Babbitt Column | Regulatory Sandbox Confirms Difficulties in Implementation, China Should Actively Deploy Industrial Sandbox

I. Regulatory sandbox is again valued due to blockchain fever

In November 2015, the UK's Financial Conduct Authority (FCA) pioneered the sandbox concept and proposed three models: regulatory sandbox, industrial sandbox, and umbrella sandbox. The FCA also took the lead in launching the regulatory sandbox program. After several years of operation, the report "Regulatory Sandbox Lessons Learned Report" [20] was released in October 2017, and many countries or regions subsequently learned the UK regulatory sandbox. It started mainly in the Commonwealth countries and later developed in non-Commonwealth countries, such as the United States.

Since General Secretary Xi ’s instructions on October 24, 2019, China has once again launched a blockchain R & D and deployment plan, including a regulatory sandbox plan, similar to the UK regulatory sandbox. [2] Before October 24, many people in China thought that China was very aware of the current state of development of foreign blockchains, but General Secretary Xi said "Relevant departments and their responsible leaders should pay attention to the current status and trends of blockchain technology "It has been made clear that Chinese practitioners may not be aware of the current situation. Today, it is said that the development of blockchain technology is required. Many institutions have stated that they will start the regulatory sandbox. But how much do you know about the current status and trends of the regulatory sandbox? Is there any in-depth research on the situation of foreign regulatory sandboxes? We can't just implement the regulatory sandbox just because many countries implement it.

We have published several articles on sandboxing, including sandboxing, technology, results, experience, and sandbox economics. In particular, because of competitiveness, sandbox projects will only be global, not just local projects. After studying the sandbox experience report and participating in the implementation of foreign sandboxes, the author found that the original regulatory sandbox system in the United Kingdom was flawed, and proposed the regulatory sandbox 2.0 to make up for it [12].

As China is about to open the regulatory sandbox, we once again combed the experience and academic reports of foreign regulatory sandbox implementation, especially the reports of the past year. In the past few years, I have doubted the logic and practicality of the regulatory sandbox. In his 2017 speech in Guiyang, he suggested that China should develop the industrial sandbox first, not the regulatory sandbox.

Our research this time found that the Bank of England knew that there was a problem with the regulatory sandbox as early as 2018. At that time, the United States criticized the regulatory sandbox and the Bank of England also began to make up for it, but refused to admit it publicly. But the paper bag couldn't hold the fire, and finally in September 2019, the UK acknowledged that there was a problem with the regulatory sandbox. After the United States has experimented with the sandbox, it has directly begun to practice the industry sandbox and abandoned the sandbox. During this time, regulatory authorities in various countries, including the Hong Kong government, have been implementing the regulatory sandbox, and criticism has continued. The problem arose, but the Bank of England remained silent, and officials continue to sing praises to this day. It's as if the U.S. Hyperledger was found to be a fake chain in 2017, but it was not acknowledged by other US agencies until 2 years later.

This time the UK regulatory sandbox was evaluated by world-class regulatory experts. One is a well-known lecture professor in Australia, specializing in regulatory technology, and regulatory agencies in various countries are studying his related papers. The other is a senior consultant to the US federal government and a US regulatory expert who is responsible for designing and implementing the US version of the regulatory sandbox.

This article studies the advantages and disadvantages of the regulatory sandbox system and the current development path abroad. Section 2 reviews the known shortcomings of the regulatory sandbox in the past; section 3 introduces international collaborative academic papers published at the end of 2019, which mentions that the regulatory sandbox is much less useful than advertised; and section 4 talks about US regulation Sandbox criticism; Section 5 states that the UK Fund acknowledges criticism of the United States; Section 6 states that the UK regulatory sandbox testing rules do not comply with software engineering principles; and Section 7 introduces various industry sandboxes, including the UN ICAO sandbox Plan, US Food and Drug Administration's pharmaceutical supply chain plan, and Taishan Sandbox in China; Section 8 compares the regulatory sandbox with the industry sandbox; Section 9 summarizes this article.

Second, known regulatory sandbox disadvantages

For the United Kingdom, the main purpose of the regulatory sandbox is to publicize the government's open attitude, grant special innovations to technology companies, and allow government regulators to learn new technologies. Another important purpose is to allow regulators and technology companies to communicate directly. For example, the Hong Kong government has updated the regulatory sandbox, and private institutions can communicate directly with regulators. In past articles, some shortcomings of the current regulatory sandbox have been pointed out [15]:

After passing the sandbox test, the law has not changed. After the regulator learns technology, the technology company still cannot deploy the system, wasting a lot of resources and time of the company. The real benefit is the government regulatory agency, not the national economy, nor the participating agencies; there is no objective, scientific, and instrumental evaluation and testing, and there are no standards. Different regulatory agencies and personnel can obtain different evaluation results.

In October 2019, Martin Graham, former AIM market chairman of the London Stock Exchange, came to China to introduce foreign financial supervision experience, indicating that some Britons were dissatisfied with the current FCA regulatory sandbox system and considered it too conservative and did not use it. The scientific way to evaluate, practitioners are not satisfied with the evaluation results.

Practitioners in the UK believe that the UK regulators are too conservative to make slow progress in technology and markets, but Canada believes that the regulatory sandbox is too lax and becomes an administrative process, losing the significance of regulating new technologies and encouraging innovation. They see the “regulatory sandbox” as merely a “rubber stamp” for administrative agencies. The regulatory sandbox rules in both countries are similar, but their implementation is very different, because the rules are rough, and how to implement them is determined by local regulators. Canada is lenient and Britain is harsh, but neither is satisfied.

Third, academic research finds that regulatory sandboxes are of little use

At the end of 2019, academic papers discussing the impact of the regulatory sandbox on the industry appeared, and concluded that the regulatory sandbox is not a good system. The paper is entitled “Building FinTech Ecosystems: Regulatory Sandboxes, Innovation Hubs and Beyond” by Ross Buckley, Douglas W. Arner, Robin Verdit, Dirk A. Zetzsche . [24] Among them, Ross Buckley is a professor of science at the University of New South Wales in Australia and a chair professor of international financial law. He specializes in the relationship between disruptive innovation and law, such as fintech, regulatory technology and blockchain, and he focuses on cryptocurrencies and central bank digital currencies. His downloads of articles in fintech and regulatory technology have surpassed any other social scientist in the world.

First author Ross Buckley

First author Ross Buckley

This is a joint research project between Australia, Hong Kong and Luxembourg. The article mentions that there are now 50 countries or regions in the world that have launched regulatory sandbox programs, and many innovation centers have emerged.

Academic paper cover

Academic paper cover

The article mentions that the regulatory sandbox has three main purposes:

  • Promote government openness to new technologies;
  • Encourage technological innovation;
  • Give supervisors the opportunity to learn new technologies.

But achieving these goals does not necessarily require a regulatory sandbox. In fact, these goals can be accomplished from the Innovation Hub, not the regulatory sandbox. The regulatory sandbox has been implemented for 5 years, and only 120 companies have passed the sandbox test. The number is small and the process is slow. ). What's worse, some companies that passed the regulatory sandbox actually closed down, saying that the regulatory sandbox did not provide substantial help. This makes the United States, Germany, and Luxembourg no longer implement regulatory sandboxes.

The article states that regulatory sandboxing is costly because of the need to manage applications, testing, and legal text work. Each participating agency needs to discuss each case on a case-by-case basis, with a large workload and high costs.

The article criticizes that the regulatory sandbox system is unfair, and those who participate in the sandbox plan have more information than outsiders and can get more preferential treatment. This unfairness is unacceptable abroad. However, the regulatory sandbox is designed to give the sandbox more information and benefits than the outside, because the team in the sandbox can communicate directly with the regulator. This unfair communication provides a great market advantage to the sandbox participants, and the outside team is dissatisfied with this advantage, which may cause legal disputes.

The analysis of the collected data in this article shows that there is no evidence that the regulatory sandbox is the best system for fintech. Because the regulatory sandbox consumes resources, they suggest that it is the innovation center that should be taken seriously, not the regulatory sandbox.

The article proposes that there are other ways to achieve the purpose of regulatory sandboxes, such as "class waiver" methods, such as determining that blockchain technology can be used, and regulators can directly approve the application of a blockchain technology in certain fields No need to discuss it one by one. The cost of "collective technology approval" is low and fair.

Criticizing the regulatory sandbox after the U.S. attempt

The US regulatory sandbox is similar to the UK. Only the Federal Financial Consumer Protection Bureau (CFPB) in the United States has tried the regulatory sandbox, which is led by Dan Quan. After putting into practice the supervision sandbox, he made sharp comments.

U.S. FinTech Regulatory Expert Dan Quan

U.S. FinTech Regulatory Expert Dan Quan

Dan Quan is a well-known expert in fintech regulation in the United States. He has practiced the regulatory sandbox in the federal government of the United States. He specializes in regulatory policies, especially high-tech regulation, and is an adviser to many well-known think tanks. He is a senior consultant to the director of the Federal Financial Consumer Protection Agency, specializing in the study and practice of fintech regulation. He is also involved in the Bank of England's GFIN project, where he previously conducted research at Harvard and Oxford universities.

Dan Quan has published articles on the American Banker [25] and Stanford University Center for Philanthropy and Civil Society PACS website [23] after trying the regulatory sandbox. Since he has rich practical experience, his opinions are many and have reference value, we will elaborate below.

Report from Stanford University Research Center

Report from Stanford University Research Center

(1) Financial regulators should not engage in scientific and technological evaluation

He noted that US Securities and Exchange Commission (SEC) member Hester Peirce, who supports open dialogue between regulators and regulators, is concerned that if regulators “boost or host sandboxes,” regulators may actually Act as a technology gatekeeper, and the gatekeeper mechanism slows down or even stops innovation (because supervisors don't understand technology). This clearly shows that the SEC believes that the regulatory sandbox does not necessarily encourage innovation, but will reduce the willingness of entrepreneurs to innovate.

"Cryptocurrency mother" Hester Peirce thinks regulators shouldn't do tech assessments

"Cryptocurrency mother" Hester Peirce thinks regulators shouldn't do tech assessments

The main purpose of the regulatory sandbox is "fintech evaluation". Unlike traditional "financial regulation", it is not appropriate for traditional regulators (such as the US Securities and Exchange Commission) to conduct assessments of technologies they are not familiar with. Science and technology evaluation should be evaluated by national science and technology institutions or non-governmental third-party science and technology institutions. Financial regulators should only provide regulatory needs to assist these institutions, rather than assessing technology by themselves.

(II) Supervision sandbox is like a child's play

In August 2018, Maria Vullo, a former head of the New York Department of Financial Services, recommended the U.S. Treasury recommend a British-style regulatory sandbox in the United States: "Children in the sand Toddlers play in sandboxes. Adults play by the rules ". Supervisor Maria Vallo believes that all companies must abide by the established rules and opposes the regulation of the sandbox system to allow participating companies to make exceptions. Note that New York State has established some cryptocurrency regulations.

Maria Vullo opposes regulation of the sandbox as it would violate the law

Maria Vullo opposes regulation of the sandbox as it would violate the law

(3) The regulatory sandbox does not consider consumer interests

The Financial Times stated that the "fintech sandbox" is a harmful form of regulation for consumers, and consumer groups are overwhelmingly opposed to regulating the sandbox. The main considerations of the regulatory sandbox are regulatory agencies and regulated agencies, and consumer rights are not taken seriously. At the same time, US consumer groups see that the regulatory sandbox, like any tool, can be abused.

Consumers' opposition to the regulatory sandbox is clear. Why? Just look at the purpose of the regulatory sandbox. The three purposes of the regulatory sandbox are to promote the government's development attitude, encourage innovation, and provide regulators with opportunities to learn new technologies. The first relates to the reputation of the government, the second is to enterprises, and the third center is the supervisor. Which of them is related to consumers? Not to mention consumer-centeredness, at best it is marginal effect. If the plan has nothing to do with consumers, consumers will not be willing to pay. If regulators want to learn new technologies, regulators should pay for themselves.

The British experience report is also written from the perspective of regulators, not from the perspective of consumers. Readers have time to study the UK's "Regulatory Sandbox Experience Learning Report" to see if this is a report from UK regulators on learning new technologies, or from a consumer perspective to assess the contribution of new technologies to society?

(IV) Hollow regulatory sandbox system has no actual content

Dan Quan believes that the regulatory sandbox program is a shining toy, and despite its fanfare, sandboxes are nothing but shiny toys with lots of fanfare and no substance. The regulatory sandbox has no scientific and technological indicators and no scientific and technological connotation. In this case, the regulations are still very loose, and different people can make different interpretations, and even have completely opposite interpretations.

(5) There are few successful cases of sandbox supervision in the UK

Americans also find that there are far fewer success cases of regulatory sandboxes than failures. British official media only reports success stories and cases, but the United States believes that there are more failure cases than success cases. Americans believe that well-designed regulatory programs can promote innovation and consumer protection, but they are not effective because the UK's regulatory sandbox is empty.

(6) Learning the new technology in the name of the regulatory sandbox is not the right way

The purpose of the UK's proposed regulatory sandbox is to allow regulators to learn new technologies and to design new regulatory approaches after learning. But Americans think that this has no effect. Why? When regulators understand a new technology, newer technology may already be available. Regulators cannot learn to keep pace with technological development. Learning new technologies should not be the purpose of regulatory sandboxing.

(7) Supervision sandbox focuses on solving marginal problems

Dan Quan pointed out that the real reason for the development of the regulatory sandbox in the UK is "regulatory uncertainty and regulatory fear" (to put it simply, that regulators are not sure about new technologies and are afraid to make decisions), but he believes that the regulatory sandbox plan cannot reduce Regulatory uncertainty and regulatory fear. " After Americans tried to regulate the sandbox, they found very few questions about regulatory uncertainty. Most of the questions are deterministic. Based on these identified factors, the regulatory body can already make a decision. Other factors that cannot be determined can make judgments even if they do not understand the relevant technology. There is no need to open a regulatory sandbox plan. To open the regulatory sandbox for these few uncertain factors, this is an irresponsible waste of social resources for the regulated institutions, regulators and consumers.

Dan Quan believes that if the regulator lacks a solid understanding of the fast-growing fintech market, the regulatory sandbox will not work properly, and these problems cannot be solved. The regulatory sandbox should not focus narrowly on issuing "Waivers" or No Action Letters (so that the supervised can experiment and test), and many people now mistake this as a regulatory sandbox The only thing the box needs to do.

(8) Cannot blindly follow the trend and launch the supervision sandbox

Because the regulatory sandbox consumes a lot of resources, you should be very careful about getting your sandbox up and running. According to a report commissioned by the UN Secretary-General's Special Advocate for Inclusive Finance for Development (UNSGSA), "about a quarter of regulators have been activated without first assessing feasibility, needs, potential outcomes or side effects. Sandbox project. "

(9) Promotion should be verified after the scientific validity of the regulatory sandbox

The United States has also criticized the scientific nature of the British regulatory sandbox, that is, the United Kingdom has not conducted any experiments (if any, where is the experimental design?), And there is no data to prove that the regulatory sandbox is effective. Britain has only experience reports, but "experience reports" are not scientific experiments or research reports. In the absence of scientific experiments and data, Britain promoted the system, which is irresponsible to the world. In the United States, if a drug or a system is to be implemented, it must undergo rigorous experiments, and there are many data that are believed to be true and effective before being invested in a large number of resources; if there is no way to obtain a large amount of data, these cases need to be followed for a long time and analyzed in detail.

(10) The fundamental problem is that the regulatory sandbox operates without developing good rules.

Americans not only criticize, but also propose solutions, Dan Quan believes that "a flexible regulatory system, but a clear regulatory approval route" is the right path. If there is a clear route for regulatory approval, both the regulatory agency and the regulated agency can assess in advance whether they can pass, and both parties can prepare in advance. This is the only way to provide guidance and help to the supervised, and it is not the simple and crude supervision system with a hollow content. The FCA in the UK does not take the time to study and develop such a system, but just starts the regulatory sandbox program, which is irresponsible. After all, the regulatory sandbox is only a temporary solution, and it is not practical to consider it as the best regulatory system.

The author believes that the Americans' "a flexible regulatory system, but a clear regulatory approval route" is very meaningful and worthy of research and development by Chinese scholars. The reason is clear. Technology development and technology evaluation are different, so are technology evaluation and financial supervision. Regulators don't need to understand how to develop a new technology, but they need to know how to regulate new fintech. For example, the regulatory agency may not understand how to use the blockchain for transaction clearing, but it can ask technology institutions to evaluate technology and implement clearing supervision, because it is very clear whether the clearing results are correct and whether the clearing process is in compliance. .

V. British funds accept criticism from the United States

The British Nesta Fund acknowledges these criticisms from the United States [17].

Admit that there is room for improvement in the regulatory sandbox in September 2019

Admit that there is room for improvement in the regulatory sandbox in September 2019

In the text, Nesta believes: "Although the FCA sandbox system has been successful, it has been criticized, questioning the level of assessment made by institutions that pass sandboxes and their subsequent developments. This is a problem facing regulatory sandboxes around the world. … There is no strong evidence or assessment of any such project anywhere. Unless you talk to participating agencies, it is difficult to discover some of its benefits or its limitations. We think this is a big problem. "

"Despite the success of the FCA sandbox, it is not immune from criticism, … questions the level of evaluation done on firms going through the sandbox and what happens to them afterwards. But this is an issue for sandboxes around the world, he says … .There is very little robust evidence or evaluation that gets done on any of these kinds of programmes anywhere. Without doing interviews, it's very difficult to uncover some of the benefits or the underlying limitations. And we think that's a big issue, "says Mr .Armstrong.

After careful reading, Nesta believes that the regulatory sandbox has the following problems:

  • The regulatory sandbox has been complained, and the problem behind the complaint is real (agree with multiple points in the United States);
  • It is not clear to what extent the participating institution system has been evaluated in the UK regulatory sandbox project (agree with the US fourth opinion);
  • It is unclear what benefit the participating institutions will have by passing the regulatory sandbox test, and the subsequent development of these institutions is also unclear (agree with the US 5th point). In fact, some companies that went through the sandbox went out of business.
  • The United Kingdom has not conducted a systematic evaluation of the regulatory sandbox system (agreeing with the United States' 9th opinion), but no institution in the world has evaluated any regulatory sandbox system. (Does this mean that American criticism is just American "opinion", not scientific research report?).
  • These regulatory sandbox issues are an issue for sandboxes around the world, not just in the UK (agree with the 8th view of the US).

The UK's next-generation plan is to work with other countries' regulators on the Global Financial Innovation Network (GFIN). Note that the United Kingdom no longer uses the terms "sandbox" and "regulation". In the new plan, only cooperation and innovation are valued (this is equivalent to agreeing with the first view of the United States).

Six, the regulatory sandbox test plan does not comply with software engineering principles

Testing in the UK Regulatory Sandbox requires only three to six months of system testing by participating institutions, but the test data is provided by participating institutions (not provided by the FCA or provided by a third party agency). What test is this? Software engineering testing requires:

  • Independent third party testing (Independent Verification & Validation), the third party must have the ability to test software, can use any test method;
  • The test must be guaranteed by Coverage Testing, and there can be multiple coverage indicators;
  • Continuous Testing. Software testing must be performed all the time.

And the Bank of England's regulatory sandbox test:

  • It is not a third-party test. The test data is provided by a regulated technology company. This is not a software engineering-defined test. According to the software engineering definition, this is just a "software demonstration." In contrast, FinTech Sandbox in Boston, USA, provides data from customers (this is an independent third party) to test the system in the sandbox.
  • There is no test coverage. For example, the US government NASA uses the MC / DC (Modified Condition / Decision Coverage) test coverage standard. If the system test fails to meet these indicators, the system cannot pass the test. If the system test meets these indicators, it indicates that the system has a certain quality. These coverage standards have nothing to do with the system. As long as it is software, these coverage standards can be used. FCA can use these published test coverage. The regulatory sandbox does not specify test coverage, which means that the system passes the regulatory sandbox test and cannot represent any quality of the system.
  • No continuous testing. The supervision sandbox is only 3 to 6 months. Even if there are rigorous tests in the sandbox, once the software of the participating institution passes the sandbox test, it will lose its practical effect, because future software changes will not be continuously tested in the sandbox.

Today, if an institution passes the regulatory sandbox test and obtains the UK FCA sandbox certificate, what does this mean? This only means that the software can be demonstrated, and it does not mean that the software is of high quality. If something goes wrong in the future, who will be responsible? Is it a software company? However, software companies will think that it cost a lot of time (resources and time) and it was very hard to pass the FCA sandbox. FCA has also issued a certificate. If something goes wrong, how can FCA not be held responsible? But is FCA willing to take on this responsibility?

Seven , industrial sandbox system

In addition to developing a flexible but clear-cut regulatory system, another route is to develop the industrial sandbox directly, using high technology and tools to evaluate. China Taishan Sandbox is the world's first blockchain industry sandbox. It was deployed in Qingdao in December 2017. The United Nations International Civil Aviation Organization's industrial sandbox opened in 2018 and has also been deployed online; the United States completed a blockchain-based pharmaceutical supply chain reference architecture in 2018, including verification algorithms, and started experiments in 2019, preparing to be comprehensive in 2023 online.

The figure below is a modern "industrial sandbox" system shown by a previous report from the British Innovate Finance [22]. It can be seen that there are not many "industrial sandboxes" that have been completed, and there is no blockchain industry sandbox on it, only traditional software. System's industry sandbox. Here are several sandbox systems for the blockchain industry.

Modern Industry Sandbox System Source: UK Innovate Finance Report

Modern Industry Sandbox System Source: UK Innovate Finance Report

(I) UN ICAO Sandbox Program

The first industry sandbox to be adopted abroad was ICAO, which is a specialized agency of the United Nations. It was established in 1944 and is headquartered in Canada. It is responsible for the administration and governance of the International Civil Aviation Convention (Chicago Convention). Its purpose is mainly as follows:

  • Ensure the safe and orderly development of international civil aviation worldwide;
  • Encourage the art of design and operation of aircraft for peaceful purposes;
  • Encourage routes, airports and navigation facilities for international civil aviation applications;
  • Meet the needs of the people of the world for safe, normal, effective and economic air transport; prevent economic waste due to unreasonable competition;
  • Ensure that the rights of States parties are fully respected and that each State party has a fair opportunity to operate an international air transport company;
  • Avoid differential treatment among contracting States;
  • Promote flight safety for international navigation

As the organization that sets global aviation regulations and standards, ICAO engages all Member States, aviation organizations, and the industry's most important companies and other leaders in shaping the global and industry agenda. In order to better serve customers, ICAO launched the blockchain program, as there are many participating countries and airlines, the sandbox program will be launched in 2018. The following is the organization's website on the blockchain industry sandbox.

ICAO's Blockchain Industry Sandbox

ICAO's Blockchain Industry Sandbox

The ICAO blockchain sandbox runs on a cloud platform, enabling different partners to process on the same platform. It is the blockchain infrastructure of the aviation industry. It enables partners to create and test services, systems or products on a decentralized platform. The sandbox interface is defined as follows:

Sandbox system interface specified by the United Nations ICAO

Sandbox system interface specified by the United Nations ICAO

The main purpose of the sandbox is the following 4 records [18]:

  • Pilot Logbooks
  • Aircraft Maintenance
  • Passenger Records
  • Financial transactionsfinancial Transactions

The use of blockchain can eliminate the possibility of falsified records and can implement a system for recording personnel and aircraft permission data across countries. This project assists States and ICAO to better understand how to use the technology in the regulatory field.

Through this sandbox platform, ICAO can:

  • Provide a suitable, secure, ready-to-use, scalable architecture;
  • Set up a one-stop solution for related enterprises using the smallest physical space;
  • Before the blockchain is deployed, provide a test platform to reduce deployment risks.

In 2018, ICAO opened the sandbox of the blockchain industry. It began in August and went online in September. Airlines can have nodes in October. The sandbox only defines interfaces, validation algorithms, and high-level architecture, but has no implementation details. Under this standard, the industry is still allowed to be innovative. The standard is loose but rigorous, it is difficult to explain differently, and the verification is stricter.

The sandbox system is the infrastructure of ICAO. It provides APP software templates and uses the platform to govern the civil aviation industry. The community is also open. This is also a global universal platform application that establishes a global standard for civil aviation industry governance.

ICAO has not launched the regulatory sandbox, and has directly opened the industry sandbox. Also note that the industry sandbox was launched in August 2018 and went live in October. If the supervision sandbox is started, I am afraid that the relevant institutions are still applying for sandbox in the first 3 months, and then they will pass the sandbox test after another 6 months.

(2) US Food and Drug Administration (FDA)

The United States Food and Drug Administration (FDA) cooperates with the Supply Chain Finance Research Center to develop pharmaceutical supply chain management. The author has analyzed its scheme in detail in 2019. They first build a reference architecture and propose a verification algorithm. Any organization can use this framework to develop its own system to implement the pharmaceutical supply chain management. The following figure is the blockchain system verification algorithm.

U.S. pharmaceutical supply chain management blockchain verification algorithm

U.S. pharmaceutical supply chain management blockchain verification algorithm

Only plans do not specify a blockchain standard, but develop a blockchain application standard, including reference architecture and verification algorithms. This is consistent with the author's speeches over the past few years, that is, first establish a blockchain sandbox, then build a blockchain application, and then develop together.

The US Food and Drug Administration, like ICAO, has not launched a regulatory sandbox program, but has directly defined reference architectures and interfaces. The system can be used as long as it is verified by its algorithm. This is a huge gap from the regulatory sandbox.

(Three) China Taishan Sandbox

The Taishan sandbox system was produced by China Tianmin (Qingdao) International Sandbox. It began development in 2017 and has entered the third generation [11]. Taishan sandbox is mainly for the blockchain and fintech services. It can test the capabilities of the underlying protocols of the blockchain, such as consensus mechanism, block generation mechanism, encryption mechanism, etc. In addition, Taishan sandbox can also test blockchain applications and fintech. Applications, such as payments, clearing, copyright, etc. You can also add other applications.

Taishan Sandbox has a complete sandbox access technology evaluation index model and test index layered model to guide sandbox supervision and testing. Provide testing and supervision technical means such as access and review platform, automated testing platform, consensus and transaction tracking system, security and penetration testing toolset. For example, testing the underlying consensus mechanism Taishan Sandbox uses tracking methods to collect data, check whether it is a Byzantine general agreement, and visualize the collected data to verify the agreement. [15]

Tarzan Sandbox Consensus and Transaction Tracking System (Source: Tarzan Sandbox)

Tarzan Sandbox Identification and Transaction Tracking System (Source: Tarzan Sandbox)

The design of the automated test platform is as follows:

The design of the automated test platform is as follows: The design of the automated test platform is as follows:

Automated test platform (Source: Taishan Sandbox)

The Taishan sandbox is a core blockchain industry sandbox with six elements (tech companies, customers, fund investment, incubation, education research and development, and regulatory agencies).

For the government, the industry sandbox is a powerful regulatory tool, because any chain can be tested on it. The technology is evaluated completely, and the technology used is open, fair, and scientific, rather than relying on an administrative process.

As far as locality is concerned, because each place will have a different blockchain industry, the industrial sandbox is different in each place. Some want to develop the automotive industry, some want to develop the energy industry, some want to develop the financial industry, and some want to develop the agricultural industry. If they want to develop finance, they will need a financial blockchain sandbox. Each area has a different field of development and a different blockchain industry sandbox.

For an industry, with the industry sandbox, all development will be standardized, and it will no longer be a chaotic phenomenon, but an orderly development. Can be used for various applications. For example, supply chain, trading, clearing and settlement, payment, investment management, sharing economy, etc., we can write these scenarios in a sandbox. In this way, the development of blockchain technology will speed up, because a lot of industry knowledge will be on it. Accumulated precipitate.

The opening of the industrial sandbox to universities and research institutions is an important starting point to promote academic research and educational practices. Chinese scientific research institutes can leverage the sandbox to become the world's blockchain research center and develop blockchain applications and blockchain underlying technologies in the sandbox at low cost.

The industrial sandbox includes functional testing, reliability testing, interface testing, security testing, and performance testing. In addition to doing traditional testing, we can track the behavior of the chain in real time. Whether it is a true chain, a pseudo chain, or a weak chain or a Hu chain can be clearly seen in a sandbox. Anyone can say that he has a true chain, but whether it is true or not will be known after a sandbox test. Because sandbox testing is open, fair, and scientific. Therefore, the sandbox system can promote the development of the entire blockchain industry. [10,11]

Comparison of industry sandbox and regulatory sandbox

Compared with the regulatory sandbox, the industrial sandbox has the following characteristics:

Deep integration of industrial sandbox and industry to encourage innovation

Learn from the US pharmaceutical regulation and the United Nations International Civil Aviation Organization, define interfaces and validation algorithms, and encourage industry to develop systems in a free space for innovation. Regulatory sandboxes are universal and implemented against institutions. The industry sandbox is targeted at industries, and costs and impacts are quite different.

Industry sandbox is global

The ICAO sandbox is global, not local.

Industry sandbox protects governments and funds

The regulatory sandbox is only evaluated for a single agency. If problems occur in the future, there will be legal disputes between the assessed agency and the regulatory agency. However, the industrial sandbox is all industrial, which can avoid government and fund fooling. For example, in 2019, the U.S., British, Korean, Chinese, Spanish, Canadian, Hong Kong governments or funds have used the Taishan sandbox to evaluate blockchain projects, and it will soon be possible to understand whether the project is innovative and authentic, thus avoiding government (Fund) Support (invest) false projects. Blockchain spears (innovation projects) and shields (industrial sandboxes) need to be developed together. We cannot only develop spears. This will also lead to "dangerous and disorderly" development like in the past, and we cannot support the "safety and security" of General Secretary Xi Order "development.

Centralized management without "decentralization"

The industrial sandbox does not adopt a "decentralized" approach, but allows the participating institutions to provide test data freely. Instead, the central institution sets its own standards, protocols, and data, and the participating institutions need to obey. A centralized organization is managed using a distributed mechanism.

Industry sandbox and standards are bound to support each other

Industry sandboxes and standards are consistent and mutually supportive. The author also mentioned the top 10 research directions of blockchain in 2019 [3], and sandboxes are tied to standards. Standards do not have an industrial sandbox, but only reference values. The industrial sandbox insists that standards must be "actionable", that is, they can be automatically verified. This is a huge gap from standards that can only be referenced.

Blockchain, sandbox, standards are finally financialized

In addition to the sandbox and standards of the blockchain industry, ICAO also introduced financial products NDC. The US FDA is also the same. In addition to introducing reference architectures (standards) and verification algorithms, it also allows the promotion of financial products such as insurance and pharmaceuticals on the blockchain network.

No case by case, no different evaluation and testing standards

The industry sandbox does not require lawyers to participate in the assessment. Only scientific and objective assessments can be conducted by any institution. The industry sandbox is also open to community development.

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Nine , summary

The UK regulatory agency FCA proposed a sandbox system in 2015, and has implemented trial sandbox supervision for 5 years. It has encountered some difficulties.

The Bank of England is the leader in blockchain finance. There are many pioneering initiatives in this area, some of which are very successful, such as the digital pound scheme. But there are some projects that are not very successful, such as the regulatory sandbox system. This system is unscientific, unfair, difficult to use, and costly.

Based on research reports from the United States, Britain, Australia, and Europe, the regulatory sandbox has the following purposes (the first three are from the United Kingdom), and these can be replaced with lower cost methods.


China was the first country to develop a sandbox for the blockchain industry, but the United States and the United Nations took the lead in using the industry sandbox in large numbers; China began talking about regulatory sandboxes in 2017. However, today, the regulatory sandbox has been identified as a problem by many countries. China should take the initiative to abandon the British-style regulatory sandbox and immediately move to the industrial sandbox, like the US pharmaceutical supply chain management and the United Nations International Civil Aviation Organization.

The industry sandbox can make China's blockchain industry lead the world. After all, China is the first country in the world to complete the sandbox of the blockchain industry.

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[3]. Cai Weide. "Top 10 Research Directions of Blockchain", 2019.12.08.

[4]. Cai Weide, Jiang Xiaofang. "The Great Plan for the Revival of Centennial Pound Sterling-Unraveling the Mystery of the Bank of England's Digital Fiat Project", 2019.10.29.

[5]. Cai Weide, Jiang Xiaofang. "Rebuilding the Global Financial System Based on Wholesale CBDC Digital Currency", 2019.10.01.

[6]. Cai Weide, Jiang Xiaofang. "Ambush in all directions, commercial banks really want to be embarrassed?-Interpretation of the IMF's" Rise of Digital Currency "Report 2019", 2019.09.18.

[7]. Cai Weide, Jiang Xiaofang, "Payment System Architecture Based on Wholesale Digital Fiat Currency (W-CBDC): Interpretation of Fnality White Paper (Part 1)", 2019.10.06.

[8]. Cai Weide, Jiang Xiaofang, "Wholesale Digital Fiat Currency Reconstruction Financial Market: Interpretation of Fnality White Paper (Part 2)", 2019.10.08.

[9]. Cai Weide, "Authentic and Stable Coins! Blockchain Needs Supervisability", 2019.05.30.

[10]. Cai Weide, Jiang Xiaofang. "The rise of the blockchain industry is true this time, but is it ready for supervision? (Next)", 2019.04.24.

[11]. Cai Weide, Jiang Xiaofang. "The rise of the blockchain industry is true this time, but is the regulation ready?", 2019.04.16.

[12]. Cai Weide. “Regulatory Sandbox 2.0 and Industrial Sandbox Economics”, 2019.01.10.

[13]. Cai Weide. "Industrial Sandbox and Blockchain Technology Evaluation", 2018.09.02.

[14]. Cai Weide. "The sandbox of the blockchain industry can become the biggest driving force for the financial innovation industry", 2018.07.27.

[15]. Cai Weide, Jiang Xiaofang. "What's Different about New Financial Supervision Technology in the UK", 2018.03.27.

[16]. Blue Book on Technology Evaluation and Analysis of Global Public Chain Projects.

[17] Michelle Perry, Taking the next step in sandbox evolution, 2019.09.29.



[20] FCA, Regulatory sandbox lessons learned report, 2017.10.20.


[22] Innovate Finance (UK), “Industry Sandbox: A Development in Open Innovation Industry Sandbox Consultation Report,” 2017.

[23] Quan Dan, A Few Thoughts on Regulatory Sandboxes.

A Few Thoughts on Regulatory Sandboxes

[24] Ross Buckley, Douglas W. Arner, Robin Verdit, Dirk A. Zetzsche, Building FinTech Ecosystems: Regulatory Sandboxes, Innovation Hubs and Beyond, 2019.11.5.

[25] Quan Dan, Here's what the CFPB's sandbox should look like, 2018.9.13.

Cai Weide : Director of Beihang Digital Society and Blockchain Lab, Chief Scientist of Tiande Technology, Head of Major Project of Ministry of Science and Technology, Dean of China Information Industry Blockchain Research Institute, Blockchain Internet in National Big Data (Guizhou) Comprehensive Experimental Zone Laboratory Director, Dean of Tianmin (Qingdao) International Sandbox Research Institute, Honorary Dean of CCID (Qingdao) Blockchain Research Institute, Chairman of China Asia Economic Development Association Blockchain Industry Professional Committee, Beihu Gold Block Director of the Chain Commission

Jiang Xiaofang : Doctoral candidate of Beihang Computer School, Chartered Financial Analyst (CFA), Founding Member of Beijing Financial Analyst Association