The advancement of Artificial Intelligence (AI) technologies has posed both unprecedented opportunities and complex challenges for societies worldwide. As AI applications continue to proliferate across industries such as healthcare, transportation, finance, and more, concerns have emerged regarding ethical implications, data privacy, and potential risks associated with their deployment. In response, many governments and regulatory bodies have turned to innovative approaches such as “AI regulatory sandboxes” to strike a balance between fostering AI innovation and ensuring responsible development.

To regulate but not restrict

Regulatory sandboxes have become a significant instrument in various countries, used to evaluate innovations within a defined and monitored time frame while being subject to regulatory oversight and controlled constraints. This approach serves as a valuable tool for policymakers, furnishing them with empirical evidence regarding the advantages and potential risks associated with emerging technologies. Moreover, an evidence-based approach empowers policymakers to adopt a well-informed stance in crafting legal and policy responses that foster beneficial innovation. For businesses engaged in these sandboxes, insights gleaned from a study on ‘fintech regulatory sandboxes’ indicate that this controlled environment enhances access to funding by mitigating information imbalances and reducing regulatory costs. Such multifaceted utility positions regulatory sandboxes as a catalyst for fostering innovation, supporting economic growth, and ensuring responsible governance in a rapidly evolving landscape of emerging technologies.

While the inception of the first formal regulatory sandbox is often attributed to the Financial Conduct Authority in the U.K., numerous other nations have subsequently introduced or announced similar initiatives to assess innovations spanning various industries. According to data from the World Bank, as of November 2020, there were approximately 73 regulatory sandboxes, both announced and operational, within the financial sector across 57 jurisdictions. In India, all financial sector regulators, including the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, Pension Fund Regulatory and Development Authority, and International Financial Services Centre Authority, have launched their respective regulatory sandboxes. Expanding beyond finance, Karnataka has enacted the Karnataka Innovation Authority Act, 2020, establishing an Innovation Authority dedicated to promoting and regulating innovative technologies through a regulatory sandbox model. Notably, the recently passed Telecommunications Act 2023 proposed a regulatory sandbox where the central Government has the authority to establish one or more regulatory sandboxes, as prescribed, to promote and facilitate innovation and technological development in the field of telecommunications, specifying the manner and duration for their implementation.

The benefits of regulatory sandboxes

In the discourse surrounding AI regulation, the concept of regulatory sandboxes emerges as a compelling avenue for exploration. When one considers the necessity of stringent, detailed regulation or favouring adaptable strategies like soft or self-regulation, the introduction of a regulatory sandbox remains a viable option. Firstly, such a sandbox provides a controlled environment for experimentation, offering invaluable insights into AI technologies capabilities and limitations while fostering collaboration between innovators and regulators. Additionally, it promotes transparency and accountability by requiring participants to disclose information about their AI models, addressing concerns about opacity and enabling tailored regulations. Furthermore, by mandating risk assessments and safeguards, the sandbox encourages responsible innovation, mitigating potential societal impacts of AI applications and nurturing a culture of ethical development within the industry.

Article 53 of the European Union’s AI Act, has the provision of a regulatory sandbox to test technology before making it mainstream. Additionally, Spain became the first European country to have established the statute of the Spanish Agency for the Supervision of Artificial Intelligence (AESIA), ahead of the European regulation on artificial intelligence. This regulation will mandate member states to designate a ‘national supervisory authority’ responsible for overseeing the implementation of regulations related to AI.

Globally, there is a competitive race to regulate and harness AI’s vast potential. The EU has come up with an AI Act, the U.S. has released a white paper on the AI Bill of Rights, and the U.K. has a national AI Strategy. China is trying to regulate various aspects of AI like generative AI while Singapore is following an innovation-friendly approach.

India’s approach to AI

In India, NITI Ayog released a discussion paper outlining a national strategy for AI, which led to the establishment of the national AI Portal. The Ministry of Electronics and Information Technology (MeitY), released a report on AI Innovation 2023 highlighting India’s AI vision through seven working groups. The latest proposal of the Digital India Act, 2023 also talks about regulating AI by creating a separate set of laws and regulations.

India’s interest in regulating AI is grounded in a multifaceted approach encompassing economic ambitions, ethical considerations, job creation, industrial transformation, and overall societal welfare. As a global technology hub, the chair of the Global Partnership on Artificial Intelligence and the Delhi Declaration, India aspires to foster innovation in alignment with its cultural and ethical values. A comprehensive regulatory sandbox can be envisioned to guide businesses, researchers, and policymakers, steering AI development towards sustainable growth.

A regulatory sandbox should not be viewed as an approach to directly govern AI, but rather as a progressive step preceding formal legislation. It serves as a preparatory measure tailored to India’s specific circumstances, paving the way for future regulatory actions aligned with the country’s needs and developments in the AI landscape. By providing a controlled environment for testing innovative AI applications, a regulatory sandbox enables stakeholders to assess risks, refine regulatory frameworks, and foster collaboration between regulators, industry players, and other stakeholders. This collaborative approach not only promotes responsible AI deployment but also positions India at the forefront of shaping effective and adaptive regulatory frameworks for emerging technologies. Given the distinct Indian context, it becomes pivotal to determine which approach is most viable and efficient in striking a balance between fostering AI innovation and ensuring ethical, transparent, and accountable AI implementations.

Sanhita Chauriha is a Data Privacy and Technology Lawyer.