South Africa must build regulatory sandboxes, not sand houses — including Icasa

Economist Sifiso Skenjana argues that National Treasury needs to increase funding for regulatory sandboxes to ensure South Africa is ready to respond quickly to sudden global technological shifts.

This would build on the success the Reserve Bank and Financial Sector Conduct Authority saw through the Intergovernmental Fintech Working Group’s sandbox.

Skenjana says that telecoms and broadcasting sector regulator Icasa should follow in its Kenyan counterpart’s footsteps and launch a similar regulatory sandbox.

His full column follows below.

As we head get into the February busy season with both the State of the Nation Address as well as the Budget Speech later in the month, all eyes will be both on President Ramaphosa and Finance Minister Enoch Godongwana as they deliberate on the economic and socio-economic pressure points the economy is still reeling from.

An obvious conversation will be on Eskom and the energy crisis facing the country in addition to other challenges like high levels of youth unemployment, digital inclusion, low economic growth and a constrained fiscal environment from which to support developmental expenditure.

South Africa’s Ease of Doing Business Ranking has deteriorated colossally over the last 15 years dropping from a ranking of 32 in 2008 and now down to 84th out of 190 countries globally and we can ill-afford for legislation to continue being a growth inhibitor due their lack of responsiveness and agility to a fast-changing industry and competitive marketplace.

These institutional failures and vacuums make the R1.2 trillion investment drive target tabled by President Ramaphosa over the next four years a mammoth task to achieve.

Of particular importance will be a view on how the National Treasury will be approaching budgeting for capacity building within our regulatory landscape, especially as digital transformation continues to become a dominant growth enabler.

There are very few sectors that will escape unscathed if our regulatory frameworks in this digital era are not sufficiently agile, underfunded / unfunded regulatory sandboxes and are not sufficiently clear in articulating the roles and responsibilities of the state, regulatory bodies, and industry players.

Sandboxing for Growth and Inclusion

One the great examples where government responded well to an imminent regulatory pressure point, was the launch of the regulatory sandbox through the Intergovernmental Fintech Working Group (IFWG).

According to the IFWG, “The Regulatory Sandbox (RSB) provides market innovators with an opportunity to test new products and services that push the boundaries of existing legislation and regulation responsibly, all under the responsible supervision of relevant regulators”.

The IFWG closed its first application window in May 2020 where a total of 54 unique applications were received from 49 innovators across a range of financial services offerings including digital payments, crypto assets, crowdfunding, cross-border payments / remittances, and index insurance amongst others.

The reserve bank in October last year provided feedback on the sandbox initiative and reported that ultimately nine applications successfully entered the RSB for testing. Out of those:

• Two are currently running the sandbox testing.
• One tested successfully and there are now considerations for regulatory amendments (not required)
• Five tested successfully and now new regulations / regulatory amendments need to be considered
• One testing paused pending licence.

This sandbox is already proving to be a resounding success where the FSCA has now announced the development of regulation to recognise crypto as financial assets, while leaving room for players to innovate around those legislative guidelines.

What is important about these regulatory sandboxes is that they crowd in innovators while walking journey with the regulators and other critical industry bodies.

This creates a fertile environment for a growing industry that is not constrained by outdated regulatory white elephants.

The World Bank Group identified five areas in which RSBs can assist local industry development namely:

1. Facilitating intra-industry collaboration and partnerships
2. Encourage innovation
3. Inform regulators
4. Protect consumer rights
5. Enable market growth

Jayoung James Goo and Joo-Yeun Heo in their 2020 paper, The Impact of the Regulatory Sandbox on the Fintech Industry, with a Discussion on the Relation between Regulatory Sandboxes and Open Innovation found that

“The adoption of regulatory sandboxes had very positive influences on the growth of the fintech venture investment. The results implied that regulatory sandboxes may play a vital role in increasing the influx of venture capital into the fintech venture ecosystem by removing regulatory uncertainty. The findings of this research contribute to providing the empirical evidence to policy makers in interpretations of the positive impact of regulatory sandboxes”

And given the extent to which the digital economy continues to offer new opportunities for industry growth and development, it becomes increasingly important for government and National Treasury to deeply fund the creation of these regulatory sandboxes at a sectoral level to ensure that not only the financial sector is able to respond to the imminent digital shifts but also for sectors like telecommunications, online intermediation platforms, business process outsourcing, mining, agriculture etc.

In fact, our continental neighbour Kenya, through their Communications Authority, recently published draft guidelines for regulatory sandboxes in the ICT sector (Framework for Emerging Technologies Regulatory Sandbox).

Telecommunications and broadcasting sector regulator ICASA would be well-suited to kick-off a similar regulatory sandbox for the local ICT sector.

Agility of Digital Legislation

Similarly, the rate of technological change requires an entire overhaul of the traditional approaches to legislative and regulatory framework design.

Each of the regulatory bodies need to be capacitated with an “emerging technology project office” to ensure that each of the critical shifts taking place in the market are understood early through a regulatory lens and not reactively when new markets have emerged and market structure complexities emerge.

Khair ElZarrad and Others in their 2022 paper, Advancing an agile regulatory ecosystem to respond to the rapid development of innovative technologies, argue that adaptive policy-making infrastructure is a cornerstone for an adaptive and agile regulatory process.

They argue that policy offices should consider:

1. Forming internal multidisciplinary intelligence teams to track and evaluate innovative and emerging technologies in that sector
2. Expand tools and pathways in the policy-making process
3. Utilise their full spectrum with stakeholders about innovative technologies such as white papers and proposed frameworks and feedback loop mechanism establishment.

The lack of such capacity in these regulatory body offices will either hamstring sector-level development through slow adaptation and outdated regulatory frameworks, as well as rendering the economy uncompetitive in a broader global economic marketplace.

Government and National Treasury therefore need to consider with intent the capacity-building urgency and associated budget allocation to ensure we improve the quality of our regulatory approach in new and growing sectors in our economy.

Regulation can make or break an economy in a fast-growing global marketplace and South Africa continues to have little to show in how agile and adaptive legislation has enabled growth in our domestic economy.

The SONA and the budget must now recognise that a well-capacitated regulatory office is as much of an economic asset and ought to be reflected in the budget and policy choices to be presented in the coming month.

Sifiso Skenjana is an economist and managing director of ESG Analytics.

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