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Regulatory Sandboxes – Testing Environments for Innovation and Regulation

Introduction

With the process of digitalisation moving ever further forward, new technologies and business models are making their way into many areas of the economy and life faster than ever before. Such innovations offer a vast range of opportunities, but they often also have major effects on consumers, companies and society, which are difficult to assess in the short term.

What exactly are regulatory sandboxes?

Regulatory sandboxes are facilities for testing innovation and regulation which enable digital innovations to be tested under real-life conditions and experience to be gathered. Such real-world testing environments are operated for a limited period of time and across a set area and are intended to allow for the testing of new technologies and business models, which are only partially compatible with the existing legal and regulatory framework.

With the process of digitalisation moving ever further forward, new technologies and business models are making their way into many areas of the economy and life faster than ever before. Such innovations offer a vast range of opportunities, but they often also have major effects on consumers, companies and society, which are difficult to assess in the short term. The purpose of regulatory sandboxes is to learn about the opportunities and risks that a particular innovation carries and to develop the right regulatory environment to accommodate it.

Regulatory sandboxes, living labs and testing environments

The concept of a regulatory sandbox and other similar concepts are subject of ever greater debate. Despite intensive discussions and numerous scientific papers on this subject, there is no uniform definition of these concepts. It is therefore important to develop a common understanding of regulatory sandboxes that is in line with the Regulatory Sandbox Strategy of the Federal Ministry for Economic Affairs and Energy. Accordingly, regulatory sandboxes combine three elements as shown in the diagram: testing within certain limits, the use of legal room for manoeuvre and active regulatory learning.

Of course, even the most innovative ideas must be compatible with the applicable legal framework. This is why such sandboxes require instruments that provide legal flexibility, for example in the form of experimentation clauses (i.e. temporary rules allowing experiments to be conducted). The German Carriage of Passengers Act shows what such a clause providing scope for innovation and for legal viability might look like.

Experimentation clause contained in Section 7(2) of the Carriage of Passengers Act

“In order to allow for the practical testing of new modes or means of transport, the licensing authority may, upon request on a case-by-case basis, authorise exemptions from the provisions of this Act or from provisions adopted on the basis of this Act for a maximum period of four years, insofar as they do not conflict with public transport interests”.

Such flexibility clauses can also be found in other legislative texts, for example in the “Drone Regulation” (Regulation to Regulate Unmanned Aerial Vehicles) (in German). The more room for manoeuvre is created by experimentation clauses and other instruments, the better the conditions for testing innovative technologies and business models.

Development of a “smart” legal framework

Regulatory sandboxes do not aim to deregulate or reduce safety and protection standards. On the contrary, there are many areas in which there is legal uncertainty and for which meaningful legislation has yet to be created. At the same time, in this age of digital transformation, we must also frequently assess existing rules, which may have been established decades ago. Regulatory sandboxes can help to develop a suitable legal framework, without sacrificing useful and necessary standards.

Ultimately, the primary purpose of using regulatory sandboxes as facilities for testing innovation and regulation is to gain clear regulatory knowledge. The goal here is not only to test digital innovations under real-life conditions, but also to allow legislators to gain knowledge for creating regulation in the future. In which way do rules in certain areas need to be adjusted or designed in order to be able to apply innovations in practice, to facilitate the creation of start-ups and to promote competition without giving up necessary standards? Do we want to permit all new developments? Or do we want to ban everything that is not permitted under current regulations? In most cases, the answer is somewhere in the middle and regulatory sandboxes can help develop an appropriate regulatory framework that anticipates further developments in the future.

Here is one example to illustrate this: “Red Flag Act”

In 1865, a law was introduced in the United Kingdom to establish rules for the emerging automobile traffic. In addition to several other restrictive requirements, (e.g. the maximum speed in built-up areas was limited to 3 km/h), the law required all motor vehicles to be led by a pedestrian carrying a red flag to warn people of the approaching danger. This earned the law the popular name “Red Flag Act”. The strict requirements of this law were only relaxed decades later.

Source: National Motor Museum/Alamy

© Source: National Motor Museum/Alamy

So the clear aim is to use regulatory sandboxes not only to create areas for testing new products and business models, but also to actively develop the regulatory environment in such a way that it can keep up with the pace of digitalisation. If we succeed in using them to this effect, this would be an important step towards ensuring that Germany will continue to be successful in the global competition for talents and ideas in the future.

Computer chip and gas fiber, symbolic of digitisation; Source: Getty Images / Rafe Swan

© Getty Images / Rafe Swan

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Strategy

The Regulatory Sandbox Strategy of the Federal Ministry for Economic Affairs and Energy

The goal of the Ministry’s Regulatory Sandbox Strategy is to foster digital innovation and to further develop the regulatory framework.

What results do we expect to achieve by creating regulatory sandboxes? In order to strengthen regulatory sandboxes as a tool to drive digitalisation forward, the Federal Ministry for Economic Affairs and Energy is pursuing three objectives:

1. Regulatory sandboxes need regulatory scope

If we want to ensure that regulation does not lag behind innovation, we will need more flexibility and “breathing space” in the future. Experimentation clauses and exemptions are key components for shaping the legal framework in an innovation-friendly and future-oriented way. These instruments must be strengthened. One goal of the Regulatory Sandbox Strategy is therefore to give new laws and regulations more flexibility through the increased use of experimentation clauses.

At the same time, we need to ensure that better use is made of existing clauses. How must these clauses be designed in order to provide the greatest possible flexibility while also ensuring regulatory sandboxes are realised in a legally compliant manner? And on what legal level must or can they be established in order to create sufficient flexibility? Is it possible to incorporate a “general clause”? Legal opinions are already being prepared to help answer these questions.

2. Transfer of expertise and networking

We must reduce uncertainties, fill gaps in information and improve networking and the exchange of information between industry, science and public administration. In the context of many ongoing and planned projects, the same questions are being raised: Is this legally possible? Who should I contact? Where can I find potential project partners? What do I have to consider with regard to state aid and competition law and what about questions of liability and insurance? Who can support me?

Finding answers to these questions takes a lot of time and effort, which is often a reason why innovative and promising ideas are not put into practice.

“Handbook for Regulatory Sandboxes”

Our aim is to fill gaps in information, use synergy effects and avoid duplication of work. To this end, the Federal Ministry for Economic Affairs and Energy is currently developing a “Handbook for Regulatory Sandboxes”, which seeks to help the relevant stakeholders ask the right and the necessary questions and find answers to them. At the same time, we want to provide comprehensive information on legal issues, as well as on best practice examples.


Research report on regulatory sandboxes, online consultation


The Federal Economic Affairs Ministry commissioned VDI-Technologiezentrum GmbH with preparing an expert opinion entitled “Potential and requirements of regulatory sandboxes”. The company has worked together with the Munich law firm Bird & Bird LLP to study the matter in depth. The expert opinion initially provides a comprehensive screening of existing projects in Germany which use a regulatory sandbox approach at least in part. On the basis of six case studies, the paper then analyses selected sectors and cases to see what obstacles exist during the implementation process, and also what opportunities and possibilities are presented by the projects. The case studies can be downloaded from the following links:


- Delivery Robot Hamburg (PDF, 200 KB) (in German)
- Cooperatives eGovernment in federal structures (PDF, 448 KB) (in German)
- Telemedicine in Baden-Württemberg (PDF, 402 KB) (in German)
- Autonomous bus in Bad Birnbach (PDF, 664 KB) (in German)
- SINTEG: Smart energy showcases (PDF, 440 KB) (in German)
- AutoNOMOS Labs Berlin (PDF, 543 KB) (in German)


The contractors have worked from the case studies to draw up guidelines for the creation of regulatory sandboxes. The practicability of this draft (PDF, 967 KB) (in German) was reviewed by the experts in the Regulatory Sandboxes Network via the online consultation. The members of the network were also asked to present their own examples of interesting examples in practice. The results of the research study and the ideas from the Regulatory Sandboxes Network form the basis for the Handbook for Regulatory Sandboxes (see above). A summary of the results of the consultation processes (PDF, 373 KB) (in German) is available as a download.

“Network for Regulatory Sandboxes”

The goal of establishing a “Network for Regulatory Sandboxes” is to facilitate the exchange of information and networking between stakeholders and to disseminate information on legal possibilities, future competitions in this field and examples from practice from Germany and abroad. The network can also serve to bring together project partners, for example a start-up with an innovative idea with stakeholders who are keen to experiment. Furthermore, an interministerial working group will be set up to strengthen networking between the federal ministries.

Interministerial Working Group on “Regulatory Sandboxes as Testing Environments for Innovation and Regulation”

The Federal Ministry for Economic Affairs and Energy considers regulatory sandboxes as a cross-cutting regulatory policy instrument. They are to be used to design regulatory frameworks in such a way so as to allow innovative business models and new technologies to be realised and promoted. In addition, the Federal Ministry for Economic Affairs and Energy is not only responsible for innovation and digitalisation policy, but also for reduction of bureaucracy and better regulation.

At the same time, the specific areas of application go far beyond the remit of the Federal Economic Affairs Ministry. The 2018 Coalition Agreement (in German) also has the clear goal of advancing the development of regulatory sandboxes and testing environments in many subject areas. Close cooperation between the individual ministries is therefore a key prerequisite for implementing our regulatory sandbox strategy successfully.

In order to facilitate the exchange of information, the interministerial working group “Regulatory Sandboxes" was set up. The inaugural meeting of the working group took place in Berlin on 27 November 2018. There is broad consensus that in this age of digital transformation, regulatory sandboxes are an important and necessary instrument for further developing the regulatory framework and promoting innovation in Germany.

3. Testing regulatory sandboxes in practice

In implementing our own projects, we want to link the testing of innovation and regulation more closely to actual practice and lead the way by demonstrating positive examples. All this is to show that regulatory sandboxes can make a valuable contribution to fostering innovation in Germany. Regulatory sandbox competitions, for example in the area of the sharing economy, the drone industry or elsewhere, are intended to take up and implement ideas from industry. Our common goal is to identify regulatory obstacles and to develop legally compliant solutions to facilitate innovation and gather experience to inform future regulation.

“Regulatory Sandboxes for the Energy Transition”

Parallel to the cross-cutting initiative presented here which aims to strengthen regulatory test sandboxes, the Federal Ministry for Economic Affairs and Energy has created a new funding strand of funding in the 7th Energy Research Programme, which is entitled “Regulatory sandboxes for the energy transition”. Our goal is to accelerate the transfer of technology and innovation from research stations to the energy market by means of implementing large-scale, system-oriented demonstration projects combined with sustainable business models. The aim is to open up and test new regulatory approaches in this field.

In addition, there is another programme entitled “Smart Energy Showcases – Digital Agenda for the Energy Transition” (in German) which has already been set up by the Federal Ministry for Economic Affairs and Energy to address the technical, economic and regulatory challenges of Germany’s energy reforms through using experimentation clauses.

If you have any questions or suggestions, please do not hesitate to contact us by e-mail at reallabore@bmwi.bund.de at any time.

Pipette and test tubes on innovation policy; Source: Getty Images/Andrew Brookes

© Getty Images/Andrew Brookes

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