ECMA Opens Door to Capital Market Innovation with Launch of Sandbox

The Ethiopian Capital Market Authority (ECMA) has launched the country’s first regulatory sandbox, providing startups and established companies a flexible legal framework to test innovative capital market products and services with real customers.

During the session held at the Sheraton Addis Hotel, ECMA’s freshly crowned director, Hanna Tehklu, highlighted the need for a dynamic regulatory landscape capable of adopting innovative products for accelerating economic growth. She pointed to potentials inherent in the Sandbox that can help refine products through collaborations between regulators and participants.

“It can also serve as an incubator for ideas,” the DG noted.

Originating in the United Kingdom eight years ago, regulatory sandboxes have since propelled numerous products into global markets, including in India and Australia. These sandboxes also provide authorities with valuable insights for developing regulations that keep pace with emerging technologies.

The ECMA’s sandbox is open to both licensed firms, unlicensed firms involved in licensable activities, technology providers, and startups with market-ready products. Eligibility criteria include innovation, user benefits, the need for a sandbox, and a product ready for testing. Although the sandbox offers regulatory relief, participants must still adhere to overarching legal and regulatory standards that are not waived for testing.

Developed in collaboration with the UNDP, UK firm MPENSA, and the ECMA, the Ethiopian sandbox aims to facilitate the transition of firms into the broader market after successful testing. ECMA will continue to support participants, offering regulatory tools such as Testing Approval Letters (TALs), modified licensing requirements, and, when necessary, waivers.

Institutions interested in participating in the sandbox must apply before September 30 to gain access to regulatory support, strategic guidance, and a fast-tracked path to market. Firms with capital market service products or services under the regulatory mandate of ECMA will be considered to enter the sandbox if they meet the prerequisites.

Enacted in early 2024 alongside 15 other licenses, the regulatory sandbox allows applicants to propose solutions in areas such as crowdfunding platforms, digital sub-brokers, and robo-advisors, including automated investment management and algorithmic financial advice for retail investors. The nature of sandboxes also enables applicants to propose ideas that currently fall outside of existing legal frameworks.

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Applications for the sandbox will be reviewed by ECMA, with applicants notified of the outcome within three weeks after the application window closes. If selected, participants will collaborate with ECMA to define a testing plan, receive the necessary regulatory tools, and conduct testing in a controlled environment with real customers. An exit strategy will be developed to transition successful products to the wider market.

After completing the testing phase, participants must submit a detailed report on their findings and outcomes. Based on this report, ECMA will decide whether the product or service can proceed to full market deployment, requires further testing, or should cease operations.

ECMA has partnered with the Innovative Finance Lab (IFL) to launch its regulatory sandbox. Meanwhile, the National Bank of Ethiopia is also preparing to introduce its own sandbox specifically for fintechs.

In addition, Ethiopia’s first National E-commerce Strategy, currently in draft stage, aims to create an E-commerce Regulatory Sandbox. This initiative seeks to simplify the registration and licensing of e-commerce platforms, promote the adoption of e-receipts, and enhance tax collection within the sector.