Sandboxes: Reforming Long Outdated Regulations That Stifle Innovation

Ryan's guest is Rees Empey, Director of State Government Affairs at Libertas Institute.  Hear their discussion about how sandboxes benefit both new and existing businesses, make room for innovation stifled by regulations that are decades old, and still deliver consumer protections.  

So, what is a sandbox?  Is it time for Arkansas to say we're open to working with you?

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Transcript

Ryan Norris: 0:03

Welcome to believe in Arkansas, where we believe free people are capable of extraordinary things. Now, here's the host of believing Arkansas, Ryan Norris. Welcome back everyone to another segment of believe in Arkansas, where we believe that free people are capable of extraordinary things. It is just fascinating again, as I get to travel the state of Arkansas to meet all of these bright minds out there that have great ideas about how they can improve our state, and by improve our state's not even always rugged in terms of laws that they want to pass or any of those kinds of things, but it can be simply great ideas on business or new way of providing a service to their fellow Arkansans. And when you really look at it, and you calculate the number of problems that business solves for us in the course of our lives, you know, on a daily basis, a weekly basis, etc. I mean, they help us provide us transportation business helps us keep our cars, cars running, keep our cars clean, they, you know, business helps keep my laundry taken care of. It's just they keep us fed. It's amazing. The problems that free enterprise and business are able to solve for everyday citizens. And it's a it's an awesome, awesome responsibility that they kind of have to because they've got to keep everybody excited about their product or about their service, or else they go away. But it's really difficult to start businesses in, in general, they use, you know, a little easier, but regulations are one of the areas that make it really, really difficult. And this has effects on consumers. When regulatory is so high on business, it does affect the cost of the goods and the services that they provide. And that means that we get limited quality or quantity quality but limited quantity at times of those goods and services. So for example, in an article from 2021, May of 2021, the National Association of Homebuilders said that at all levels of government regulation, a cost an additional$94,000 on a new single family home bill that it makes up about 25%, roughly, of the cost of a new home is just in regulatory compliance. So that's no additional square footage, that's no additional amenities, no kind of updates. It's just additional cost that you have to pay as a consumer because of regulations. Now, do you think that in your home, when you look around that you received your money's worth of $94,000 a regulation? I don't think that I did that on mine. Additional to that. It shows that in small, the Small Business Administration said that compliance costs for small business every year is an additional $10,000. So whenever you're calculating hiring staff in if they're really attuned to your business, and what you do that not only do you have to calculate salary and benefits and those kinds of things, but you also have to anticipate that it's going to cost about another$10,000 on top of an employee just to maintain compliance. And then among small businesses, with all the regulatory reforms out there, nearly 70% of small business owners try to stay compliant themselves. And this of course detracts away from their ability to be productive. Not only does that increase the cost, again, of the good as in the services, but usually those that can afford it the least are paying for it the most. And in a study done by Dr. Dustin Chambers of Salisbury University on the issue of regulation and its impact on consumers. For every 2% increase in regulatory restrictions, there is a corresponding point 687 percent increase in consumer pricing. And that doesn't necessarily sound you know, like, oh, man, that sounds really small. But you would be surprised at how many times we are meeting or exceeding that 10% increase in the regulatory restrictions that are produced at the federal state and even sometimes a local level. And that low income households, they spent about 12% more of their income on heavily regulated items such as electricity, drugs, and medical care. So all of that said, just painting a picture that regulatory regulations, some of them can be necessary at times, you know, government supposed to keep us safe and protect our rights. Some of those could be argued to be keeping us safe. But what's necessary and what is not how does regulation impact our daily lives and what can be kind of done about that, particularly as we look here in Arkansas to become a state and incubators where business wants to come here to start it and begin new ideas. And I think that we have someone today who can, again, enlighten us about regulations, and about solutions to the, to the massive regulatory environment. So welcome back, Reese Empey with the Libertas of, of Utah. And Reese has been with us before to talk about Regulatory Sandboxes. He's the Director of State Government Affairs at the Libertas Institute and Rees, welcome back to talking with us here in Arkansas.

Rees Empey: 5:33

Thank you for having me back.

Ryan Norris: 5:36

I think that again, I'm kind of covered a lot in the opener here. But simple question straight to you is, what are the intended purposes of regulations, from your perspective?

Rees Empey: 5:47

You know, I'd say at its core function, the intention of regulations are to keep the consumer safe. That's why they're put in place. That's why they're there to ensure the consumer is safe and protected in consuming whatever product service they may be, and ensuring that they aren't getting ripped off, essentially.

Ryan Norris: 6:06

And, you know, I agree that that's the way we really think about it, but also looked through and I see consumer complaints, like through Attorney General's office or something and in their office of consumer protection, and most by industry, when they used to put it up by industry as to where the most complaints are coming from. Some of them are coming from the less heavily regulated areas. So are we really safe? Are they making us safer through these regulations? Or is there just some, after the fact kind of punishments that they kind of bring on to people should they get caught?

Rees Empey: 6:41

You know, I'd argue that many of these regulations are way outdated. They've been sitting on the books for 5060 plus years. And they haven't received a second look since then. And, you know, many legislators across the country are like for regulatory reform, but they have no idea where to begin, you know, third, there's obvious regulations that are like, Why is that still here, but then there are some not so obvious ones kind of hidden within, you know, most of the states bloated regulatory codes, because they just keep adding new ones without taking any away.

Ryan Norris: 7:10

Right, you and I had talked before about the issue in Mississippi, regarding drone technology being used for pesticide, and for fertilizer, in agriculture, and how there was a law in Mississippi that said you had to have a pilot's license to distribute those by air, but it makes no sense to have a pilot's license when you're using a drone. And Mississippi used a regulatory sandbox to to kind of solve that, because innovation is outpacing regulation. And in Arkansas, we only get a bite at the apple to legislate every two years. And so innovation is going exponentially faster than that in between those intervals. And it takes, of course, a long time to convince on legislators, but what they need to maybe do so you even have to add in buffer. So legislative legislation can be trying to catch up with something that needed to be solved 510 years before the fact.

Unknown: 8:14

Exactly, yeah, Mississippi is one of those states that has began looking at a regulatory sandbox to solve everything from drones, distributing fertilizer to something as simple as a corn vending machine. And Mississippi isn't the only state I've heard before this problem exists Montana's another, you know, many of these agriculture, heavy states, where innovation can be just unleashed. And with the food shortages, you know, why shouldn't we try anything that we possibly can and like you said, many of these state legislatures, it takes them years to to fix a problem that appeared 10 years ago, and something that, you know, especially a state that only meets every other year, such as Arkansas or North Dakota or Texas, a regulatory sandbox can really be helpful because that's there every single year every single day. You know, a business approached Arkansas, you don't have to be like, oh, we can take a look. But you know, we're in an off year if you're going to have to wait right or regulatory sandbox can take action immediately. And not deter that business from Arkansas. Because, you know, if you're not going to instantly welcome them, they may look at another state such as Utah or Florida. That is much quicker to act.

Ryan Norris: 9:19

That's a very good point Rees of the responsiveness that business needs the flexibility that business needs. A regulatory sandbox could be the tool that allows that to happen even in between the years that our legislators are meeting. This believe in Arkansas shout out goes to Paul Chapman and our friends at restore hope Arkansas. Paul and his team aim to reduce the rate of incarceration in the need for foster care through a community driven approach, utilizing stakeholders and community business, education and government to keep families together. As an Americans for Prosperity partner, sharing his unique experience and knowledge to identify barriers that keep families in a cycle of poverty, helping them overcome those barriers, and live a healthy, thriving life. Go to restore hope ar.org That's restore hope ar.org To learn more about the good work that Paul and his team are doing in markets. So for those that may be hearing the term Regulatory Sandboxes for the first time, could you describe kind of what that is?

Rees Empey: 10:36

Absolutely. In short, a regulatory sandbox enables innovators to work with regulators and legislators to trial new products, services and business models, while temporarily waiving laws or regulations that are in applicable to their ideas. So let's say for example, I've got an idea for a creative drone insurance, you know, that six month policy premium isn't gonna make sense if I've only flying the drone once a month, or a creative way to collect payments for my food, truck, business, etc. Or whether it's drones fertilizing a regulatory sandbox, could be the answer one of the tools in the tool belt to find real examples of regulations not working as intended, and the way they work. I'm just innovator with this great idea. Some regulations are standing in my way, I had approach the state, whatever agency or body that is currently hosting and working on running the regulatory sandbox, I would outline my trade idea what standing in my way. And upon acceptance in the sandbox, whatever those regulations are, they are temporarily waived, typically for two plus years. And that regulator is then able to collect real time data from the reporting of the innovator to say, Hey, these are the consumers, we're working with no complaints, people are happy. So then at the end of the trial period, ideally, that regulator can approach the state legislature say, hey, these rules and regulations aren't working as intended. Rather, they are stifling and preventing innovation from taking place in let's say, Arkansas in the first place, we need to take action, so then that business can exit the regulatory sandbox and enter the market legally. In other words, it creates this dynamic regulatory reform process that invites the business community to the table to highlight troublesome regulations that are standing in the way of innovation, to work with the regulators and legislators to constantly be reforming the state's regulatory code to better welcome the innovations of tomorrow.

Ryan Norris: 12:28

I like that a lot. So you you've hit on a couple of sandbox areas, we've kind of hit on agriculture, and how agri tech could be useful to get a sandbox can be useful. You hit on insurance could be a space to where innovation and sandbox can be useful. What are other areas of industry that may be open or or require flexibility such that a sandbox would provide

Rees Empey: 12:53

Traditionally and the very first sandbox that the world saw was financial technologies which deals with you know, cryptocurrency and blockchain, Blockchain creates a digital secure ledger that started to creep its way into other industries across the world. And then in 2018, the very first sandbox came to the United States by way of financial technologies for FinTech in the state of Arizona, and started to catch on and other states implementing FinTech sandboxes their own while also expanding it to other industries such as insurance. Arizona then looked at property technologies, the state of Wyoming looked at medical digital innovations. And since then, we've seen states such as Mississippi and Connecticut, look at agriculture technology, sandboxes energy technology sandboxes. In my State of Utah, we have implemented a legal services sandbox, which is run by our state Supreme Court. And we also have an education sandbox to promote innovation in the classrooms. So in other words, the sky's the limit, and we want to sandbox everything. And every in any industry, even those that we haven't thought of deserve welcoming with open arms, just because we haven't thought of it yet doesn't mean we should prevent it from coming through the front door. Let's instead give them a space to trial their their product or service, their business model, and then create smart regulation after also chipping away at the burdensome archaic regulations that are sitting on the books currently.

Ryan Norris: 14:21

So Rees, with Regulatory Sandboxes, what is it like with participation and are businesses even being attracted to getting involved with them?

Rees Empey: 14:30

So it's important to note that the United States is still fairly new to the regulatory sandbox. The first one the world came in 2014 in the United Kingdom, while the first one stateside came in 2018. In Arizona, and also our split our federalism creates some other complications between state regulations and federal regulations. However, there are some very good signs of early success. Arizona has had close to a dozen participants as well. So why West Virginia had a business relocate from Pennsylvania to partake in their FinTech sandbox. Utah's universal sandbox currently has two participants after just getting off the ground a little under a year ago. While there are a few applicants in in the hopper and others reaching out with interest, our legal services sandbox in Utah has just under 60 participants and a handful or a few dozen applicants looking to get into it. And as a result of the states really leading the way, you know, because I'm a strong believer that states are the incubator for innovative policies. In Congress, there have been three regulatory sandbox bills to tackle that the issue at the federal level, digital tokens is one of them, which deals with the cryptocurrencies. Senator Mike Lee from Utah introduced a universal regulatory sandbox based on Utah's model that would apply to any and all industries at the federal level. And Senator Marsha Blackburn introduced an agriculture technology sandbox based on Mississippi's, so if we can can get sandboxes at the state level and the federal level, sky is truly full. If we can get regulations out of the way on all levels,

Ryan Norris: 16:04

Regulatory Sandboxes, they're getting a little bit of a dispensation to work outside the normal regulatory frameworks. How does that or is there an impact on consumer protection because of this?

Rees Empey: 16:18

I would argue that consumer protection is top of mind when running an implemented regulatory sandbox, all the way from the application itself to the trial period, you know, the the business has to approach the sandbox highlight their great idea. And if that idea is clearly, obviously going to hurt consumers, they aren't going to be allowed in the regulatory sandbox, that's not good for business, it's not good for the regulator either that wants the sandbox to go as smoothly as possible. And while the business is in the sandbox, you know, innovating interacting with consumers selling their product, they are reporting to the state sandbox on what's happening. So transparency all the way there's constantly an eye on this business that is, you know, innovating and operating outside of the box, to ensure the smoothest possible trial period and that consumers are being protected the entire way.

Ryan Norris: 17:10

We've talked about Florida, we talked about Utah, what are some other states that have Regulatory Sandboxes of any size.

Rees Empey: 17:20

There are currently 11 states with Regulatory Sandboxes, Arizona and Utah are the only two as of right now to have a universal sandbox that applies to any and all, while everyone from Hawaii to Florida to West Virginia, have Regulatory Sandboxes of their own. So this isn't a red or blue issue. This is a nonpartisan issue. It's creating smart deregulation, smart regulation, while just increasing access to the little guys trying to get onto the market with their innovative product. They're not having to hire high caliber lobbyists or take the government to court. Instead, this is a way for the state to say, hey, we're open to working with you. Come talk to us, we want you to do business and innovate in our state, while also increasing access to goods, whether it's financial technologies or banking through FinTech, you know, sky's the limit, wait, getting regulations out of the way, just as you said in the introduction, plus regulations, and less compliance costs means cheaper goods getting to the consumers. And this is a way this is one tool to help deliver

Ryan Norris: 18:19

Alright. And so with 11 states that have already on that. adopted this, I mean, Arkansas needs to be the 12th in my opinion, I think that we that we would benefit from this. We need an economy that's blowing and going that people know that Arkansas is ready for business. And I think a regulatory sandbox wouldn't be a signal that we're serious about that. So, but describe to me from your knowledge, let's say using Utah, because I believe you're pretty, pretty familiar with that one. I'm a business I got a business idea. It's innovative. It's not quite fitting within the regulatory framework that I'm currently in. And how, how does that process work for me and say, Utah?

Rees Empey: 19:03

Yeah, so in Utah, we have, we'll just use the universal sandbox will will keep educational legal services off, you would approach the office of the regulatory relief office. It's director Tina Shahar that runs it. And there's a simple application online, that you can fill out, or he's very open to being contacted via email, and I can get into that we fill out the application. This is my great idea. This, these are the regulations that I think are standing in the way I don't really know where I fit. Can I please have a temporary waiver of these and you upon acceptance in the sandbox, you would then be allowed to trial this product service business model, while reporting to the sandbox itself. And you know, honestly, businesses within the sandbox are under more scrutiny than businesses outside because they are constantly reporting to the sandbox to then make an informed decision or make informed recommendations to the state legislature to make informed decisions on regulated regulatory reform or even repeal Well, because we don't want those businesses to sit in a sandbox forever, we want them to be able to get out, reform the States Code rules, whatever, and get them on to the full market legally. And, you know, one of the, the unsung heroes of the Regulatory Sandboxes, I'd say are businesses that don't know where they fit or don't have a grasp on the regulations themselves, because it's not so clear. They see the Sandbox is almost an ally, or a safe space to reach out and say, Hey, I may be breaking the rules, I don't really know where I fit, I kind of touched on insurance, I touch on, you know, commerce, I don't know who my regulator is. And then through the sandbox, just by talking to them, they find out they're allowed to operate under the state's current regulatory code, they don't need the sandbox. But that is much cheaper than hiring an attorney to come through the state's regulatory code for you, you know, this billing hours are just ridiculous when you can go straight to this friendly office that wants to sit down and wants you to do business in their state.

Ryan Norris: 20:56

So the state economies can benefit from sandboxes. Business can can be created, can innovate, because of sandboxes. And consumers can potentially have new products, new services, and lower cost goods and services, through the benefits of a sandbox. Are there other benefits out there that you can think of, I mean, those are the top three that come to my mind.

Rees Empey: 21:24

You know, I'd say that it just sends a message that, you know, we're Arkansas or we're Utah, we're Florida, and we want you to innovate, we don't have all the solutions to the world's problems. But we want you to come up with the next one. And we are willing to work with you. We don't want to deny you, we understand that regulations get in the way. So therefore, here's this space to trial, whatever great idea you may have. And that's why personally and you know, Libertas is whole, we think universal is the best way to go. There are innovations that can touch on two to five industries, sky's the limit. And we're ignorant if we think that we have thought of everything, you know that we're done innovating, things aren't ever going to change, because that's just not the case. You know, we're sitting here on laptops with earbuds and headphones on and our cell phones, we communicate 30 to 50 years ago with this, this would be unthinkable. We're working through the internet, we're recording, innovation is all around us, and it's constantly getting better.

Ryan Norris: 22:24

Yeah, and that's, that's what I see too, is that we are on this, this constant trajectory of, of improving the quality of life, and a lot of that quality of most, if not all, of those quality of life improvements existed in someone else's mind, they then decided to try to solve the problem for their community and create a business are a great idea. And that's how it happens. So all of the things that we can say, Look, we're not against you to start a business here, I think a lot of times the regulatory side of things seems to be more sticks, no carrots, on trying to get a business started. That, that the it's viewed somewhat as this government is the the opposition to business, they don't have a very friendly partnership style of environment, when it comes to, you know, small business particularly. So sandboxes, I think have that, that sweet spot to where government can be a, a ally of business to help them get things figured out, so that we can get them into the right place that they need to be. I think that it's also good to have challenges to these old regulations that have been sitting on the books forever and maybe outdated. And just, you know, cleaning that up is also another benefit. But when I was you know,

Rees Empey: 23:57

it may lead to regulators or state officials, legislators thinking creatively about ways to solve other problems, not just regulators just thinking outside of the box and getting them into that culture and that mindset, that it's okay to think outside of the status quo. You know, that's how we're driving vehicles around and we're not under candlelight anymore. You know, things constantly need to be innovating. And it's going to happen regardless, we can either be friends with innovation and and welcome it and say we're going to work with you, we're going to work to understand it and then create smart regulation after to ensure consumer protection, or we're gonna get left behind and prevent you from operating in the first place. And someone else will come fill that role and say, hey, well, we want you over here. You don't need to go there, but you can come here.

Ryan Norris: 24:39

Love it. I think that Arkansas should consider Regulatory Sandboxes as a place to again show that we're open to new and innovative ideas. We have industries within our state that have been trendsetters globally, not just nationally or just within the state, and there are more people who, whose ideas could be realized through a regulatory sandbox. I think there's benefits again to the state, attracting business in benefits for business to try to be innovative and forward thinking. And then also for the consumer, again, to have better quality of products and services, and then also potentially lower costs. So big fan on the on the sandbox side. You know, Reese, if individuals want to learn more about Libertas and the work that you all are doing? How can they get connected to you? Yeah,

Rees Empey: 25:41

Before I want to get into that, I just want to say that, you know, regulatory sandbox can work to benefit both the new small businesses as well as the old, large legacy businesses. You know, you've got companies like Walmart, what could drone delivery mean for them? Or, you know, this isn't this is for everyone. This isn't just for the newcomers, because the, you know, the folks have been around for much longer than some of these new startups. They need to keep innovating as well to remain relevant. How are they going to get the best products to their consumers? It all relies on innovation at the end of the day. To get in touch with Libertas you can reach out to my my work email, rees@libertas.org. And I'd be happy to answer any and all questions.

Ryan Norris: 26:28

Very good. Well, Reese, appreciate your time. With Believe in Arkansas, I think you're always enlightening us about the benefits that Regulatory Sandboxes can bring to citizens and businesses both new and old. So we appreciate it. And hope to have you back sometime soon. And maybe you have come visit the state.

Rees Empey: 26:53

Hey, thank you for having me again, and hopefully I can come visit Arkansas. I love it out there.

Ryan Norris: 26:59

Thank you for joining us for Believe in Arkansas, where we believe free people are capable of extraordinary things. If you believe in Arkansas and would like to help unlock our state's potential. Go to www.believeinar.com to learn more and join the movement today. We hope you've enjoyed this episode of believe in Arkansas. Be sure to like follow and share