How ‘sandboxes’ could help Hawaii prosper

Some say Hawaii needs more sandboxes — and not just the kind you played in as a kid. 

Rees Empey, director of state government affairs at the Libertas Institute, based in Lehi, Utah, says just as childrens’ sandboxes foster imagination, so do “regulatory sandboxes” encourage innovation and job growth, by shielding emerging businesses or technologies from existing rules and regulations that might limit their success.

Interviewed on this week’s episode of “Hawaii Together” by Jonathan Helton, a policy researcher at the Grassroot Institute of Hawaii, Empey said such sandboxes have been gaining momentum at the state and federal levels, including in Hawaii, though their use in Hawaii could be expanded.

Helton noted that Hawaii does have a sandbox for cryptocurrency, and asked Empey what he might say to encourage state lawmakers to authorize more.

“It really just depends on the legislator and what their priorities are because you can sandbox everything,” Empey said. “That’s something we’ve seen overseas and, over the past couple of years, seen Utah and Arizona do, where they cast a wide net; it’s a universal sandbox that applies to any and all industries, rather than picking one or two, because it’s really hard to tell what really could use sandboxing.”

In Arizona, he said, a lawmaker there has been considering that state’s “universal” sandbox as a way to address affordable housing.

“I would argue that Hawaii should move beyond just a cryptocurrency sandbox,” Empey said. “Government doesn’t have all the answers, and inviting the creative minds to the table — you never know what solutions you’ll find.

“On top of giving these innovators an opportunity to trial new products, services or business models,” he said, “I think it also sends a message that: ‘Hey, we’re open to business. … We want Hawaii to be your home. We want you to bring your business and grow here in Hawaii.’” 

To see the entire interview, click on the video below. A complete transcript is provided.

11-8-22 Jonathan Helton interviews Rees Empey on “Hawaii Together”

Jonathan Helton: Aloha, and welcome to “Hawaii Together” on [the] ThinkTech Hawaii Broadcast Network. I’m Jonathan Helton, in today for your regular host, Keli‘i Akina. I’m a policy researcher at the Grassroot Institute of Hawaii. 

My guest today is Rees Empey. He’s the director of state government affairs at the Libertas Institute, which is a think tank based in Lehi, Utah.

The Libertas Institute is dedicated to changing hearts, minds and laws to build a freer society by creating and implementing innovative policy reforms and exceptional educational resources.

Rees joins me today to talk about sandboxes. But these sandboxes aren’t the kind you played in as a kid. Many states across the country, including Hawaii, have used regulatory sandboxes to encourage businesses to innovate and develop new technologies, and Rees thinks we should establish more of them. 

Thanks for talking with me today, Rees.

Rees Empey: I appreciate you having me, Jonathan.

Helton: Absolutely. So, we’re going to talk about regulatory sandboxes today, and I understand that you’ve done quite a bit of research on them. 

Can you briefly explain what the term means and how they work?

Empey: Yes. So, in short, a regulatory sandbox enables innovators to work with regulators and legislators in trialing new products, services and business models while temporarily waiving inapplicable rules or regulations that stand in their way. 

So, in short, let’s say I’ve got a creative new idea to collect payments for my food truck business, or to provide insurance coverage for drones.

I would approach the state sandbox under whatever regulatory agency it’s housed, outline my great idea,; highlight the regulations or rules standing in my way from getting it onto the market,and upon acceptance into the sandbox, I would be allowed to trial that innovation without those rules and regulations applying to me for a limited amount of time — all at the same time, constantly reporting to the regulator themselves so that the regulatory office can make recommendations on reforms or even repeals of those regulations to the state legislature. 

So, in short, it creates this dynamic regulatory reform process by inviting the business community to the table to highlight troublesome regulations and to inform smart regulatory reform to better welcome the innovations of tomorrow.

Helton: OK. So, the premise behind a regulatory sandbox seems to be that if you’re, if you’re going to have more entrepreneurial activity, more innovation, businesses should be allowed to operate in a climate that has fewer regulations. Is that correct?

Empey: I don’t know if the answer is necessarily fewer regulations; I think the correct answer would be smart regulations. 

Helton: OK.

Empey: There are things that we haven’t even thought of yet; and because of that, we should not just automatically bar these new innovations from getting onto the market. 

Instead, let’s let them trial so that we, we have an understanding of it to then craft smart regulation around them to ensure consumer protection is guaranteed.

Helton: And so, and so, at a basic level, a regulatory sandbox seeks to do this by trying to waive a lot of the regulations that might otherwise apply to developing a new technology. And then, through the trial period of the technology, figure out which regulations really work. Is that — am I understanding that correctly?

Empey: That’s right. Yeah, some of these regulations have been on the books for 50-, 60-plus years, and we can’t expect, you know, these new innovations, such as cryptocurrency or blockchain, to fit neatly within, for example, banking regulation.

Helton: Yes. [Rees], you mentioned cryptocurrency. So, Hawaii has set up a sandbox for cryptocurrency. And — before we talk about that, I’ll start off with a question: Do you think Hawaii could benefit by relying more on sandboxes?

Empey: I think so. You know, on top of giving these innovators an opportunity to trial new products, services or business models, I think it also sends a message that: “Hey, we’re open to business; we want to work with you; we don’t want to prevent you from coming. 

You know, we want Hawaii to be your home. We want you to bring your business and grow here in Hawaii,” which also leads to job growth.

Helton: Yes, I was just looking earlier today — the Tax Foundation just released a report [saying] Hawaii is one of the worst states to start a business in. So, sandboxes might be something to combat that trend to help Hawaii’s rankings improve for more businesses to start up. 

But let’s circle back to cryptocurrency. I know Hawaii has a sandbox for cryptocurrency technologies, and it’s — it was started a couple of years ago. 

Can you give us some of the background into that and how it’s maybe helping people who use cryptocurrency in Hawaii?

Empey: If I’m not mistaken, prior to the sandbox, cryptocurrency was essentially illegal in the state of Hawaii due to the capital reserve requirement [that] for every $1 in bitcoin, you have to have $1 of currency to back that, which is hard in such a volatile up and down market that the cryptocurrencies are, and it was implemented to better welcome and understand those. 

I’m no expert on the Hawaii stuff. I wasn’t yet working on this when Hawaii implemented theirs. But, in short, I believe it helps the folks of Hawaii by giving them an opportunity to engage with these businesses that orient themselves around cryptocurrencies; showing them it isn’t necessarily something to be scared of — that this can make their lives better, whether it’s interacting with the cryptocurrencies themselves or maybe the technology such as blockchain, which creates a secure digital leger, by giving them the ability to interact with that, not necessarily just cryptocurrencies.

Helton: Yeah, so, more than just Hawaii: How many other states have sandboxes, and what kind of successes are those states seeing?

Empey: In total, there are 11 states with sandboxes ranging everywhere from the financial technologies — cryptocurrencies — to education, to legal services. 

Some of the major successes, I would say, are coming out of Utah. 

Hawaii is definitely one of the most successful sandboxes. I know that there are close, there have been close to two dozen participants in the sandbox. 

In Utah, we have a legal services sandbox, which is run by our state Supreme Court, and there are currently, I believe, 58 participants in it that have offered thousands of legal services at a much lower cost and much more streamlined fashion to Utah’s.

Another notable sandbox, I would argue, is the first one that the United States saw, in the state of Arizona, where there have been close to over a dozen participants, and that really — that caught on. Because after that, you saw states such as Wyoming, Utah start to explore them as well, and also begin applying them to other industries — not just financial technologies, but also insurance, legal services.

There have been energy technology sandbox bills, agriculture technology sandbox bills. So, it’s still fairly new, and the success is very early, but I believe it’s promising.

Helton: All right. Not to be argumentative or contrary, but isn’t the idea of a sandbox maybe a little bit questionable from a free market perspective? 

It sounds a little bit like the government can pick which companies get to be in the sandbox, and let’s kind of pick the winners and losers. 

So, do you think it might be better to just decrease regulations for all businesses and let companies innovate naturally?

Empey: I’d argue — there are a few points to that. For the picking winners and losers, that’s where transparency is so important. 

For example, Utah, Hawaii, West Virginia, Arizona have been very transparent who’s applied to the sandboxes as well who’s currently participating, which creates — it’s a much more difficult time to pick winners and losers and allow cronyism into it.

And on top of that, as much as I would love to come in and start slashing regulations, it’s just not going to happen. And this regulatory sandbox is inviting the community directly impacted by these regulations to highlight what’s standing in their way. 

Because we often see states that, you know, we want regulatory reform, and there are those obvious ones or they don’t really know where to begin. But inviting this business community to the table can really help push the needle on that for smart regulatory reform, while also maybe identifying some troublesome regulations that aren’t so obvious.

Helton: OK. So it sounds to me like a sandbox is, is partially a, is [a] pragmatic response to over-regulation in, in cases where…

Empey: Absolutely.

Helton: … regulators wouldn’t, or lawmakers wouldn’t want to slash regulations to the extent that they might need to be cut. So, a sandbox allows a trial period to find which ones are really harming businesses the most. 

Empey: Absolutely.

Helton: And so, besides that, what — what would you say the main objections to sandboxes are? In these 11 different states, when lawmakers have been debating them, what kind of concerns have been brought up?

Empey: I’d say there’s, there’s one or two. Consumer protection is definitely one of them, that, you know, this is going to turn us into the Wild West of regulations, and that just isn’t the case. Consumer protection is guaranteed from the very beginning of the sandbox, or at least it’s a very strong point in how the sandbox can be successful and operates. 

From the very application that a business will submit, you know, if their idea is clearly going to harm consumers, they’re not going to be allowed into the sandbox; they won’t receive that waiver. 

And while operating in the sandbox, they’re constantly reporting to the regulator and/or agency on how many consumers they’re having, feedback they’re receiving. 

So then, you know, the end goal is to have that rule or regulation reformed or even repealed so they can exit the sandbox and enter the market legally.

Another point that a lot of folks will make is that folks just aren’t using them, but I push back on that. This is still a fairly new idea, the first one coming to the United States in 2018. 

This started back in 2014 in the United Kingdom, and all these other countries from Europe to Asia have had success, and there’s no reason why it can’t be successful here in the United States.

It’s just going to take a lot of awareness, good marketing campaigns and empowered regulators that want to want to invite these folks to their state — whether it’s Utah, Hawaii, Tennessee — to say, “Hey, we want to do business with you, and we’ll work with you to get you there.”

Helton: So, speaking of marketing and awareness, what — what do you think is the best way is to convince a state lawmaker that sandboxes would be helpful? Who are, you know, who are the best people to approach? 

And also, for Hawaii specifically, have you had the opportunity to have any conversations with lawmakers in Hawaii about sandboxes?

Empey: I have spoke to a few Hawaii legislators, but, but not many, at the conferences I’ve attended. I’d say, you know, sandboxes are unique in the way that they can be used to tackle almost any problem. 

The Arizona legislator we worked with said, you know, “I wanted to really tackle affordable housing, and this sandbox is a tool start targeting that. Because I could introduce a bill for affordable housing, but let’s let, you know, these businesses come to us and say, ‘Here are some great ideas we have to make Arizona a better state for housing.’” 

Or in Mississippi, for example, where the first agriculture technology sandbox came up. 

It really just depends on the legislator and what their priorities are because you can sandbox everything. And that’s something we’ve seen overseas and, over the past couple of years, seen Utah and Arizona do, where they cast a wide net; it’s a universal sandbox that applies to any and all industries, rather than picking one or two, because it’s really hard to tell what really could use sandboxing. 

And it’s also a way where you’re not picking winners and losers; you’re inviting everyone to the table, regardless of what industry they’re in.

Helton: All right. And so, you mentioned, real quick, you mentioned Arizona had created a sandbox for affordable housing. Can you go into the details of that a little bit, if you know them? Because I know [in] Hawaii, that is a very large problem for us, is trying to find solutions to create affordable housing.

Empey: So, Arizona didn’t create an affordable housing sandbox specifically. 

Helton: OK.

Empey: I was saying the legislator himself said a priority issue of his was tackling affordable housing, and he saw sponsoring and running and passing a universal sandbox as a step in that direction, where — he didn’t really know where to begin. 

So, you know, in other words, “Let’s invite the business communities to the table. How — what are some of your ideas to make this a reality?” Because, you know, businesses should be making — businesses should be innovating; government should not.

Helton: OK. And so, other than a blanket, a universal sandbox, what kind of industry or technology-specific sandboxes do you think that might work well in Hawaii?

Empey: You know, I [laughs], Hawaii’s one of those difficult states. So, I would advocate, you know, at the end of the day, for sandboxing everything. 

But something, you know — agriculture has become an interesting industry that’s gained a lot of attention starting in Mississippi; now several states are like, “Oh, that would be really important to us in South Dakota,” or, you know, et cetera, et cetera.

Energy technology is another one, [with] a bill started in Mississippi. And Connecticut’s regulators recently approved an energy technology sandbox to update the grid, get affordable energy to the consumers, and they want businesses to come in and trial and make that a reality for all the folks in Connecticut. 

And it’s begun to start to trickle up to the congressional level where there have now been three regulatory sandbox bills introduced in Congress. Every, uh — digital tokens, which focuses on the cryptocurrency, to universal to agriculture technologies.

So the states are really leading the way and you can sandbox anything. 

You’ve got a problem? You know, it’s like, why not try a sandbox? There’s someone out there with some idea that doesn’t even know where to begin to get a business off the ground, and a sandbox sends a message that we’ll work with you to help turn that idea into a reality.

Helton: Yes. Regulators are, I believe, the ones who are partially behind setting up the sandbox. They’re in conjunction with lawmakers. So, how, how have you been able to — in your work with lawmakers — how have you been able to make sure that regulators set up the sandbox in a way that is really business-friendly and isn’t just a sandbox on paper, doesn’t really invite anyone to participate?

Empey: This has definitely been a problem in one or two states where a sandbox passes and the regulator wants nothing to do with it.

Aand that’s where the education campaign really comes in handy. You know, approaching folks ahead of time before a bill is even introduced, or before efforts go underway to implement one, get them on board and empower them. 

But also, just finding a good host. Sometimes, you know, one regulatory agency may not work, and you have to do something completely different. 

I’m not saying that was the case in Utah, but what we did for our universal sandbox was create an office independent from all the regulatory agencies that has an advisory board consisting of folks from various business clusters and the regulatory agencies to inform our director on what they think about applicant A, B, C, D all the way through Z.

Helton: So you were able to work, to set up essentially a new office that would help work with the businesses that wanted to be in the sandbox. And that way, you avoided some of the bad blood that might, hypothetically, have been there for a regulator who didn’t want to implement the sandbox. Is that correct?

Empey: Yeah, absolutely. And to that point, there’s almost an unsung hero that I’ve heard from our universal sandbox in Utah that there are these businesses that are just reaching out to this new independent office from the regulatory agencies because they don’t really know where they fit or they’re afraid to, to tell on themselves and approach the regulator themselves and say, “Hey, I may be breaking your rules.”

But they see this universal sandbox outside of all those agencies as, I guess, you’d say, a safe space, where there’s an open dialogue and the sandbox helps find where they fit. And in a lot of cases, they haven’t needed the sandbox. They just didn’t have the expertise or capital to hire an attorney. But because of the sandbox, they’ve had an office they could easily approach and talk through their problems.

Helton: Right. And so, other than sandboxes, I know that the Libertas Institute has done research on a lot of different policies. So are there any other policies — maybe give me a quick list — that Hawaii might be able to use to become a more innovative state?

Empey: Yeah. We’ve done a few of those and also developing some more underway. 

One of our five policy pillars is tech and innovation because we want Utah to be tech-friendly, innovative and, you know, at the cutting edge of new, new and emerging technologies. 

We’ve worked on everything from food trucks — freeing them from local ordinances, regulations that are unfairly putting them at a disadvantage compared to the traditional brick-and-mortar [buseinesses] and creating an environment where they can more easily travel through the state of Utah — to legalizing minor-run businesses, whether it be a lemonade stand or lawn-mowing business. 

And as a result of the reforms on the childrens’ front, we have launched over the past handful of years a children’s entrepreneurial market where, throughout Utah, we host these little fairs where kids come, set up a business and adults will come in and pay for their goods and services, whether it’s baked goods or a sewn blanket. It’s kind of crazy how innovative some of these kids can be, and that’s been something really rewarding to see. 

They’re not going to get rich at this children’s market, but it’s really teaching them a lesson at a young age that if they have a good idea, they can monetize it, and I have no doubt that they will grow into the next entrepreneurs of tomorrow.

And one of the new policies we’ve started to take a look at is protecting the gig economy and gig workers, whether it’s Uber or DoorDash — you know, sky’s the limit when it comes to the gig economy, and that’s something we’re currently working on and [asking], “What does a good model for protecting those workers look like?” and unleashing that, while, all at the same time, protecting, with these new and emerging technologies, the privacy of all Utahns from government; you know, ensuring that warrants are still required for electronic data and stuff like that.

Helton: We are looking forward to seeing some of those policies come to fruition in Utah and other states. We will definitely keep an eye on what works and what we can use here in Hawaii. 

I know the things that you just mentioned are things that Hawaii could certainly use to, to create, to advance economic freedom and to ensure that someone who’s wanting to start a business isn’t squashed by regulators.

Now, hypothetical situation: You’re talking to a Hawaii lawmaker. The Hawaii cryptocurrency’s sandbox has, was extended for another [two years] earlier this year, and so it’s going to come up again. It’s going to come up again for debate.

What would you say to that lawmaker and urge them to either continue this sandbox or make it permanent for cryptocurrency or just make it better in general?

Empey: I think one of the most important lessons to be learned from sandboxes are what regulations aren’t working, and I think Hawaii’s sandbox has taught valuable lessons on whichrules and regulations need reforms so these businesses can exit the sandbox — because we don’t want them in there forever. We want them to eventually get out and be on the whole market legally with a welcoming regulatory environment that is, you know, crafted for the innovations of tomorrow.

I would argue that Hawaii should move beyond just a cryptocurrency sandbox. You know, energy is a big issue. Lots of folks are talking about water — [that’s] a big issue in Utah. And government doesn’t have all the answers, and inviting the creative minds to the table — you never know what solutions you’ll find.

Helton: We absolutely agree. And to finish up, is there anything else you would like to share with the listeners today?

Empey: I don’t believe so, but I appreciate you inviting me on.

Helton: Absolutely, and we appreciate you coming on. 

We think that your message on sandboxes especially is important for lawmakers to hear. So I’d like to thank you for coming on to speak today and, you know, exploring this topic with me. 

Of course, we’d like to thank the audience for joining us and listening to another episode of Hawaii Together. I’m Jonathan Helton, standing in for Dr. Keli‘i Akina. Until next time. Aloha.

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