As Virginia’s economy recovers from the COVID-19 pandemic, state lawmakers are looking for ways to attract businesses and promote technological innovation. However, many entrepreneurs and businesses face an array of cumbersome regulations when trying to offer innovative products and services. Old Dominion lawmakers can offer them a hand by cutting some of this red tape through a promising bipartisan approach called a “regulatory sandbox,” which provides regulatory relief for innovative businesses for a limited period.

Earlier this month, Sen. William Stanley (R-20) introduced Senate Bill 712 to create a regulatory sandbox program. As experience in other jurisdictions shows, sandbox programs can help improve innovation, promote consumer welfare, and expand financial access. If the proposed legislation becomes law, Virginia will join a growing number of innovation-friendly states and countries trying this approach, including the United Kingdom, Hong Kong, Singapore, South Korea, and others. In the U.S., a growing number of states have created sandboxes with bipartisan support. Stateside, Arizona’s and Hawaii’s sandbox programs have attracted at least ten companies.

Due to the relative novelty of sandbox programs, Virginia lawmakers will likely have questions about their effectiveness. Republicans might ask whether a sandbox program could reduce regulatory barriers for businesses. Democrats might want to know how sandbox programs could help create a better regulatory framework and promote consumer welfare. It should reassure lawmakers from both parties that the newly proposed program can improve both innovation and consumer welfare in three major ways.

First, by granting regulatory relief for a limited period, sandbox programs allow regulators to observe how different regulatory frameworks affect businesses, and to better understand whether the burden of specific rules exceeds their expected benefits.

Second, by enabling close interaction with innovative companies, sandbox programs can help regulators learn about rapidly changing business models, such as those using blockchain and decentralized finance (DeFi) technologies. The resulting lessons can enable lawmakers and regulators to craft market-friendly rules that reduce the regulatory burden for businesses and expand access to financial services.

Third, the legislation presents lawmakers with an opportunity to maximize regulatory learning by requiring the newly established Department of Regulatory Innovation to produce a detailed report after sandbox participants leave the program that details the company’s business activities within the sandbox, the regulatory relief it received, how specific rules affected its operations, and whether specific rules should be kept, amended, or repealed in the future. A joint General Assembly committee could periodically review these reports and present its recommendations to the legislature based on the department’s findings.

Moreover, to make the sandbox program more effective, Virginia lawmakers can learn from regulatory experiences in other jurisdictions. The Virginia sandbox legislation does avoid several mistakes that have limited the effectiveness of other sandbox programs. While at least 12 states have enacted sandbox programs, not all have been successful in attracting participants. Restrictive requirements—such as requiring applicant companies to establish a physical presence in the state and limiting the sandbox’s scope to specific sectors like insurance—have constrained the ability of states like Kentucky, Wyoming, and Nevada to entice companies. In contrast, Virginia’s proposed sandbox is open to companies that establish a “virtual location adequately accessible” to the department. As in Hawaii’s successful program, non-resident companies can potentially apply to the sandbox and bring their innovations and potential new jobs to Virginia.

Other aspects of the proposed sandbox program appear to be well-designed. The application process for companies is relatively straightforward, and the consumer disclosure requirements will help improve transparency and consumer awareness without creating burdensome regulations for sandbox participants. These aspects of regulatory design—combined with the relatively large size of Virginia’s economy and its proximity to urban centers and innovation clusters—can provide the basis for a successful sandbox program. Due to these potential benefits, Senate Bill 712 can help make Virginia a leader in innovation and job growth.