Regulatory sandboxes: From niche to broad and established innovation policy instruments

In its simplest form, a regulatory sandbox means a time-limited exemption from current legislation. Technology developers and rule-givers, such as the state and authorities, work together to learn and test which rules can work in practice for innovative products and services. The idea is that in this way regulators can limit any risks, while at the same time learning lessons from what can be gradually transferred from exception to norm. The level of knowledge is raised both by the person carrying out the experiment and by the regulator. It increases the possibilities to develop rules in smaller steps, which can speed up the process between innovative ideas and implementation.

The concept of regulatory sandboxes is believed to have originated in the work of the UK Financial Conduct Authority (Financial Conduct Authority, FCA) in 2015 to promote more effective competition in the financial market for the benefit of consumers. Companies were given the opportunity to test innovative products, services and business models in a real market environment. At the same time, appropriate protective measures were in place through the provision of the authorities. In this way, the financial technology (fintech industry) in Great Britain would also have better conditions to grow. Globally, it is still in fintech that the tool has been used most frequently (according to a report in around 50 countries so far).

BIS Working Papers No 901 Regulatory sandboxes and fintech funding: evidence from the UK

Many examples abroad

The regulatory sandboxes used in South Korea and Japan are considered to be the most specialized and used the most times. These countries have established special geographical and subject-specific special zones. In these zones, trials can be allowed even if they would be in conflict with the countries' existing regulations. I Japan there are several types of exception rules for different forms of experimental activity. They are, for example, about autonomous driving, drones, artificial intelligence and 5G. I Sydkorea, companies that want to be exempted from certain regulations can apply to a specific sandbox, for example in fintech. Within 30 days of proposal, the government notifies the company if a new product or service is in conflict with existing regulations and if the company needs an exemption to carry out the trial operation. In total, the South Korean government has also designated more than ten regulatory-free zones to allow testing of new technologies and to develop region-specific industries.

Even Singapore has developed sandboxes. Behind these are partly the country's central bank and financial supervisory authority, Singapore Monetary Authority (MAS), partly Energy Market Authority (EMA), which is under the Ministry of Trade and Industry, and the Ministry of Health (MOH), which manages public healthcare.

As previously mentioned, Great Britain has been a pioneer. It was the first country to establish a clear funding mechanism aimed at regulatory organizations that wanted to develop their working methods, for example through regulatory sandboxes. In 2017, the Ministry of Energy, business and Industry established a fund of ten million pounds (equivalent to approximately SEK 118 million) where regulatory and regulatory authorities can apply for project funds. The aim is to create mandates and conditions for proactive policy development.

In I Norge, the government has taken a first step towards a regulatory sandbox through an assignment to the Data Protection Agency, which corresponds to the Swedish Privacy Protection Authority (IMY). The overall goal of the sandbox is to stimulate innovations based on AI in combination with personal data. The Norwegian Data Protection Authority offers a test environment where the participating organizations receive free advice and feedback. Sandkassen will not grant an exemption from the Personal Information Act.

Another example comes from Germany. The Bundesministerium für Wirtschaft und Klimaschutz (BMWi) has there developed a strategy for regulatory sandboxes to favor digitalisation and develop regulatory frameworks. By increasing the use of trial clauses, new laws and regulations can thus become more flexible. BMWi has also created funding for energy innovations, to drive the energy transition all the way from the research lab to the energy market. A regulatory sandbox in the energy area has been implemented to facilitate and speed up the transition work. It involves creating large-scale, system-oriented demonstration projects in combination with developing new business models.

I USA has Departementet Federal Aviation Administration (FAA) created a sandbox to study new legislation in the area of unmanned aerial vehicles (UAS). Ten public-private partnerships have been selected and given the opportunity to conduct trials. The FAA has also created a pilot program to test autonomous drones in various locations around the country. The authority has also begun to approve various commercial applications for drones.

I Kanada there are several solutions to sandboxes in various areas under the government. Two examples are the Canadian Securities Administrators (CSA) sandbox for fintech companies, as well as the Department of National Defence (DND) and Canadian Armed Forces (CAF) joint sandbox for innovative solutions in the defense sector.

Even the EU has noticed the advantages of sandboxes and has linked the tool to the program DIGITAL's Test and experimentation facilities.

In addition, it is clear in the proposal for the EU's AI regulation and recently in the Net Zero Industry Act that the community emphasizes regulatory sandboxes as central instruments for both a favorable AI development and a green transition of the industry.

Swedish demand for regulatory sandboxes

No regulatory sandbox has yet been started on a larger scale in Sweden. This despite the fact that Sweden ranks among the most innovation-friendly countries in the world. The Financial Supervisory Authority has been tasked with investigating the need more closely, but has said no to introducing the test tool. The reason is that they do not consider themselves to be tasked with working with innovation.

Instead, it is the Privacy Protection Authority that was forerunners. Within the framework of a government assignment to strengthen innovation, the authority has tried a completely new way of providing in-depth dialogue-based guidance. The working method is called regulatory testing, and it was tested in a pilot project that focused on AI in healthcare. IMY now assesses that regulatory testing activities are an effective way of working to provide guidance on complex questions about new technology.

The Energy Market Inspectorate has initiated and carried out a project aimed at investigating conditions and developing a model for how regulatory sandboxes could be implemented in the Swedish energy market. The inspectorate intends to establish an innovation center that can act as a first point of contact for market participants and innovators who are unsure about rules, processes or principles in the energy markets.

Region Gotland and partners have applied to the government for the right to establish a regulatory sandbox to test and evaluate both a complementary physical electricity grid and a virtual electricity grid.

The Swedish Transport Agency issues permits for various types of experimental activities with vehicles to test new technology. Two of these permit variants apply to tests of longer and heavier vehicle trains and automated vehicles.

A relatively common method in Sweden is otherwise to open for regulated trials. Then the Riksdag or government decides on a time-limited law or regulation that applies to a certain experimental activity. Current examples within the legal system are the trial activities Faster prosecution and Faster prosecution of young offenders.

Although no regulatory sandbox has yet started in Sweden, there are several signs that demand is high. For example, Sweden's municipalities and regions (SKR) clearly highlight the need for experimental activities. In 2019, the Committee for Technological Innovation and Ethics (Komet) also carried out a survey that gave explicit support for experimental activities as an innovation and development method. Komet has also emphasized that Sweden needs more regulatory testing activities such as sandboxes (or regulatory greenhouses as they chose to call them).

Ways forward for sandboxes in Sweden

A couple of years ago, the Council of the European Union adopted conclusions on the role that regulatory sandboxes and experimental clauses play in an innovation-friendly, sustainable and resilient regulatory framework that is secured so that it provides stable long-term rules of the game also in the future. The Council's conclusions describe regulatory sandboxes as concrete frameworks which, by providing a structured context for experimentation, make it possible to test, where appropriate, in a real environment innovative technologies, products, services or methods (currently especially regarding digitalisation) under a limited period and in a limited part of a sector or an area under regulatory supervision to ensure that appropriate safeguards are in place.

Sweden will soon be the only country in Europe that has not tested this proven tool that can provide more innovation-friendly conditions. The level of knowledge is raised both by the person carrying out the experiment and by the regulator. It increases the possibilities to develop rules in smaller steps. And that would drive innovation development in Sweden.

However, a first regulatory sandbox in Sweden is not introduced by itself. Even authorities that are interested in and follow international developments need special assignments and special funds to get things done. Vinnova has general knowledge of sandboxes as well as an international network and can act as a facilitator.

A tool such as a regulatory sandbox could be advantageously linked to long-term innovation coordination functions, such as the strategic innovation programs and coordinated government missions in the field of digitization. A connection between the sandboxes and the programs creates the conditions for being able to systematically identify needs, coordinate experimental activities and disseminate lessons learned. It also creates the conditions for sandboxes to be initiated at the level that is most suitable for the purpose, i.e. at a local, national or EU level. For example, it would be possible through special assignments to identify needs, provide support and gather experiences of specific sandboxes and link these assignments to already ongoing long-term initiatives such as the Council for Sustainable Cities (cooperation between authorities), Viable Cities (coordinated innovation within cities) and the EU: s function for the five missions within Horisont Europa. Another example would be connections between sandboxes and nationally coordinated government assignment linked to digital innovation and the EU's DIGITAL framework program.