To ensure that the consequences of any failure are contained, the experiments are conducted within agreed boundaries, such as the number of clients, scope of the activity, etc. The experiment is time-bound. If successful, the entity must exit the sandbox and fully comply with all relevant regulations if it wants to roll out the innovative product to the broader market. If the experiment fails, well, we all learn something. Regulatory sandboxes not only encourage FinTech innovation by providing a safe space for experimentation. They also give regulators an opportunity to learn the risks associated with new technologies and right-size regulation accordingly. In fact, the sandbox is an experiment not only for firms but for regulators as well. Harnessing technology to manage risk We must also look to harnessing FinTech to better regulate and supervise financial institutions and help them manage their risks. From a regulatory perspective, among the more promising applications of technology is in what is called “RegTech”, aimed at enhancing the efficiency and effectiveness of financial firms’ risk management and compliance. We can see RegTech advancing in several areas. Predictive analytics is being used in stress testing – to assess the ability of large, complex financial institutions to withstand a variety of stresses affecting different parts of the business in different geographies. Cognitive computing and behavioural algorithms are being used to monitor and detect suspicious trading and possible misconduct in financial institutions. Machine learning capabilities can help to identify subtle patterns in behaviour, which are hard to detect using traditional data analysis.

If not resolved, it may fragment global markets into distinct liquidity pools that are less resilient to market shocks. Christopher Giancarlo, Acting Chairman of the CFTC, has put it well: “It is critical that we make sure our rules do not conflict and fragment the global marketplace … the CFTC should operate on the basis of comity, not uniformity, with overseas regulators.” 7 Adjustments to domestic regulation must not impede the globalisation of finance and the free flow of capital. 4/9  BIS central bankers' speeches  Breaking up large banks or trapping capital and liquidity through ring-fencing measures may make them easier to resolve but could weaken their ability to respond to different stress scenarios. Ring-fencing could also hinder the ability of global banks to provide connectivity and facilitate intermediation across different pools of capital, especially in EMDEs. If global finance is fragmented, both financial stability and financial inclusion could suffer. I come from a small country. And we small countries have an instinctive pull towards international standards and a global system. This may seem to matter less to large countries. But may I suggest that all countries today are smaller than they used to be, or smaller than they think they are. Smaller in the sense that what happens outside our borders has an increasingly larger impact on what happens inside. The US has much to gain from continuing to work alongside other regulators, exercise leadership where needed, and help to shape and promote international regulatory standards. International cooperation necessarily involves some compromises.