1. Introduction
Panacea refers not only to the Greek goddess of healing, but it also means a remedy for all ills or difficulties. This idea illustrates with some precision the tone of the analyses made about the regulatory sandbox institute in Brazil. In short, it has been presented as the solution to all the problems that exist in the relationship between regulators and the regulated. According to extensive literature, regulatory sandboxes are means to achieve greater innovation, as it would give the private sector more space to implement disruptive solutions in an emerging market with few state incentives to technological development (Batista Vieira et al., Reference Batista Vieira, Andrade Campos, Rommell Bezerra de Alcântara and Vieira de Melo2024; Lima & Pasqualetto, Reference Lima and Pasqualetto2023; Quatrochi, da Silva & Cassiolato, Reference Quatrochi, da Silva and Cassiolato2023).
Regulatory sandboxes recently emerged as a prominent instrument in contemporary regulatory strategies, offering controlled environments for testing innovative solutions within pre-defined legal parameters. Particularly in the financial sector, where regulatory rigidity may constrain technological advancement, these experimental spaces have served as a mechanism to balance market dynamism with regulatory oversight. However, the effectiveness of regulatory sandboxes as a governance tool remains a subject of debate, particularly in jurisdictions characterized by strong institutional frameworks yet pressing developmental imperatives.
This case study examines the Brazilian Central Bank’s (Banco Central do Brasil – BCB) experience with regulatory sandboxes between 2021 and 2023, assessing their role in fostering financial innovation within a traditionally conservative regulatory sectoral framework. As the most structured and institutionally embedded sandbox initiative in Brazil, the BCB’s program provides a revealing case study on the actual interplay between regulation and innovation. In particular, this analysis engages with the idea of an entrepreneurial state to interrogate whether regulatory sandboxes can function not merely as deregulatory tools but as state-led instruments to drive technological development in financial markets.
By analyzing the design, implementation, and outcomes of the BCB’s sandbox, this study contributes to broader discussions on the regulatory capacity of emerging economies to balance institutional missions with market modernization. It further examines whether the BCB’s experience challenges the often-presumed dichotomy between regulation and innovation, suggesting that specialized bureaucracies can operate in tandem with private actors to generate forward-looking financial solutions. In doing so, the Brazilian case offers knowledge that transcends its national borders, providing a comparative perspective that may prove relevant to global analysis on technological governance, regulatory experimentalism, and financial sector modernization through AI and data innovations.
Ultimately, we situate the BCB’s regulatory sandbox within the larger discourse on AI regulation and financial governance, offering critical reflections that align with ongoing debates in the European Union and beyond (Just, Sivertsen & Lewin, Reference Just, Sivertsen and Lewin2024). In an era of rapid technological transformation, regulatory sandboxes may hold the potential to bridge the gap between legal frameworks and innovation imperatives, but their success depends on how they are institutionally designed and politically mobilized among parallel public policies.
In consideration of these subjects, this article was divided into four sections. Section 2 provides a review of the diffusion of regulatory sandboxes within broader frameworks of regulatory experimentalism and innovation policy. In Section 3, an in-depth analysis of the Brazilian Central Bank’s sandbox initiative is presented. The study places particular emphasis on the institutional design, normative structure, and the selection process for participating firms. Section 4 engages critically with the outcomes and limitations of this initiative, particularly concerning risks of regulatory capture, market concentration, and the neglect of redistributive considerations. The final section synthesizes the empirical and theoretical findings to argue that regulatory sandboxes may serve as instruments of legal adaptability in emerging markets. However, the transformative capacity of these sandboxes depends on their articulation with coherent industrial strategies, institutional safeguards, and democratic accountability. Instead of a universal remedy, the BCB’s sandbox demonstrates the contingent nature of regulatory experimentation, whose effectiveness is contingent upon the state’s capacity to govern innovation in the public interest.
2. The relationship between regulatory sandboxes and stimuli to innovation: a perception through the lenses of Brazilian challenges
The relationship between economic regulation and innovation in Brazil is characterized by a complex interaction of institutional arrangements, market forces, and development policy traditions. While conventional economic theories tend to depict regulation as a hindrance to market-driven innovation, a growing body of literature, namely from neo-Schumpeterian and developmental state schools of thought, emphasizes the state’s role in defining innovation environments. From this perspective, innovation is not only the result of market competition, but of coordinated and strategic interactions among public agencies, research institutions, and private firms (Mazzucato & Beslon, Reference Mazzucato and Beslon2020).
States can stimulate innovation in various ways, such as through development banks, macroeconomic policies, microeconomic reforms, public procurement, investment in universities, and state-owned enterprises. However, state action must be accompanied by the strengthening of control bodies to prevent corruption and by measures that promote competition to avoid inefficiency among companies operating in a competitive environment. Adjusting the relationship between the state and the market therefore involves transparency so that the population, through democratic and legal channels, can control and evaluate industrial and innovation policy decisions.
The plurality of interests and the dynamics of political and economic power sometimes generate insecurity among legal professionals and scholars who seek to reflect on innovation and economic regulation. This situation contributes to the academic debate on the subject being dominated, at least in Brazil, by a neoclassical view of the economy. After all, concepts such as perfect competition and market failures ultimately reduce the role of the state to that of not interfering with market dynamics. It would therefore be up to the government to simply reduce state intervention in the economy and control inflation at any cost.
However, a broader view of the challenges facing a peripheral country, anchored in an interdisciplinary reading of the topic, allows us to identify that the debate on the relationship between innovation and economic regulation in Brazil is generally influenced by many theories, polysemic concepts, and different interfaces between areas of knowledge (Leurquin, Reference Leurquin2021, p. 292). The term ‘economic regulation’, for some authors, would mean any restriction on the freedom of an economic agent. In other words, it would be synonymous with ‘interventionism’ and would oppose freedom of competition, a binary choice frequently touted in one-dimensional political-economic discourse (Vance, Reference Vance2025). From this point of view, usually identified with the neoclassical/orthodox matrix of economics, state action usually hinders continuous processes of innovation, as it would supposedly increase ‘noise’ in the market. The market, in turn, would be primarily responsible for innovation, so regulating it would mean discouraging innovation.
The economics of innovation provides some relevant insights into this dynamic. Chris Freeman and Luc Soete (Freeman & Soete, Reference Freeman and Soete2008, p. 26) argue that an innovation is only complete when there is a commercial transaction of a new product, process, or artifact. An invention, on the other hand, would be an idea, sketch or model of a new or improved artifact, product or system. Thus, in economic terms, there is a distinction between innovation and invention. The former presupposes a commercial transaction. This distinction reveals a necessary complementary approach between the two phenomena and, above all, between the actors involved in them.
In Brazil, for example, according to the National Institute of Industrial Property (INPI), in 2023, the ranking of resident applicants in the country consisted of 15 public universities in the top 20 positions. In addition, Petrobras, a private oil & gas company in which the State is the majority shareholder, was the institution that filed the most patents that year. It should be emphasized that filing a patent is an indication of invention and not of innovation. On this subject, the Office of the Comptroller General published Report No. 817,023 indicating, among other things, that there is still a major challenge in the transfer of intellectual property technology, from universities to other market agents, given that few intellectual properties have become marketable products (Controladoria Geral da União (CGU), 2023). These data help to reinforce the need to implement innovation policies that coordinate the agents working in the innovation system, such as companies, research institutes, universities, and funding institutions (Avellar, p. 545 et seq.).
From the theoretical perspective of the Economics of Innovation, regulation cannot be seen as antagonistic to innovation. On the contrary, the process of appropriating knowledge already consolidated by technological leaders (catch-up) requires a complex synergy between the state, universities and private actors (Mazzucato & Beslon, Reference Mazzucato and Beslon2020). Taking regulation as a synonym for state action in a country’s economy, in a macro way, it cannot be said that it is opposed to innovation: innovation policy is anchored in the state’s ability to coordinate this synergy.
On a micro level, i.e. thinking about agents in specific economic sectors, the opposition doesn’t hold up either. The state is unquestionably relevant in coming up with innovative solutions that were not even formulated by private market players (pro-competitive regulation). The right to portability is an example of a pro-competitive regulatory instrument, as it allows consumers or users to change the economic agent providing a given service, free of charge, carrying with them, for example, their history, data or even investments. This right guarantees greater competitiveness, as competitors will be encouraged to increase the attractiveness of their companies, after all, users/consumers will not be tied to their initial decision. Portability has traditionally been implemented in the telecom market and has ensured that phone numbers kept even if the operator changes. Nowadays, however, it reaches various markets, such as the portability of salary accounts at banks or financial investments (Sales, Seixas & Leurquin, Reference Sales, Seixas, Leurquin, Seixas and Leurquin2024, p. 213).
At the micro level, regulatory instruments can act as facilitators of innovation rather than hindering it. This same principle guides other regulatory tools which, far from opposing innovation, seek to structure a more dynamic and experimental environment. Among these tools, regulatory sandboxes stand out as a mechanism for supervised experimentation, allowing innovative solutions to be tested in a controlled environment, under state supervision, but with greater regulatory flexibility. It represents a model that challenges the traditional dichotomy between innovation and regulation, demonstrating how the law can be instrumentalized to create safe spaces for experimentation without compromising market and consumer protection.
A regulatory sandbox can be understood as a legal institute that guarantees the legality of testing innovative solutions in a given market, in a controlled manner, that is, with the supervision and regulation of the public authorities. A regulatory authority oftentimes allows a temporary departure from the applicable regulatory framework, monitors the test and assesses the positive and negative effects on the market (Quirino, Hocayen & Cunha, Reference Quirino, Hocayen and Cunha2023, p. 10). In Brazil, the legal concept of regulatory sandboxes was established by Supplementary Law No. 182/2021, which provides the legal framework for startups and innovative entrepreneurship. According to art. 2, II:
experimental regulatory environment (regulatory sandbox): a set of special simplified conditions for participating legal entities to receive temporary authorization from the bodies or entities with sectoral regulatory powers to develop innovative business models and test experimental techniques and technologies, by complying with criteria and limits previously established by the regulatory body or entity and through a facilitated procedure [translated by the authors].
Article 11, §3 of this law states that the regulatory authorities must establish the criteria for selecting or qualifying the regulated party; the duration and scope of the suspension of the incidence of the rules; and the rules covered. This environment of experimental regulation suggests that the phenomenon of economic regulation can encompass the technical expertise of the state bureaucracy and the skills of the economic agents themselves, in order to promote innovations in the sector, greater legal certainty and a reduction in informational asymmetries.
The relevance of the regulatory sandbox is justified by the need to think about sectoral economic regulation aimed at stimulating innovative outputs. James Vieira, Campo, Alcântara and Melo (Reference Vieira, Campo, Alcântara and Melo2024, p. 343) state that the regulatory sandbox supports innovation policy insofar as it: (i) fosters innovation by reducing barriers and costs for companies, which will be able to test their ideas and products; (ii) reduces regulatory uncertainty by creating a flexible regulatory environment, allowing greater learning about legal requirements; (iii) accelerates technological development by enabling the emergence of disruptive solutions; (iv) identifies regulatory gaps through the experimentation process; (v) protects consumers by binding companies to predefined rules. There is therefore a dialogical relationship between regulation and innovation, rather than an oppositional one.
The regulatory sandbox was only introduced into Brazilian law in 2021, although some events that preceded the law were important for the consolidation of the institute in the country. A series of initiatives were enacted by Brazilian authorities to try to ensure greater legal certainty for fintechs to develop innovations, especially after the UK’s experience with the sandbox (James Vieira et al., Reference Vieira, Campo, Alcântara and Melo2024, p. 345; Zheng & Wu, Reference Zheng and Wu2024; Washington, Lee & Lee, Reference Washington, Lee and Lee2022). In 2018, for example, the Central Bank of Brazil created the Laboratory of Financial and Technological Innovations (LIFT), with the aim of promoting the creation of prototypes of technological solutions for the National Financial System. However, LIFT does not have regulatory implications, but aims to monitor the development of the application of technology or the business model of projects under development. In other words, it is not synonymous with a regulatory sandbox, because the participants do not supply products or services to real customers in the laboratory environment. James Vieira, Priscila Campos, Rhuan Alcântara and Clovis Melo (Reference Batista Vieira, Andrade Campos, Rommell Bezerra de Alcântara and Vieira de Melo2024, p. 347) report that the Special Finance Secretariat of the Ministry of Economy, the Central Bank, CVM and Susep issued a joint statement with the aim of implementing the regulatory sandbox model in Brazil.
In the same year, the Central Bank decided to implement its controlled testing environment initiative for financial and payment innovations. Cycle 1 of its regulatory sandbox aimed to select up to 10 projects, using the criteria set out in Notice 72/2019: degree of maturity, innovation, magnitude of risks and technical and operational capacity and governance structure of the entity interested in its development. In this first cycle, nine priority themes were established: (i) solutions for the foreign exchange market; (ii) promotion of the capital market through mechanisms of synergy with the credit market; (iii) promotion of credit for micro-entrepreneurs and small companies; (iv) open banking solutions; (v) solutions for the PixFootnote 1; (vi) solutions for the rural credit market; (vii) solutions to increase competition in the SFN and SPB; viii. financial and payment solutions with potential effects of stimulating financial inclusion; and ix. promoting sustainable finance .
Despite their growing prominence as instruments of regulatory experimentation, regulatory sandboxes also present significant shortcomings that challenge their efficacy as innovation-enabling mechanisms (Crampes & Estache, Reference Crampes and Estache2025). One of the most pressing concerns is their implicit reliance on deregulation as the primary means of fostering technological development, which seems to be in trend nowadays in geopolitical tropes. This dynamic was evident in the recent AI Action Summit in Paris, where regulatory discourse (from State representatives such as the United States, the European Union, and France) largely reflected a false dichotomy between regulation and innovation, reinforcing the perception that stringent legal oversight necessarily hampers technological progress (Anjos, Reference Anjos2025). Shifting the initiative for technological advancement to private firms, policymakers, and regulators risk becoming passive observers rather than active shapers of AI governance, which in turn reinforces existing asymmetries in digital power. By allowing temporary exemptions from existing legal frameworks, sandboxes often prioritize market-driven solutions over structured, long-term and state-led innovation strategies. This can create an environment where regulatory oversight is seen as an impediment rather than an essential component of sustainable innovation.
While sandboxes can help policymakers identify regulatory gaps, they do not guarantee that these gaps will be filled in a way that is aligned with the public interest in the long term. Moreover, their implementation, especially in emerging markets and developing economies (EMDEs), is not always the best solution for driving financial innovation. On the contrary, it can impose unexpected challenges on regulators and generate risks, such as creating an environment of unequal competition in the market (World Bank, 2020).
Another critical issue is the risk of regulatory sandboxes becoming a substitute for more active and comprehensive innovation policies. As instruments that require relatively limited direct intervention from public authorities, sandboxes may be overused as a symbolic and rhetorical response to demands for regulatory modernization. This shift places undue emphasis on regulatory flexibility rather than on institutional capacity-building or sectoral strategies that proactively shape technological advancement. Sandboxes may also divert attention from deeper structural reforms, such as investment in public research and development, workforce reskilling, or the creation of broader policy frameworks for technology governance (OECD, 2023). In this sense, the sandbox model risks being instrumentalized as an indicator of regulatory progress, despite its inherently narrow and experimental scope.
The reliance on sandboxes can erode the traditional role of public regulators in shaping innovation trajectories. By delegating much of the initiative to private sector actors, regulatory agencies risk diminishing their own expertise in emerging technological fields. Such mechanisms foster dialogue between regulators and industry, but they do not necessarily enhance the technical capacity of public authorities to regulate complex new technologies effectively, especially one that has to keep up with the pace of change in the financial sector (European Securities and Markets Authority and European Insurance and Occupational Pensions Authority, 2020). This dynamic can lead to a regulatory capture scenario in which regulatory agencies become overly reliant on private sector perspectives, reducing their ability to independently assess risks and formulate forward-looking policies.
Beyond concerns of regulatory efficacy, sandboxes may also introduce new risks related to market fairness and consumer protection. The World Bank’s analysis of global sandbox experiences indicates that while sandboxes are often framed as fostering competition, their structure may instead favor well-resourced incumbents who can better navigate the regulatory exemption process. Small and emerging firms, particularly in developing economies, may lack the legal expertise and financial stability required to engage with sandbox frameworks, thereby exacerbating existing market asymmetries (Ayyagari, Demirgüç-Kunt & Maksimovic, Reference Ayyagari, Demirgüç-Kunt and Maksimovic2011; Cheng et al., Reference Cheng, Hou, Rösler, Bottari, Ossandón, Rossion and Röder2022).
Regulatory sandboxes also present challenges in terms of legal certainty and scalability. Because they operate on an ad hoc and temporary basis, the lessons drawn from sandbox initiatives may not seamlessly translate into broader regulatory reforms. According to OECD’s research on AI regulatory experimentation, sandbox results often remain siloed within small-scale testing frameworks, which limits their impact on systemic regulatory adaptation (OECD, 2023). Furthermore, as sandboxes grow in popularity, there is an increasing risk of regulatory fragmentation, where multiple overlapping sandbox initiatives create conflicting precedents that undermine coherent governance approaches.
3. TheBrazilian Central Bank’s experience with a regulatory sandbox
3.1. The institutional role of the central bank of Brazil
The Central Bank of Brazil was officially created in 1964, by Law No. 4,595, as a federal autarchy that is part of the National Financial System (SFN). Part of its functions were carried out by the Banco do Brasil, created in 1808. It was organized as a mixed central bank, performing the functions of a deposit, discount and issuing bank, as well as selling products privately to the royal administration and contracts. It was only in 1945, during the government of Getúlio Vargas, that the Superintendence of Currency and Credit (SUMOC) was created, by Decree No. 7293, which became responsible for controlling the financial market and fighting inflation. This body was fundamental for the future creation of the central bank, which only took place, as we have seen, in the 1960s (Bulhões, Reference Bulhões2019, p. 101).
During the 1980s, there was a process of government financial reorganization, with the aim of separating the accounts and functions of the Central Bank, Banco do Brasil, and the National Treasury. The Central Bank began to consolidate itself as the monetary authority and the National Treasury began to carry out activities related to the management of funds collected by the Federal Revenue Service (Carvalho, Oliveira & Monteiro, Reference Carvalho, Oliveira and Monteiro2010, p. 27). The SFN is currently made up of three councils: the National Monetary Council (CMN), the National Private Insurance Council (CNSP), and the National Supplementary Pensions Council (CNPC). The CMN is responsible for the currency, credit, capital, and foreign exchange sectors and its supervisory bodies are the BCB and the Securities and Exchange Commission (CVM). The CNSP is responsible for the private insurance market and has the Superintendence of Private Insurance (SUSEP) as its supervisor. The CNPC is responsible for the supplementary pension market and has the National Supplementary Pension Superintendence (PREVIC) as its supervisor.
The BCB executes the CMN’s guidelines and is responsible for guaranteeing the purchasing power of the national currency. According to Article 10 of Law 4.595, of December 31, 1964, the BCB must ensure the adequate liquidity of the economy; maintain international reserves at an adequate level; stimulate the formation of savings; ensure stability and promote the permanent improvement of the financial system. In addition, among other aspects, the BCB is responsible for issuing paper money and metallic currency; buying and selling federal government bonds; exercising credit control; supervising financial institutions; authorizing the operation of financial institutions; and controlling the flow of foreign capital into the country.
It can therefore be seen that one of the BCB’s regulatory tasks is to maintain the stability of the financial system. This purpose can be considered even more complex given the sector’s competitive challenges. The four largest institutions in the National Financial System (SFN) are Banco do Brasil, Caixa Econômica Federal, Itaú and Bradesco and they concentrated 57.8% of credit operations in 2023. This figure has decreased over the years, as in 2021 it was 58.4% and in 2022 it was 57.9%. In terms of total assets, the concentration went from 56% in 2022 to 55.3% in 2023 (Central Bank of Brazil, 2024a).
Despite this downward trend, the concentration of this market is significant and, for some economists, this has consequences for the country’s banking spread, which is one of the highest in the world. Therefore, the BCB’s institutional challenges involve maintaining the stability and liquidity of the National Financial System, but also encouraging competitiveness in the sector, in order to help reduce banking spreads. It is therefore understood that measures such as a regulatory sandbox must address these impasses arising from the very nature of the Central Bank and the economic context in which Brazil is inserted.
3.2. Analysis of BCB’s strategic management committee of the regulatory sandbox meeting briefs and reports
The inaugural cycle (Ciclo 1) of the sandbox commenced on December 6, 2021, with an initial pool of 52 project submissions. However, only seven projects received authorization to participate after a selection process, which was structured to ensure that only projects meeting specific regulatory and innovation criteria could proceed. The sandbox was initially designed to accommodate up to 10 participants, with the possibility of increasing this number by up to 50% depending on the quality and feasibility of the submissions. The evaluation criteria led to a significant reduction in the number of eligible projects, following a series of assessments and deliberations. Seven projects were ultimately approved for participation (Banco Central do Brasil, 2022).
Itaucard developed a payment application enabling credit card transactions – either upfront or in installments – via Pix. This solution leveraged Pix’s settlement structure to allow transactions directly from a post-paid payment account. The project’s scope included defining the number of buyers and sellers involved, finalizing technological functionalities, and establishing agreements with merchants. Mercado Pago introduced a network of physical locations for cash deposits into digital accounts. This service allowed account holders to deposit cash at partner establishments, expanding deposit options beyond traditional bank branches and correspondents. Himov proposed a credit model using real estate as collateral, designed particularly for senior customers. This product, resembling a reverse mortgage, provided access to credit without periodic amortizations. The project aimed to enhance financial inclusion for older individuals with property assets.
Meanwhile, JP Morgan developed a technological solution for multi-currency payment instructions, intended for use among financial institutions authorized by the Banco Central do Brasil to operate in the foreign exchange market. This solution integrated blockchain technology to facilitate instant currency exchanges without requiring intermediaries such as clearinghouses. OTC focused on creating a platform for issuing and trading secondary Bank Credit Certificates (CCBs). The platform aimed to enable financial institutions to issue and negotiate CCBs efficiently using blockchain technology. The innovative aspect was the removal of the requirement to register CCB transactions with BC-authorized entities, as blockchain was expected to fulfill security and settlement tracking needs. Inco, another platform for CCB issuance and trading, targeted customers of its peer-to-peer lending service. The platform allowed creditors to transfer their claims to other investors before maturity, enhancing liquidity. Like OTC, it employed blockchain to bypass traditional registration requirements. Iupi developed a platform to facilitate fund transfers between multiple accounts using temporary settlement accounts. This model aimed to mitigate risks in payment transactions by ensuring that payment execution and contractual obligations could be fulfilled under pre-established conditions.
Even though regulatory sandboxes are conceived as mechanisms to facilitate innovation within controlled legal environments, their implementation presents several challenges that necessitate careful scrutiny. These include the necessity and scope of regulatory relief, risks of implicit regulatory endorsement, concerns regarding competitive distortions, the resource-intensive nature of sandbox initiatives, and the complexities involved in assessing their long-term impact, among others. Our analysis examined 28 officially registered and publicly available briefing notes from meetings of the BCB’s Strategic Management Committee of the Regulatory Sandbox (CESB, in Portuguese) to find evidence of mentions, questions, concerns and conclusions regarding these challenges .
At the core of the regulatory sandbox framework lies the provision of regulatory relief, enabling firms to test innovative products and services that may not fully conform to existing legal requirements. However, the extent to which such relief should be granted remains a subject of contention during CESB meetings (CESB, 2021b). The Legal Office of the Central Bank of Brazil (PGBC) was tasked with analyzing whether regulatory relief is necessary as a condition for participation, emphasizing both the innovative business model and the regulatory competence of the Banco Central do Brasil and the National Monetary Council (CMN), with regulatory flexibility serving as a complementary measure.
Certain projects have thus been excluded from the regulatory sandbox on the grounds that they required legislative changes beyond the scope of regulatory flexibility, based on legal opinions emphasizing the limits of regulatory discretion. Moreover, discussions within CESB have debated whether the sandbox itself constitutes an appropriate mechanism for addressing regulatory challenges or whether alternative frameworks should be considered (CESB, 2021c). Some meetings also addressed the possibility of modulating existing regulations to accommodate innovative business models, recognizing that excessive rigidity could stifle innovation, while unstructured flexibility could erode regulatory coherence (CESB, 2021d).
In financial and highly regulated sectors, the misperception of regulatory endorsement may create consumer reliance on a false assumption of regulatory oversight. This issue is further compounded when projects facing significant regulatory hurdles remain in the sandbox despite potential market distortions. A CESB discussion highlighted the difficulty of evaluating certain projects from a regulatory perspective and their possible negative effects on market dynamics (CESB, 2021d). To mitigate these risks, regulatory authorities often establish clear disclaimers, explicitly stating that participation in a sandbox does not constitute regulatory approval or an assessment of a project’s viability or compliance. The legal framework governing sandbox operations further imposes transparency obligations, requiring participating firms to disclose the experimental nature of their products and the absence of formal regulatory validation.
Additionally, the BCB retains authority to impose limitations on projects that pose excessive risks to the National Financial System (SFN) or the Brazilian Payment System (SPB). If significant deficiencies in risk management are identified, BCB may determine corrective measures or, in extreme cases, establish execution limits for a project. Furthermore, participation in the sandbox does not guarantee future authorization to operate, reinforcing the principle that the initiative is an experimental regulatory space rather than an endorsement of market readiness (Banco Central do Brasil, 2022; CESB, 2021g).
The inherent design of the sandbox, involving close interaction with the Central Bank, has the potential to create competitive imbalances between the selected projects admitted into the program and other financial entities operating under the standard regulatory framework. Entities participating in BACEN’s sandbox may benefit from modulations and potential flexibilization of regulatory requirements, which could effectively grant them a competitive advantage over incumbents (OECD, 2020; CESB, 2021d; CESB, 2021e). This concern becomes particularly pertinent when BACEN’s sandbox is used to provide temporary relief from certain regulatory obligations to test innovative solutions (CESB, 2021b; CESB, 2021f). To mitigate these risks, BACEN’s regulatory framework should incorporate principles of competitive neutrality, ensuring that any advantages derived from sandbox participation are justified by the broader public interest objectives, such as fostering innovation within the Brazilian financial system (European Securities and Markets Authority and European Insurance and Occupational Pensions Authority, 2020). Furthermore, BACEN, through the monitoring by specific working groups and the requirement of final evaluation reports, implicitly adopted mechanisms to assess whether any advantages stemming from sandbox participation translate into long-term market efficiencies (through the analysis of general regulatory modernizations) rather than short-term regulatory arbitrage in particular cases (CESB, 2023).
The implementation and administration of BACEN’s sandbox required significant resource commitments for both the institution and the participating entities. For BACEN, the oversight of this sandbox program demanded the involvement of specialized technical and legal expertise from various units, as evidenced by the composition of the CESB, which included representatives from several departments (CESB, 2021a). This requires dedicated personnel capable of assessing the novel business models and emerging technologies proposed in the 52 initial proposals received. The process involved the analysis of projects by a technical assessment team and the ongoing monitoring by specific working groups established by BACEN. Similarly, firms seeking admission to BACEN’s sandbox face substantial administrative and financial burdens, including the preparation and submission of detailed application materials and potentially the presentation of their projects to the CESB. Participating entities must also comply with the reporting requirements established by BACEN and adapt their operations to the specific modulations defined for their participation in the sandbox. These burdens can disproportionately affect smaller entities and startups, potentially impacting the intended objective of facilitating market entry for new players (World Bank, 2020). To ensure the sustainability of the sandbox, the Central Bank ought to continuously evaluate the cost-benefit ratio of this initiative, considering whether alternative regulatory instruments or targeted regulatory reforms might offer more effective and scalable solutions for fostering innovation in the financial system (Allen, H.J., Reference Allen2019).
Assessing the efficacy of BACEN’s sandbox also presents methodological and practical complexities. It can be challenging to isolate the direct impact of the sandbox initiatives from broader trends within the Brazilian financial market and other external economic factors (World Bank, 2020; Allen, H.J., 2019). Moreover, the initial design of BACEN’s sandbox operated within a limited timeframe for its 1st cycle, ending in December 2022 (Banco Central do Brasil, 2022), although extensions were possible and granted to some projects until December 2024, a timeframe significantly longer than what was initially foreseen (CESB, 2023). This temporal constraint could potentially limit the scope for long-term longitudinal studies on the sustained effectiveness of the tested models. While it is difficult to find explicitly detailed and standardized evaluation metrics for cross-jurisdictional comparisons (European Securities and Markets Authority and European Insurance and Occupational Pensions Authority, 2020; World Bank, 2020), BACEN established clear criteria for project selection, monitoring through dedicated working groups, and decisions regarding project continuation or elimination based on factors such as adherence to regulations (including PLD-FT), innovation, and strategic alignment with BACEN’s objectives. To address this, the ongoing monitoring and the requirement of final evaluation reports serve as mechanisms to gauge the outcomes related to the tested innovations. Moreover, cross-national comparative analysis was encouraged through an exchange of experiences with the Securities and Exchange Commission of Brazil (CVM) regarding their own sandbox initiative (CESB, 2022).
3.3. Regulatory sandboxes and the risks of privatizing regulation
From a critical perspective informed by the role of the state in innovation, regulatory sandboxes may not necessarily reflect state-led innovation strategies. Instead, they risk exacerbating a broader trend of regulatory retreat, in which public institutions relinquish their role as active shapers of economic and technological development, effectively outsourcing governance to private actors (Mazzucato, Reference Mazzucato2013, Reference Mazzucato2021; Mazzucato & Collington, Reference Mazzucato and Collington2023).
In emerging economies such as Brazil, where regulatory bodies already face structural constraints, sandboxes can contribute to the weakening of public capacity by promoting an illusion of state engagement in innovation while functionally reducing oversight (Banco Central do Brasil, 2022). The BCB’s regulatory sandbox, as documented in official reports, illustrates this tension: while framed as a mechanism to foster financial modernization, its operational design largely defers regulatory discretion to market actors, limiting the state’s ability to set long-term public interest objectives (Banco Central do Brasil, 2022; Kattel et al., Reference Kattel, Drechsler and Karo2022; Mazzucato, Reference Mazzucato2013) critiques the notion that the state should act merely as a facilitator of private sector innovation, arguing instead that public institutions must play a proactive role in shaping and directing technological change. Yet, regulatory sandboxes – particularly in jurisdictions like Brazil – often reinforce a model where the state is reduced to a permissive referee rather than an active participant in financial innovation.
This phenomenon aligns with a broader pattern of regulatory privatization, in which decision-making power shifts from public authorities to market participants. As noted in the Relatório de Gestão – Sandbox Regulatório (2022), the BCB sandbox allowed participants to operate under modified regulatory conditions with reduced direct oversight. While proponents argue that this fosters a more agile regulatory environment, it also raises concerns about regulatory capture and the institutionalization of a permissive framework that prioritizes financial sector interests over broader socio-economic concerns (Vieira et al., Reference Vieira, Campo, Alcântara and Melo2024). Moreover, regulatory sandboxes risk creating dependency on private sector expertise at the expense of public institutional knowledge. When regulators increasingly rely on industry self-reporting and voluntary compliance mechanisms, they forfeit their ability to independently assess emerging risks (Mazzucato, Reference Mazzucato2021). In Brazil, this concern is particularly acute given the rapid technological developments in fintech, blockchain, and AI-driven financial services – areas where public oversight is crucial to mitigate risks related to market concentration, algorithmic bias, and financial exclusion (Banco Central do Brasil, 2022; Vieira et al., Reference Vieira, Campo, Alcântara and Melo2024).
Regulatory sandboxes are often presented as a state-led initiative to foster innovation, but in practice, they can function as a means for the state to symbolically engage in innovation policy while minimizing direct intervention. The BCB’s sandbox, for example, was justified on the grounds of promoting financial inclusion and competition (Banco Central do Brasil, 2022). However, its implementation primarily involved the relaxation of regulatory requirements rather than the proactive development of public innovation policies. Genuine state-driven innovation involves direct investment, mission-oriented policies, and the creation of public technological capacities (Mazzucato, Reference Mazzucato2013). Yet, in Brazil’s case, the regulatory sandbox operates in a manner that effectively reduces the state’s role to that of an arbitrator of market experimentation, rather than a co-developer of new financial technologies. This aligns with broader neoliberal regulatory trends where states prioritize deregulation and private sector empowerment over strategic governance (Mazzucato & Collington, Reference Mazzucato and Collington2023).
The case of fintech regulation in Brazil exemplifies this dilemma. While the BCB sandbox sought to encourage financial startups, its design disproportionately favored well-capitalized incumbents, reinforcing market concentration rather than fostering genuinely competitive ecosystems (Vieira et al., Reference Vieira, Campo, Alcântara and Melo2024). Moreover, the emphasis on regulatory flexibility over regulatory strengthening risks normalizing a deregulatory stance that could undermine consumer protections and financial stability in the long run (Banco Central do Brasil, 2022).
The expansion of regulatory sandboxes without corresponding investments in state capacity-building carries significant long-term risks. First, it accelerates regulatory asymmetries, where only large financial actors with the necessary legal and technical expertise can effectively navigate the sandbox framework. Second, it weakens the regulatory knowledge base within public institutions and civil servants, making them increasingly reliant on industry-led assessments (like external consultants). Third, it risks entrenching a deregulatory logic in financial governance, where regulatory relief becomes a default mechanism rather than an exceptional tool for experimentation (Kattel et al., Reference Kattel, Drechsler and Karo2022).
Rather than merely offering temporary regulatory exemptions, governments should integrate sandboxes into a broader industrial policy framework that includes public investment in technology, regulatory workforce training, and mechanisms for public-private collaboration that do not simply defer governance to the market. The Brazilian experience highlights the urgency of such considerations, particularly in sectors where digitalization and AI-driven decision-making are reshaping financial landscapes at an unprecedented pace (Vieira et al., Reference Vieira, Campo, Alcântara and Melo2024). While regulatory sandboxes are often framed as a progressive regulatory innovation, their implementation in emerging markets like Brazil reveals deeper structural challenges related to the state’s role in financial governance. Innovation does not emerge solely from market flexibility but from strategic state intervention and institutional capacity-building. Unless regulatory sandboxes are accompanied by a corresponding strengthening of public oversight and policy direction, they risk exacerbating trends of regulatory retreat, market concentration, and the erosion of state-led technological development.
4. Conclusion and outlook
The main contribution of this work is to support the idea that there is no single remedy to promote Brazil’s technological catch-up process, so treating the regulatory sandbox as a panacea means, to some extent, distorting reality. In other words, the country requires a set of micro and macro measures to consolidate an innovation and industrial policy aimed at strengthening national companies capable of competing with foreign companies, both inside and outside Brazil.
This does not mean that the regulatory sandbox is useless, on the contrary. Formulating experimental regulatory models can help reduce informational asymmetries between regulators and regulated companies. However, this synergy must not lose sight of the technical knowledge of the bureaucracy, as well as the political dynamics of the directors and other members of the regulatory agencies. This concertation between the above-mentioned players must be duly monitored by the responsible Brazilian bodies, in an attempt to consolidate a transparent, secure institutional design that is, above all, geared towards generating innovative solutions for Brazilian consumers and citizens.
The experience of the Brazilian Central Bank’s regulatory sandbox demonstrates the potential and the inherent limitations of regulatory experimentalism in emerging markets. Sandboxes may not fully substitute for a comprehensive industrial policy that fosters national competitiveness in the long term. The Brazilian case is a testament to the necessity of designing regulatory frameworks that strengthen the institutional capacity of regulatory agencies to actively shape market dynamics, rather than offering temporary exemptions.
One of the key challenges identified in this study is the risk of regulatory sandboxes reinforcing a model of passive state involvement in innovation. Governments may risk outsourcing regulatory authority and diminishing their own technical expertise if they rely on private-sector-led experimentation without a clear strategic direction. The BCB’s sandbox, by emphasizing flexibility and market-driven solutions, mirrors a broader trend of regulatory privatization, where public agencies become dependent on industry-led assessments rather than proactively defining the contours of financial innovation. Moreover, the selective nature of sandbox participation – where only a limited number of projects receive regulatory relief – raises concerns about competitive imbalances. While the initiative’s intention is to encourage financial inclusion and economic dynamism, it has predominantly benefited well-capitalized firms with the resources to navigate regulatory requirements. This dynamic could potentially deepen market concentration rather than fostering genuine competition, reinforcing the position of dominant financial actors while sidelining smaller fintech enterprises. Additionally, the absence of a long-term institutional framework to integrate sandbox-generated insights into broader regulatory reforms could limit the effectiveness of these initiatives. Regulatory sandboxes often produce fragmented results that may not necessarily translate into scalable regulatory improvements. Without a structured mechanism to ensure that the lessons learned from sandbox experiments inform broader policy decisions, these initiatives could risk becoming isolated pilot programs rather than catalysts for systemic regulatory evolution.
In the future, it would be beneficial for the Brazilian regulatory framework to consider incorporating a more strategic approach to financial innovation governance. This could involve refining the sandbox model and ensuring that it operates within a coherent industrial policy that prioritizes state-led capacity-building. Rather than relying solely on regulatory flexibility, it may be worthwhile for Brazil to explore investing in strengthening public institutions, fostering public-private partnerships that do not compromise regulatory independence, and implementing long-term policies that align financial innovation with national development objectives. It is essential to recognize the regulatory sandbox as one among several policy instruments to support innovation, rather than as an all-encompassing solution. Its effectiveness will depend on how it is integrated into a broader policy ecosystem that actively engages the state in shaping technological progress. Otherwise, there is a risk that they will serve more as mechanisms of deregulation than as genuine tools for fostering sustainable and inclusive financial innovation.
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