Arizona’s leadership in financial technology (FinTech) is becoming increasingly apparent. In March, Arizona became the first state to enact a regulatory “sandbox” under HB2434 that allows emerging companies in FinTech, blockchain and cryptocurrency to grow their respective innovations without stringent regulations. This sandbox grants these types of businesses the opportunity to flourish for up to two years or gain up to 10,000 customers before needing to apply for a formal license. Not only is this a major success for Arizona FinTech companies but it’s also another step toward fostering our state’s thriving business community.
Because Arizona is the first state to openly welcome the development of FinTech, we now have a competitive advantage within this space. This is important, as FinTech is among the fastest-growing and increasingly adopted technologies to date. According to PwC’s 2017 Global FinTech Report, 77 percent of financial service institutions expect to adopt blockchain and other FinTech applications by 2020, and such adoption is projected to result in a revenue increase of up to 20 percent. While other states continue to struggle in devising legislation to regulate FinTech companies, Arizona is already leading the way.
Arizona’s sandbox is being regulated by the Office of the Attorney General, which sets limits on the size of transactions to protect consumers. To be eligible for the program, applicants must demonstrate sufficient knowledge and plans to test, monitor and assess innovations to protect consumers against potential failure. The program also authorizes the attorney general to set an application fee to be deposited into the Consumer Protection-Consumer Fraud Revolving Fund to further protect consumers.
The regulatory sandbox program is just one of many ways Arizona is nurturing the FinTech industry. Blockchain is one of the primary technologies leading FinTech because of its potential to drastically improve the global economy. It’s highly effective because data isn’t centralized or even decentralized; it’s distributed across several individual computers. This means no one personally owns the system, and it’s incredibly difficult to take down. Also, anyone can use it or help run it.
Blockchain is not only innovative by design but it also possesses hundreds if not thousands of potential applications. This technology enables supply chain, asset ledgers, financial transactions and social networks to run more efficiently, and can help improve property law, credit enforcement and crowdfunding agreements. Blockchain improves these areas by reducing fraud within traditional paper contracts. The recent amendment of the Arizona Electronic Transactions Act includes digital signatures encrypted in a blockchain, which further preserves the enforceability of contracts. The regulatory clarity surrounding the state’s blockchain sector is a primary reason why Arizona has become a leader in developing such applications.
Because of Arizona’s pro-growth legislation, several other FinTech companies have been able to thrive and innovate here. A prime example is PayPal, which for more than 15 years has been the leader in FinTech. The company is worth more than $80 billion and, according to Forbes magazine, the 193rd biggest public company in the world. Other companies leading FinTech in the state include Dash, Nexus Earth, AmCheck, Infusionsoft and Base Commerce.
While Arizona is already making strides in FinTech, the addition of the regulatory sandbox will promote even more growth and innovation. If legislative efforts surrounding FinTech continue to foster its development, the potential for companies in the sector to succeed will become practically limitless.
Steven G. Zylstra is president and CEO of Arizona Technology Council.
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