Sandbox success cements Lithuania’s reputation as fintech hub

It’s now more than a year since the Bank of Lithuania became the first in the region to launch a regulatory sandbox, a fintech-conducive regulatory and supervisory environment designed to foster innovation in the financial sector.

Only the third of its kind to open in continental Europe, the sandbox has been an enormous success.

According to the Bank of Lithuania, at the end of 2018 there were 87 licensed fintech companies in Lithuania. At the end of 2019, there was a total of 113 licensed fintech entities in the country: 91 electronic money and payment institutions, 18 crowdfunding and peer-to-peer platform operators as well as five specialised banks, contributing to Lithuania’s growing reputation as a fintech hub.

“Fintechs and start-ups usually tend to have bold and innovative ideas; however, at the same time, they lack general knowledge and experience when it comes to the financial ecosystem, legal issues and regulation,” says Dovilė Arlauskaitė, sandbox project manager at the Bank of Lithuania.

“The regulatory sandbox allows existing and potential financial market participants to test their financial innovations in a live environment under the guidance and supervision of the Bank of Lithuania. Participants are selected according to certain eligibility criteria (genuine innovation, consumer benefit, the need for testing in a live environment, readiness for testing and the ambition to provide financial services in Lithuania). Should financial innovations pay off, companies would be able to start operating under normal conditions, as in, apply for a license,” she adds.

The relationship between the bank and start-ups is not a one-way street, however.

As Arlauskaitė tells Emerging Europe, while the bank helps start-ups, the start-ups also educate the bank.

“We learn about new trends and products, which is very important in the field of supervision,” she says. “The regulatory sandbox serves to ease the implementation of financial innovations in the financial market, especially where regulation of any activity that relies on financial innovations is insufficient or unclear. Furthermore, the regulatory sandbox is intended to help the Bank of Lithuania to understand in advance the possible effects of financial innovations on consumers and the financial system, identify emerging risks, determine possible shortcomings regarding regulation of the financial market (where they are related to the implementation of financial innovation) and, within its competence, eliminate or reduce such regulatory shortcomings and any potential negative effects induced.”

Companies currently using the sandbox include Ooniq, a peer-to-peer (P2P) insurance platform.

“The P2P insurance platform is based on the principles of the sharing economy, where its members form groups to protect themselves against losses, make their own decisions on loss compensation using pooled funds and get back those unused,” says Arlauskaitė. “We have received requests from several other applicants and are currently discussing the possibility of providing them with the sandbox services.”

The bank has already extended the scope of the sandbox with another project – LBChain – a blockchain-based technological platform with regulatory guidance.

“It aims to solve several problems faced by financial innovators,” Arlauskaitė tells me. “Besides the lack of experience in legal issues and regulation, fintechs and start-ups also generally do not have the opportunity to test their products in a safe and innovation-conducive environment. LBChain offers both: consultations by the Bank of Lithuania on regulation as well as technical and technological assistance by the leading blockchain integrators.”

Fintech companies from three European countries have already used LBChain to test a variety of products, including a KYC solution for AML compliance, a cross-border payment solution, smart contract for factoring process management, payment tokens, a mobile POS and payment card solution, a crowdfunding platform as well as an unlisted share trading platform.

The Bank of Lithuania is well aware of the fact that the sandbox is good for the country’s brand and reputation as being innovation-friendly, and is ready to share our experience on an international level.

“We have joined the Global Financial Innovation Network (GFIN),” says Arlauskaitė. “It provides support to companies wishing to test innovative financial products, services or business models across international markets, thus breaching borders of one jurisdiction. After the cross-border testing pilot, GFIN members have been provided with valuable experience and feedback that will help regulators to continue developing the framework for future cohorts. GFIN is now looking for solutions to address the identified issues and will announce the second call for applications in the first half of 2020.”