These days, crypto is all the talk of town in Pakistani business circles, with the evangelists happy to finally have their long-held beliefs reiterated at the highest levels while the naysayers are dumbfounded by the entire saga. Though the packaging is new, it’s reflective of the broader problem in our policymaking ecosystem, which is marked by periods of absolute lull followed by everything happening at once, usually not in the most well-thought-out manner.

Luckily, the two regulators overseeing financial services, ie the Securities and Exchange Commission of Pakistan (SECP) and the State Bank (SBP), operate more professionally. Last week was a good reminder of this when the latter released its sandbox guidelines, an initiative that had been in the works for a couple of years, as the first draft came all the way back in December 2023.

This was a much-needed initiative from the central bank, as the SECP had launched its own sandbox more than five years ago and by now ran a number of cohorts. While the commercial uptake is yet to truly pick up momentum, it has allowed quite a few innovative businesses to experiment with novel business models such as peer-to-peer lending and real estate tokenisation, among others.

At its core, a regulatory sandbox is a controlled testing environment where startups can trial innovative products and services under relaxed regulatory conditions. Think of it as a laboratory where companies can experiment with real customers and real money, but within strict boundaries that protect consumers and maintain financial stability, which is a critical consideration when it comes to financial services since people’s funds are typically involved.

While the SBP sandbox guidelines are a welcome move for untested financial service models, their success will likely be underpinned by variables that go beyond regulation

As far as modalities are concerned, the SBP intends to run a cohort-based programme where innovators can apply with their ideas and will be assessed on the basis of innovation, customer utility, understanding of regulatory barriers and scalability, among other things. Once selected, they will enter a 180-day testing phase where the solution will be experimented with on a limited scale to identify its potential, risks etc.

In the ideal case, where testing yields success, the entity may apply for a licence to operate commercially, and if there is no existing framework, it may be issued a ‘No Objection Letter’ by the SBP until the legalities are sorted out.

Though extremely important, these are mere procedural details that an average user of financial services doesn’t really care about. For most of us, the big question is, what would the whole exercise lead to? Will we get access to a better range of financial products or improve the existing experience? And if so, what would be areas of intervention?

The SBP doesn’t really spell out any particular verticals, but it has pointed out five components under utility: increased security, accessibility (eg with a focus on the disadvantaged groups), enhanced consumer experience, reduced onboarding time, and improved price benefits. From the guidelines, the centre seems to be mulling a thematic approach, where for each cohort it will invite applications from those trying to tackle that particular problem.

For instance, over the last few years, the SBP’s main focus in digital financial services remains Raast, where the uptake of the person-to-merchant module is still relatively slow, or at least not broad-based. As far as guesses go, the theme for one cohort could be exactly this: how to increase accessibility of retail payments or improve their customer experience.

Not too long ago, it released the participation criteria for Raast, creating room for not only entities overseen by the SECP but even non-regulated ones. Fintech veteran Raza Matin reiterates this view, saying that payment initiation services providers will likely be one of the major areas of intervention. Other potential themes, according to him, are embedded finance, micro-lending and eventually the tokenisation of real-world assets. Meanwhile, Omer Bin Ahsan, the CEO of Haball, believes open banking will also be of interest, in addition to segments like decentralised finance, remittances, credit data and know-your-customer.

While the sandbox is certainly a welcome move in providing a pathway for untested financial services models, its success will likely be underpinned by variables that go beyond just regulation. In particular, the issue of risk capital remains a serious challenge for the ecosystem, given the only asset class, ie venture capital, which was deploying funds, has seen fortunes change over the last few years. Moreover, the willingness and ability of traditional institutions to actively participate, not only in experimenting but also backing potentially scalable businesses with various forms of financing. Unfortunately, the existing evidence there is not too comforting.

The writer is co-founder of Data Darbar and works for the Karachi School of Business and Leadership.

Published in Dawn, The Business and Finance Weekly, June 2nd, 2025