EBRD and Estonia are working on their first sandbox

By Dylan Bell


Designing an environment supporting innovative start-ups

Estonia has successfully established itself as a global leader in reforms and the introduction of new approaches. The country even branded itself as “e-Estonia”. But smart marketing is one thing – creating an environment where innovation can thrive requires additional steps.

One key element is the establishment of a supportive regulatory environment. It sounds simple, but is in effect fiendishly difficult. It is all about finding the right balance. What better way is there to find out what is needed, what works and – equally important – what does not work in order “to make it easier for Estonian start-ups to innovate” than testing different approaches?

To find answers to that question the EBRD together with Estonia’s Ministry of Finance and the country’s Financial Services Authority has now launched its first technical assistance Fintech project in the country. An inaugurating workshop gathered more than 35 attendees that represented a wide range of market participants including start-ups, banks and innovators.

One of the possible solutions is to build Estonia’s first regulatory sandbox. While this may sound playful, it is a serious concept. Sandboxes facilitate innovation and enable firms to test – pursuant to a specific plan agreed and monitored by a supervisor – innovative financial products, financial services or business models with the result to bring such solutions to the market faster.

A regulatory sandbox is nothing like a regular sandbox. One similarity though may be that the actors are usually young: young children here and young companies there, but both act under supervision. Another one is that they allow for creativity. Yet while children build sandcastles, start-ups need support not to become cloud-castles.

The regulator plays a crucial role in this. In Estonia’s case, the EBRD-led project will allow the authorities to learn more about innovative businesses, while companies will be able to test new ideas with real customers utilising the dexterity and innovation that start-ups are renowned for in a controlled regulatory environment.

The benefits of sandboxes are plentiful. Start-up participants receive feedback on their business model, access to technical expertise and ongoing support from the testing team after they pass the eligibility criteria. Regulators see greater competition introduced to the market due to ease of access as well as reduced time and cost for implementing innovative technologies.

Over the coming three months the EBRD, the European Commission and the Estonian authorities will work on benchmarking the technologies as well as designing and creating the framework relevant for the successful implementation of a digital sandbox.

The following step will see a list of recommended reforms submitted to the Estonian government to ensure the implementation of new and innovative technologies in the country’s financial markets. 

The EBRD is actively engaged in policy discussions on innovation. To this effect, the Bank has recently requested to join the Global Financial Innovation Network (GFIN) as an observer. The observer status will allow the Bank to assist regulators, foster knowledge sharing and support the development of cross-border testing across its regions with more effectiveness.

The Bank, including through its Local Currency and Capital Markets Development initiative, has become increasingly engaged in advisory projects related to financial innovation. This is especially so the case in central and eastern Europe, where enhancing private sector competitiveness through innovation is one of the key points of the Bank’s strategy for region. The EBRD is also supporting the Pan-Baltic Capital Market Union initiative.

Before children go to the sandbox, they ask their parent a simple question: “Can we play outside please?” At the start of the EBRD’s technical assistance project for Estonia was an equally straightforward question: “How can the country’s position at the digital frontier continue to foster innovation?”

This experiment will provide an answer.