The Role of Regulatory Sandboxes in the Digital Age

“Law and technology produce, together,

a kind of regulation of creativity

we’ve not seen before.”

Lawrence Lessig

I. Introduction

What happens when technology advances so quickly and the law doesn't? Should the law always lag behind in order to understand the potential risks of a new technological development?

For Facebook to reach 100 million users, it took 4,5 years; for Instagram 2,5 years; and for ChatGPT it took two months.[1] This phenomenon, which is known as “the pacing problem", occurs due to the pace difference between technological developments and legal developments and, accordingly, the difficulty of legal tools in regulating technology.[2] In brief, it refers to technological developments outpacing the laws and regulations.[3]

When new technological developments have emerged, it could be risky for both creativity and innovation to restrict it in advance on the grounds that it does not yet have the regulation. On the other hand, in a circumstance where there is a legal gap, trying to understand the potential harms of technological developments by waiting for the disputes, experiencing it, and implementing regulations accordingly is similarly risky too. Therefore, these two facts need to be addressed in a balanced manner. Here a concept can be used: Regulatory sandbox.

II. What is Regulatory Sandbox?

Despite the fact that there is no general definition for the term of regulatory sandbox,[4] the Council of the EU suggests a detailed explanation and clarifies the term as,

“concrete frameworks which, by providing a structured context for experimentation, enable where appropriate in a real-world environment the testing of innovative technologies, products, services or approaches – at the moment especially in the context of digitalisation – for a limited time and in a limited part of a sector or area under regulatory supervision ensuring that appropriate safeguards are in place.”[5]

Regulatory sandbox is an effective instrument that companies could use to find more creative and innovative goods, services, etc. by analyzing and testing in the course of innovation, under the scrutiny of regulations.[6]

Although there are similarities between the notion of sandbox in computer science and regulatory sandbox, which are two different concepts indeed, the latter is the tool that helps to understand the risks and test innovations against the current regulatory framework.[7] Generally speaking, regulatory sandboxes are increasingly used in several different areas, for instance in finance, law, security, and health, as well as the new areas of technology, e.g., artificial intelligence (AI), Financial technology (FinTech), blockchain/distributed ledger technologies (DLT), and internet of things (IoT).[8]

The regulatory sandbox is crucial in helping regulators to better understand technology and filling the gap between fast-moving technology and slow-moving law.[9] It creates an area for testing innovative approaches facing particular challenges due to current regulations, thus, revealing what is required for innovative ideas.[10]

III. The Importance of Regulatory Sandbox for Artificial Intelligence

Given the extremely rapid development of artificial intelligence technology, the notion of regulatory sandboxes for AI becomes even more important. The regulatory sandbox that focuses on finding flexible solutions for innovation and yet complies with the legislation has been suggested by the OECD[11] as follows,

“Governments should promote a policy environment that supports an agile transition from the research and development stage to the deployment and operation stage for trustworthy AI systems. To this effect, they should consider using experimentation to provide a controlled environment in which AI systems can be tested, and scaled-up, as appropriate.”[12]

Taking into account the suggestions given by OECD, The European Union has started to work to make the first Act in the field of Artificial Intelligence, and the European Commission has proposed a regulatory framework for Artificial Intelligence Act. In addition to all the other elements of the framework, the AI Act also contains extensive provisions on the sandbox. Particularly, the articles in Title V named "Measures in Support of Innovation" contain provisions regulating the sandbox in terms of establishing, functioning, developing, testing, etc.[13]

The first paragraph of Article 53 and the rest, is regulated by taking into consideration the principle given by the OECD aforementioned:

“Member States shall ensure that their competent authorities establish at least one AI regulatory sandbox at national level, which shall be operational 24 months after entry into force.”[14]

Even a pilot of the first regulatory sandbox on AI was introduced recently by the government of Spain, and the European Commission to understand the obligations and how to implement the AI Act.[15]

IV. Pros and Cons of Regulatory Sandbox

Regulatory Sandbox has various benefits to the sphere of technology:

·    Regulators sandbox makes it possible for regulators can understand the nature of innovative products through using it in the course of establishment, testing, and so on. As a result, a sandbox helps the policy-making process.[16]

·   A controlled environment mitigates the risks while developing products and services. Additionally, since there is no requirement to comply with all regulations due to the nature of the regulatory sandbox, the creativity of innovators can be encouraged.[17]

·    Because regulatory sandboxes encourage innovation, This will lead to more safe products and services on the market, benefiting consumers in the long run.[18]

Nonetheless, there have been some risks resulting from the misuse and abuse of regulatory sandboxes.

·     In order to attract innovators, regulatory requirements may be lowered too much, leading to regulatory arbitrage.[19]

·      As regulatory sandboxes are limited in scope and apply to relatively few firms, they can put pressure on the time and resources of already overburdened regulators.[20]

·     Because it is a relatively new approach in the field of law, and even in technology, there is doubt about whether a sandbox is always a proper solution to use in the policy-making process.[21]

V. Conclusion

As technology advances, many new approaches have emerged, bringing both benefits and risks. Regulatory sandbox discussed in this article is relatively new and could be a fruitful tool that can be used to ensure that the law does not fall behind the technology. Although there is no globally accepted definition, a regulatory sandbox is generally an experimental tool that allows innovators to test their products in a limited area and for a limited time, without having to comply with all the requirements of current regulations. Besides its importance in the other areas aforementioned above, in recent times when countless Artificial Intelligence tools have emerged, and some regulations have been implemented to address their possible risks, the intersection of sandbox and AI technologies is extremely crucial as well. In conclusion, regulatory sandbox should be used in a balanced way, taking into account both its pros and cons, in order to bridge the gap between current regulations and technology.

References

1.   https://verfassungsblog.de/the-eus-pacing-problem/

2.   https://www.mercatus.org/economic-insights/expert-commentary/pacing-problem-and-future-technology-regulation

3.   https://thefulcrum.us/media-technology/artificial-intelligence-regulation

4.   Yordanova, K., Bertels, N. (2024). Regulating AI: Challenges and the Way Forward Through Regulatory Sandboxes. Multidisciplinary Perspectives on Artificial Intelligence and the Law. Law, Governance and Technology Series, vol 58. https://doi.org/10.1007/978-3-031-41264-6_23 p.446

5.   https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020XG1223(01)

6.   European Parliament Briefing, Artificial Intelligence Act And Regulatory Sandboxes, p. 1. https://www.europarl.europa.eu/RegData/etudes/BRIE/2022/733544/EPRS_BRI(2022)733544_EN.pdf

7.   https://www.law.kuleuven.be/citip/blog/the-shifting-sands-of-regulatory-sandboxes-for-ai/

8.   https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020XG1223(01)

9.   European Parliament Briefing, op. cit., p. 2.

10. OECD (2023), "Regulatory sandboxes in artificial intelligence", OECD Digital Economy Papers, No. 356, OECD Publishing, Paris, https://doi.org/10.1787/8f80a0e6-en.

11. ttps://oecd.ai/en/wonk/sandboxes

12. https://oecd.ai/en/dashboards/ai-principles/P12

13. For further information: https://www.euaiact.com/title/5

14. https://www.euaiact.com/article/53

15. For further information: https://digital-strategy.ec.europa.eu/en/news/first-regulatory-sandbox-artificial-intelligence-presented

16. Attrey, A., M. Lesher and C. Lomax (2020), "The role of sandboxes in promoting flexibility and innovation in the digital age", Going Digital Toolkit Note, No. 2, p.12. https://goingdigital.oecd.org/data/notes/No2_ToolkitNote_Sandboxes.pdf.

17. European Parliament Briefing, op. cit., p. 2-3.

18. Ibid., p. 3.

19. Ibid., p. 3.

20. Attrey, A., M. Lesher and C. Lomax, op. cit., p. 12.

21. Ibid., p. 13.

Bibliography

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