• North Carolina’s Regulatory Sandbox waives certain regulations for promising new products in finance and insurance
  • We could all benefit if the state’s largest industry, agriculture, could also avail itself of a lighter regulatory climate to encourage innovation
  • To improve the regulatory sandbox even further, lawmakers should let regulations be recommended for repeal as unnecessary and immediately subjected to the rules review process

In 2021 the North Carolina General Assembly approved a promising new way to address the problem of state regulations preventing or dissuading bringing new products to market. It is called a “regulatory sandbox,” colorful imagery for providing a spot for innovators to test out new ideas relatively safe from overregulation.

Recognizing the strangling effect of overregulation especially on bringing new ideas to consumers, the law allows the waiving of some regulations for newly emerging products and services for 24 months to give them a test run while keeping consumer protections in place. Martec’s Law shows that technological change happens exponentially (increasingly fast) while institutional change is logarithmic (means slow). With respect to government regulation, however, the pace of technology vs. the pace of bureaucracy is like comparing Formula 1 world champion driver Max Verstappen with a drunken sloth.

With bureaucracy hamstringing beneficial technological changes, the General Assembly created the “North Carolina Regulatory Sandbox” initially for financial and insurance services (FinTech and InsurTech). The program is implemented by the North Carolina Innovation Council, created for the purpose of “support[ing] innovation, investment, and job creation within North Carolina by encouraging participation in the regulatory sandbox.” Chosen participants receive a waiver from certain state regulations for 24 months to test out a product or service. They pay an application fee ($50) and participation fee ($450), must have a physical presence in North Carolina, and must pass a criminal background check. At the completion of the sandbox period, they submit a final report to their regulating agencies and transition to the full regulatory environment.

How North Carolina’s Regulatory Sandbox Works

North Carolina isn’t going it alone by having a regulatory sandbox, even for a couple of industries. Many other states as well as several nations around the world have regulatory sandboxes for certain industries, and some — Utah, Arizona, and Kentucky — have universal sandboxes (i.e., open to any industry).

Adding Agriculture to the State’s Regulatory Sandbox

The state’s largest industry is agriculture, and its importance to the people of North Carolina goes well beyond industry numbers. The price and quality of food produced here affect everyone’s well-being. Technological innovation can help farmers produce more for less as they deal with outside stressors pushing them in the opposite direction, such as inflation, weather, rising labor costs, rising fuel prices, and regulation. The impacts of that last one, however, can at least be managed by lightening it.

Locke’s “Policy Solutions” urges legislators to seek ways to deregulate the agricultural sector, since more regulation hinders its growth. The guide specifically calls for expanding North Carolina’s regulatory sandbox to include agriculture: “An agriculture sandbox would open more options for farmers and let them explore new innovations without reactive regulation preemptively closing them off.”

Fortunately, North Carolina already has the infrastructure in place for an agriculture sandbox (and, for that matter, a universal sandbox). Policymakers have already done the heavy lifting in establishing the regulatory sandbox law and setting up the Innovation Council.

A few minor changes could expand the current Innovation Council to include a focus on agriculture as well. The Innovation Council, which includes the Commissioner of Banks and the Commissioner of Insurance (or their appointed designees), should include the Commissioner of Agriculture or appointed designee. The range of backgrounds for public members on the council — either “financial services; insurance; blockchain; FinTech, InsurTech; or entrepreneurship” — should be extended to include agricultural fields, from pork to produce, poultry to cattle, and others.

Using the Regulatory Sandbox to Improve the State’s Business Climate

North Carolina’s regulatory sandbox requires further changes to move it from a mere product incubator to a more substantial, pro-business, and pro-consumer program. Beyond expanding the program to agriculture and other industries, lawmakers interested in providing a more welcoming climate for innovation beyond current sandbox participants should consider the following reforms:

1. Make the incubation period indefinite

In general, after 24 months, the testing period is over, and the new technology must either sink or swim under the full regulatory environment. If the lifted regulations are helping North Carolinians obtain a new product or service, then this environment is favorable for the product and consumers. Removing the waiver of certain regulations could result in loss of the new product or service. Furthermore, the 24-month period may dissuade some would-be participants worried it would end too soon and without regulatory reform.

It would be, however, antimarket and unfair to companies outside the sandbox to have competitors remain under a lighter regulatory regime that they cannot also enjoy. The next two points would address that unfairness.

2. Have the Innovation Council report the waived regulations to the General Assembly for repeal

A longer incubation period could help the Innovation Council see how detrimental certain regulations they waived are to the business climate in the affected industry. At the end of their sandbox incubation periods, many states require reporting on the sandbox program decisions to the legislature with one hope being regulatory reform. North Carolina’s regulatory sandbox program should have the Innovation Council report waived regulations to the legislature with the recommendation that they be repealed.

The General Assembly has had a laudable deregulatory agenda since Republicans gained control of both chambers in 2011. This reform would address very practical steps for deregulation by pinpointing demonstrably unnecessary regulations standing in the way of greater innovation.

3. Sunset the waived regulations unless readopted as new rules

An important part of this deregulatory agenda was the 2013 addition of sunset provisions with periodic review of state regulations. Under that process, administrative rules (regulations) are reviewed every 10 years by their originating agency and either allowed to sunset as unnecessary or subjected to the rules adoption process as if they were new rules. Without review, a rule automatically sunsets.

The regulatory sandbox law could be supplemented by having the regulations that get waived for participants in the program be immediately reported to the Rules Review Commission as an unnecessary rule (i.e., Step 2 in the rules review process, General Statutes § 150B‐21.3A.(c)) and undergo the rules review process from that point on, regardless of how far away their slated 10-year review period is.

The ultimate purpose of the regulatory sandbox program, after all, should not be only to provide temporary relief of regulatory burdens on the handful of chosen participants in a couple of industries. It should be to discover what regulations we can do without to grow opportunities in a host of industries — especially agriculture — and then use that information to clear the path for all competitors.