Regulatory Sandboxes: The future of regulation?

Motunrayo
By Motunrayo Bamgbose-Martins, Summer Research Fellow
August 01, 2018

Introduction

On June 19, 2018, the Deloitte Center for Government Insights published an article on The Future of Regulation: Principles for Regulating Emerging Technologies. In it, William D. Eggers, Mike Turley, and Pankaj Kishnani lay out the business and technological challenges of regulating today’s technologies. The article offers five principles for regulating emerging technologies: adaptive regulation, outcome-based regulation, risk-weighted regulation, collaborative regulation, and regulatory sandboxes. This commentary explores regulatory sandboxes, a concept borrowed from the tech sector and first implemented in the United Kingdom.

What are regulatory sandboxes?

A recent law review article explains that a regulatory sandbox “creates an environment for businesses to test products with less risk of being ‘punished’ by the regulator for non-compliance.” The Deloitte article defines regulatory sandboxes as “controlled environments allowing innovators to test products, services, or new business models without having to follow all the standard regulations.”

Why use regulatory sandboxes?

This commentary focuses on the benefits of regulatory sandboxes to regulators. However, sandboxes also benefit businesses and consumers. The Deloitte article explains that, among other things, sandboxes create an enabling environment for innovation by allowing firms to test products in a live setting. The ideas that evolve from these sandboxes can provide significant benefits to businesses and consumers, particularly if these ideas would otherwise have been constrained by the regulatory environment.

Regulators need to keep up with technological advancements. Brian Mannix mentions in his GW Regulatory Studies Center commentary that “[a]ny rigid set of rules will become obsolete as technology changes, and will require constant revision lest they become an obstacle to innovation.” Regulators might be uncertain, however, about how to keep up.

Regulatory sandboxes offer some benefits to regulators to help with this challenge. First, sandboxes allow regulators “to keep pace with technological advancements and new business models that may not conveniently fit into the existing regulatory framework.” Second, regulatory sandboxes give regulators insight into “areas in which existing regulation might stifle innovation” and how to avoid those problems. Third, the sandboxes “allow some potentially riskier products and services” to be tested without “fear of harming consumers.”

Challenges of regulatory sandboxes

Regulatory sandboxes also come with challenges. First, the entry barriers to some regulatory sandboxes limit participation and therefore the number of innovative ideas that can emerge from the sandboxes. Second, regulators may have a difficult time adapting their approach to the feedback from the sandboxes. Some changes might require new legislation, for example, which may be outside the regulator’s immediate control or influence. Third, regulators must decide what level of risk to permit in a sandbox.

Regulatory sandbox in United States

In the United States, an example of a regulatory sandbox is the Unmanned Aircraft System (UAS) Integrated Pilot Program (IPP). As noted on its website, the Federal Aviation Administration (FAA) views this program as a chance for the private sector and public sector to work together to accelerate safe integration of drones (i.e., UAS) into the national airspace. In this program, the final awardees will be allowed to test safe ways to conduct drone operations under normally-prohibited circumstances (e.g., at night, over people, and beyond the pilot’s line of sight). The program gives the FAA, private operators, and localities a chance to develop solutions to the most difficult challenges drones pose.

On May 9, 2018, the Secretary of the U.S. Department of Transportation (DOT), Elaine L. Chao announced the ten state, local, and tribal governments selected for this program. These awardees will work with the FAA to refine their operational concepts by collecting drone data over the next two and half years. The announcement said that the data generated by the program will help DOT and FAA “craft new enabling rules…, identify ways to balance local and national interests…, improve communications with local, state and tribal jurisdictions, address security and privacy risks, and accelerate the approval of operations that currently require special authorizations.” Overall this is a promising example of the potential for beneficial effects of sandboxes in the United States.

Conclusion

While this commentary recognizes that sandboxes may not be the best approach in all regulatory domains, it highlights their potential and early use in one Federal agency. Regulatory sandboxes offer benefits for consumers, businesses, and regulators, particularly when compared to traditional regulation. Just as developers test new software before its release, sandboxes offer regulators a way to test new regulatory approaches before they are launched.