Reforming regulatory policies is the first priority that Korea should manage in preparation for the gale of the fourth industrial revolution. According to the research of Tech&Ro, an IT law firm, 13 out of the world's top 100 unicorn startups are banned to implement their business model in Korea, and 44 are only available to run on condition. Though more and more young Koreans are trying to take an untraveled path despite the harsh environment, their attempts seemed to be cut out due to the strict legal system to prevent risks in advance.
The ‘Regulatory Sandbox’ is a policy for those socially innovative technologies that are blocked by the legal system and fail to see the light. It is a system that suspends the enforcement of existing regulations for a certain period of time when new products and services are released. The expression "Sandbox" was literally derived from the sand playground that children are allowed to freely play in, so that companies just like children would be able to freely spread various ideas within Sandbox in the boundary of protection. The approach to implement regulatory sandbox was first initiated in the UK to foster the fintech industry and has since been launched in more than 20 countries around the world.
So how can implementing regulatory sandboxes promote social innovation? First, it allows companies to gain an upper hand in the competition for innovative ideas in the global market by giving them leeway to freely test their products and services. For startups, regulatory sandbox makes it possible to commercialize products and services based on innovative ideas, and also has the effect of reducing costs to deal with uncertainties of regulations. Second, consumers would be guaranteed a wider choice of innovative products and services, which would allow them to enjoy wider benefits and conveniences. Further, positive reactions given by consumers could also contribute to creating new jobs in newly created industries. Third, at the government level, it helps to readjust and design a detailed regulatory legal system based on the experiences and feedbacks derived from the Sandbox cases. Based on empirical testing, regulatory frameworks for each new industry and new technology can be established. As such, the regulatory sandbox system should be encouraged in that its positive outcomes are not limited to individual companies, but reach to the overall industry and foster active social innovation.
Recognizing the need for regulatory reform, the Korean government has also begun making proposals to introduce a regulatory sandbox in 2018, and since then it has been currently in effect for two years. As a result, 166 new technologies, about a half of that the government has made approval for, have been released to the market or in the process of the beta test. For example, ‘Towns’, a startup that provides idle car brokerage rental services between neighbors of apartments, was exempted from the regulation which requires businesses to own at least 50 vehicles to run car rental services. "Nets Mobility," a startup that provides customized service for the elderly unable to go to the hospital due to mobility difficulties, was also exempted from the regulation that only transportations provided by the local government are available to transport the mobility handicapped thanks to the regulatory sandbox. Last year, the "foreign stock decimals investment service ( 해외 주식 소수 단위 투자 서비스)" raised citizens’ access to foreign stocks by supporting investors to buy foreign stocks in small amounts (in decimals) on mobile platforms. In fact, a total of 621.3 billion won has been invested in services that have passed the regulatory sandbox after its establishment, which means that numerous startups and companies drew on a regulatory sandbox to lay out their vision for developing innovative services and technologies.
Still, several limitations still exist. For example, though permissions are made through the regulatory sandbox, it often includes some “conditional approval" clauses that do not give companies full permission to run the service. Many companies fail to meet the strict conditions that government requires, and eventually run out of funds and close their businesses. For example, the service that provides shared accommodation among natives, which passed ICT regulatory sandboxes in November last year, failed to reach full permission due to the conditional clause which states that the owner of the house must be residing in the house during renting period and a house should be located within a 1km radius of Seoul Subway Lines 1 to 9.
In addition, follow-up management is insufficient after the end of the period for the regulatory sandbox. For example, technologies developed by the companies in the field of ICT are not able to be continuously provided to customers, since there is no provision currently that allows extending the temporary permit period after its expiration. Currently, the approval period for ICT regulatory sandbox is two years and additionally allows a one-time extension for another two years. Therefore, many companies jump into the business assuming that regulations would be eased within the temporary permit period. However, as easing those regulations is a matter of effort, not obligation, there is a lot of uncertainty with regards to the continuity of the business and companies have to take the risk of being put on hold until they get full approval. Fortunately, the amendment that allows companies to continuously extend the expiration date has just passed the first threshold of the National Assembly, but there is still a long way to go.
Still, is expected that South Korea’s regulatory sandbox policy would further bring in a system of flexible regulations with the goal of accelerating innovations in technology As the effectiveness and performance of the regulatory sandbox has been fully proven, it is hoped that additional legislative and institutional supplementation will be established in the future so that regulatory sandbox would serve as a desirable system that does not unduly slow down the pace of social innovation.
- By Youbin Han (Academic Affairs Department)