Regulatory Sandboxes: What They Are and Why They Exist

Regulatory sandboxes have become a foundational instrument in the European policy toolkit for governing emerging technologies. As the pace of innovation in artificial intelligence, biotechnology, robotics, and data-driven services outstrips the traditional legislative cycle, policymakers have introduced controlled environments where novel products and business models can be tested under regulatory supervision. The concept is deceptively simple: create a temporary, supervised space where innovators can experiment with real users and data, while regulators observe, learn, and provide targeted guidance. Yet the legal and operational reality is complex. A sandbox is not a deregulatory zone, nor is it a shortcut to market entry. It is a structured dialogue between regulated entities and supervisory authorities, designed to reduce uncertainty, surface implementation challenges, and inform future regulatory practice.

For professionals working with AI, robotics, biotech, and data systems across Europe, understanding the mechanics of regulatory sandboxes is essential. They sit at the intersection of innovation policy and enforcement practice. Participation can clarify how general legal principles—such as data protection by design, risk management, or conformity assessment—apply to specific technologies. However, sandboxes have limits. They do not override statutory obligations, and they cannot provide legal certainty in perpetuity. This article explains what sandboxes are, why they exist, what participation involves, and what they can and cannot “approve” legally. It distinguishes between EU-level frameworks and national implementations, and highlights practical considerations for organizations considering entry.

Concept and Policy Rationale

At their core, regulatory sandboxes are mechanisms for regulatory learning and regulatory certainty. They address a persistent problem in technology governance: how to support innovation without compromising public interests such as safety, privacy, and non-discrimination. Traditional regulation is often criticized for being slow and technology-neutral, which can leave innovators uncertain about how to comply. Sandboxes invert this dynamic by bringing regulators into the development process early, allowing them to observe technology in practice and provide feedback that is grounded in real-world constraints.

The policy rationale is twofold. First, sandboxes aim to lower barriers to entry for startups and SMEs that may lack resources to navigate complex compliance landscapes. Second, they serve as a testing ground for regulators themselves, enabling them to identify gaps in guidance, clarify interpretations, and refine enforcement priorities. In the European context, sandboxes are also a tool for harmonization. By encouraging cross-border participation and standardized reporting, they can help align national supervisory practices with EU-level frameworks.

Sandboxes are not exemptions from the law. They are supervised environments for testing compliance approaches and observing technology in use.

It is important to distinguish sandboxes from other innovation-friendly instruments. They are not “safe harbors” that immunize participants from liability. They are not certification schemes that confer a presumption of conformity. And they are not procurement vehicles that guarantee market access. Instead, they are experimental frameworks that operate within existing legal boundaries, with regulators offering guidance and monitoring rather than binding approvals.

European Legal Context: EU-Level Frameworks and National Variations

Europe does not have a single, unified sandbox regime. Instead, sandboxes appear across multiple EU legal instruments and are implemented at the national level. Their design and authority vary depending on the sector and the regulator involved.

Digital and Data Governance

In the digital sphere, the General Data Protection Regulation (GDPR) does not explicitly mention sandboxes, but several Member States have introduced them under national data protection laws. These are typically framed as “regulatory sandboxes for data innovation,” where the lead supervisory authority provides guidance on how to process personal data lawfully during testing. The European Data Protection Board (EDPB) has issued Guidelines on Regulatory Sandboxes under GDPR, clarifying that sandboxes cannot waive data protection principles. Participants must still ensure lawfulness, fairness, transparency, purpose limitation, data minimization, accuracy, storage limitation, integrity, and confidentiality. The sandbox provides a framework for demonstrating compliance and receiving feedback, but it does not grant immunity from enforcement if harm occurs.

Artificial Intelligence

The EU Artificial Intelligence Act (AI Act) establishes a formal, EU-wide framework for regulatory sandboxes. Article 53 AI Act mandates that Member States ensure at least one AI regulatory sandbox is available at national level, and it encourages the creation of joint sandboxes across Member States. The AI Act’s sandboxes are designed to support the development, testing, and validation of innovative AI systems under regulatory oversight. They are open to providers and prospective providers of AI systems, including those involving biometrics, critical infrastructure, employment, education, and other high-risk use cases. Importantly, the AI Act allows for testing of AI systems in real-world conditions outside the sandbox, but that is a distinct mechanism with its own safeguards.

The AI Act’s sandboxes have a specific legal status. They do not provide a presumption of conformity with the Act’s requirements. However, the Act states that outcomes achieved in the sandbox—including successfully demonstrated compliance measures—can be taken into account by market surveillance authorities and notified bodies when evaluating conformity assessments or investigations, provided the relevant conditions are met. This is a nuanced form of regulatory certainty: it is not a waiver, but it can carry persuasive weight in subsequent compliance decisions.

Financial Services

Financial sandboxes are more established in Europe, often operating under national frameworks rather than EU-wide harmonization. The European Banking Authority (EBA) has issued opinions and guidelines on sandboxes and innovation facilitators, but there is no single EU financial sandbox. Instead, countries like the United Kingdom (prior to full EU divergence), Spain, France, the Netherlands, and Lithuania have run sandboxes for fintech and regtech solutions. These typically involve coordination between financial supervisors (e.g., central banks, securities regulators) and data protection authorities. They focus on payment systems, digital assets, lending, and compliance technologies, and they often require participants to meet prudential and conduct standards during testing.

Health, Biotech, and Medical Devices

Health innovation sandboxes are emerging under the Medical Device Regulation (MDR) and In Vitro Diagnostic Regulation (IVDR), as well as national health data frameworks. These sandboxes address the complexity of clinical validation, interoperability with electronic health records, and the use of real-world data for regulatory submissions. They often involve the European Health Data Space (EHDS) infrastructure and national health data access bodies. In some countries, sandboxes are linked to “early access” or “compassionate use” programs, but they remain distinct from market authorization pathways.

Cybersecurity and Critical Infrastructure

Cybersecurity sandboxes are less common but growing, particularly for testing security controls in operational technology (OT) environments. The EU Cybersecurity Act and the NIS2 Directive do not mandate sandboxes, but national authorities may use them to test certification approaches or incident response playbooks. These sandboxes typically require strict isolation and anonymization to avoid exposing critical systems to risk.

Emerging Cross-Border Initiatives

The European Commission has promoted “EU Sandboxes” through the Digital Europe Programme and Horizon Europe, aiming to create cross-border testing environments for AI and data-driven solutions. These initiatives often focus on public-sector use cases, such as mobility, energy, and public administration, and they seek to align national sandbox practices with EU standards. While not legally binding, they signal a policy direction toward greater harmonization.

What Participation Involves: From Application to Exit

Participating in a regulatory sandbox is a structured process that typically spans several months. It requires a clear innovation hypothesis, a defined testing plan, and a commitment to regulatory engagement. The exact steps vary by jurisdiction and sector, but the general lifecycle is consistent.

Eligibility and Selection

Eligibility criteria are designed to filter for genuine innovation and regulatory relevance. Authorities typically look for:

• Novelty: The solution introduces a new technology, process, or business model that is not clearly addressed by existing guidance.
• Regulatory Uncertainty: There is ambiguity about how current rules apply, or the solution pushes at the boundaries of compliance.
• Public Interest: The innovation has potential societal benefits, such as improved healthcare outcomes, environmental sustainability, or enhanced security.
• Feasibility: The participant has the technical and organizational capacity to conduct the test safely and ethically.

Selection is competitive. Authorities may publish calls for proposals or accept applications on a rolling basis. The application typically includes a detailed description of the technology, the regulatory questions at stake, the testing methodology, risk mitigation measures, and a data governance plan.

Legal Agreements and Governance

Once accepted, participants sign a sandbox agreement with the supervisory authority. This agreement is not a license or permit; it is a framework for supervised experimentation. It outlines:

• Scope: The specific activities, data, and environments covered by the sandbox.
• Roles and Responsibilities: Who is responsible for data protection, safety, incident reporting, and user communication.
• Monitoring and Reporting: The frequency and format of progress reports, including metrics, incidents, and deviations.
• Exit Conditions: How the test will conclude, what happens to data, and how outcomes will be communicated.

Legal certainty is a central concern. The agreement should specify which laws remain fully applicable and how any deviations (if permitted) are limited in scope and duration. In many sandboxes, participants remain fully liable for harm, and the regulator’s role is advisory.

Testing Design and Risk Management

Sandboxes require rigorous test design. This includes:

• Use Case Definition: Clear boundaries on what is being tested and why.
• Data Governance: Provenance, consent, anonymization, retention, and deletion protocols. For personal data, Data Protection Impact Assessments (DPIAs) are mandatory.
• Safety Controls: Technical and organizational measures to prevent physical or digital harm, including fail-safes and kill switches.
• User Rights: Transparent information, opt-in/opt-out mechanisms, and accessible complaint procedures.
• Bias and Fairness: For AI, documentation of training data, performance metrics across subgroups, and mitigation strategies.

Authorities may require independent audits or ethical reviews, especially in health and biotech sandboxes. The level of scrutiny typically scales with the risk profile of the use case.

Reporting, Oversight, and Iteration

Participants are expected to maintain continuous dialogue with regulators. Reporting cadences can be weekly, monthly, or milestone-based. Reports cover technical progress, regulatory questions encountered, incidents, and changes to the testing plan. Regulators may issue “no-action letters” or informal guidance, but these are not binding on other authorities or courts. The sandbox process is iterative: if the test reveals new risks, the scope may be narrowed, additional safeguards introduced, or the test paused.

Exit and Aftercare

At the end of the sandbox, participants produce a final report summarizing findings, compliance lessons, and recommendations for regulatory improvement. Authorities may issue a letter acknowledging participation and describing outcomes. This documentation can be useful in subsequent conformity assessments or regulatory filings, but it does not constitute approval or certification. Data must be deleted or retained in accordance with applicable law, and participants must transition to standard regulatory pathways if they wish to commercialize.

What Sandboxes Can and Cannot “Approve” Legally

The word “approve” is often used loosely in discussions about sandboxes. It is important to be precise about what legal status sandbox outcomes carry.

What They Can Do

Sandboxes can provide regulatory guidance and evidence of good-faith compliance efforts. In some frameworks, they can also offer limited legal certainty for the duration of the test. For example:

• Guidance: Regulators can clarify how rules apply to specific technical implementations, helping participants interpret obligations.
• Documentation: The sandbox process generates evidence of risk management, data governance, and design choices that can be referenced in conformity assessments.
• Temporary Flexibility: In certain sectors (e.g., data protection), regulators may accept alternative compliance mechanisms during testing, provided risks are mitigated and rights are protected. This is not an exemption; it is a supervised adaptation.
• Pathway Mapping: Authorities can help participants identify the correct regulatory pathway (e.g., notified body involvement for high-risk AI, or self-assessment for low-risk devices).

In the AI Act sandbox, Article 53(3) states that the successful completion of a sandbox does not confer a presumption of conformity. However, it also indicates that the specific guidance provided and the compliance measures demonstrated can be taken into account by authorities when assessing conformity or investigating potential breaches. This is a subtle but important distinction: sandbox participation can influence enforcement discretion and conformity evaluation, but it does not guarantee a favorable outcome.

What They Cannot Do

Sandboxes cannot:

• Override Statutory Obligations: They cannot waive legal requirements such as data protection principles, safety standards, or fundamental rights protections.
• Authorize Market Placement: They do not replace CE marking, notified body opinions, or regulatory approvals required to place a product on the market.
• Provide Immunity from Liability: Participants remain liable for damages, breaches, or non-compliance. Sandboxes do not shield against enforcement actions if harm occurs.
• Bind Other Authorities: Guidance from one regulator in a sandbox does not bind other national or EU authorities, unless formal harmonization mechanisms are in place.
• Ensure Cross-Border Validity: A sandbox in one Member State does not automatically allow operations in another. Cross-border scaling requires compliance with the laws of each relevant jurisdiction.

Practically, this means that sandboxes are best viewed as a tool for de-risking the compliance journey, not for eliminating regulatory requirements. They can reduce uncertainty and improve the quality of documentation, but they cannot replace conformity assessments or legal approvals.

Comparative Perspectives: How European Countries Approach Sandboxes

While EU frameworks set the direction, national implementations vary significantly. Understanding these differences helps organizations choose the right sandbox and set realistic expectations.

United Kingdom (Pre- and Post-Brexit)

The UK’s Financial Conduct Authority (FCA) pioneered the regulatory sandbox model in 2016. Its sandbox includes “direct support” cohorts, “regulatory guidance” cohorts, and “digital sandbox” environments for testing with synthetic data. The UK approach emphasizes iterative testing, consumer protection, and clear exit strategies. Post-Brexit, the UK is diverging from EU frameworks, but its sandbox methodology remains influential. For EU entities, UK sandbox participation requires careful consideration of data transfer rules and regulatory alignment.

Spain

Spain’s sandbox is coordinated by the Banco de España and the National Securities Market Commission (CNMV), with involvement from the Spanish Data Protection Agency (AEPD). It has a strong focus on fintech and regtech, and it includes a “testing space” for innovative solutions under supervised conditions. Spain has also experimented with cross-border sandbox elements, particularly with Latin American regulators, which is relevant for EU companies with global ambitions.

France

France’s “Fintech Innovation” framework is overseen by the Autorité de Contrôle Prudentiel et de Résolution (ACPR) and the Autorité des Marchés Financiers (AMF). It offers a structured dialogue for licensing and compliance, often linked to sandbox-like testing for payment services and digital assets. France also has experience with data protection sandboxes coordinated by the CNIL, focusing on AI and health data.

Netherlands

The Dutch Authority for the Financial Markets (AFM) and De Nederlandsche Bank (DNB) run an innovation hub that functions similarly to a sandbox for financial services. The Netherlands has also been active in health data innovation, with sandboxes linked to the national health data infrastructure and the EHDS. The Dutch approach is pragmatic, with a strong emphasis on consumer outcomes and data ethics.

Lithuania

Lithuania’s central bank has been a leader in fintech sandboxes and has also launched a digital currency sandbox. It offers a relatively streamlined application process and has attracted cross-border participants. For EU companies, Lithuania’s sandbox can be a gateway to testing payment and blockchain solutions under EU payment services frameworks.

Germany

Germany’s approach is more fragmented, with sector-specific sandboxes rather than a single national program. The Federal Financial Supervisory Authority (BaFin) has an innovation hub for fintech and regtech, and there are regional initiatives for health data and AI. Germany’s strict data protection culture means that sandboxes involving personal data are subject to rigorous oversight by state data protection authorities.

Across these countries, common themes emerge: sandboxes are voluntary, time-limited, and subject to strict governance. They are not a substitute for licensing or conformity assessment. They are most effective when participants have a clear compliance hypothesis and are willing to engage transparently with regulators.

Practical Considerations for Participants

Organizations considering sandbox participation should approach it as a strategic compliance investment rather than a marketing exercise. The following considerations are critical.

Strategic Fit and Objectives

Clarify what you want to achieve. Is the goal to resolve a specific regulatory ambiguity, to test a technical control, to build a compliance case for a notified body, or to inform policy? Sandboxes are most valuable when the regulatory question is concrete and the innovation is sufficiently mature to generate meaningful evidence. If the product is at a very early stage, an innovation hub or standard industry engagement may be more appropriate.

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