To sandbox or not to sandbox? Diverging strategies of regulatory responses to FinTech in the Baltic States and Finland

FinTech with its various technological solutions and applications is the clearest manifestation of the latest innovations in the world of finance that has posed challenges for national regulators who have had to face in the post-2008 financial crisis era. FinTechs have brought about the blurring of jurisdictional and market lines, which entails reduced transparency and governability and increased the critical role of technology and technical expertise in the financial decision-making on the opaque and complex financial markets. In this new context, regulators and supervisors need to be able to understand the hidden assumptions and distributional preferences built into various computer programs as well as the direct and indirect effects of complex technical choices on the structure and integrity of the financial markets. One possible instrument for uncovering these effects is a regulatory sandbox. As a comparative study, this paper looks into the adoption and implementation of regulatory sandboxes for FinTech in the Baltic States and Finland where we can observe diverging trajectories. Estonia and Finland have not exploited the possibilities of this instrument, while Lithuania and Latvia adopted a regulatory sandbox framework in 2018 and 2021, respectively. The paper examines the diverging trajectories of the four countries and analyzes the political, economic and institutional factors affecting the adoption (or non-adoption) of regulatory sandboxes for FinTech. As sources of data, the study draws on policy documents and semi-structured interviews with key policy-makers.