program could bring ambitious startups into the system earlier, safely, transparently and under strong oversight.

Adopting a so-called “risk-tiered” supervision is also a viable path. That means scaling compliance requirements not to the size of the company, but to the level of risk. Singapore’s Monetary Authority uses this approach under the Payment Services Act’s modular licensing and the phased framework for digital banks, allowing payment providers to launch limited services first and expand as they meet higher standards. In turn, Abu Dhabi’s ADGM provides a similar model, which allows firms to advance from pilots to full authorization once they show compliance maturity. These examples prove that speed and safety can coexist when oversight is proportional.

And the final step for regulators is to modernize how banks and fintechs work together via a kind of “regulatory API” — open-data standards, shared reporting formats and pre-approved partnership templates. This would let institutions exchange data safely and develop together, rather than treating every collaboration as another compliance risk, eventually reducing months of due diligence into weeks.

In my view, when rules are equal for both giants and small firms on paper, it’s a policy choice that trades stability for stagnation. Big banks will always adapt to changing rules, as they have the time, the balance sheets and the weight. Fintechs don’t. If we keep making them work under the same rules that were built for systemic institutions, we’re just sending innovation abroad. 

That’s why policymakers need to act now, build a coordinated sandbox and pilot-license regime, apply risk-tiered supervision, and establish a “regulatory API,” so banks keep expanding, and fintechs have a safe space to create. Regulators don’t need to reinvent finance — just stop holding back the innovation already here.