“Innovation without regulation is chaos; regulation without innovation is stagnation.”
1. Introduction
Imagine a world where groundbreaking fintech ideas, AI-driven fraud detection, seamless cross-border payments, or personalized Insurtech, can be tested in the real world without the immediate threat of crippling fines or shutdowns. That’s the promise of regulatory sandboxes.
The concept of regulatory sandbox means, structured systems that permit the time-bound, controlled testing of novel concepts and technology (“Regulatory Sandbox”). These regulatory sandboxes which are under the control of a regulatory authority, are intended to offer financial institutions and fintech a safe setting in which to test out new goods and services while abiding by regulatory requirements. The fundamental goal of the sandbox is to give a real-world testing ground where they may gather data on the benefits and dangers of novel financial solutions as well as closely monitor and reduce possible risks and can lead to several benefits.
On 13 August 2019, Reserve Bank of India (“RBI”) released the final framework for the regulatory sandbox, which has emerged as a pivotal catalyst in shaping the future of the Indian banking sector. Eligible applicants include startups, banks, NBFCs, and fintech-supporting entities. As of 2026, the framework has matured significantly like cohorts have shifted to “theme-neutral” and “on-tap” applications, with extended tenure, explicit Digital Personal Data Protection Act, 2023 (DPDPA) (“DPDPA”) compliance requirements, and focus on AI, fraud prevention, and digital innovations. However, it is essential to note that India’s Regulatory Sandbox is still evolving as regulators work towards introducing standardized rules into their operations.
The Insurance Regulatory and Development Authority of India (“IRDAI”) notified the IRDAI (Regulatory Sandbox) Regulations, 2025 (replacing 2019 rules), expanding scope for Insurtech and reinsurers. The Securities and Exchange Board of India (“SEBI”) maintains its Innovation and Regulatory Sandbox frameworks, with ongoing refinements for securities-linked fintech. This multi-regulator ecosystem promotes sector-wide innovation while addressing evolving risks.
2. The Importance of Harmonizing Regulatory Frameworks
In a globalized economy where digital technologies are rapidly facilitating cross-border innovation, the significance of harmonizing regulatory frameworks across jurisdictions cannot be understated. Regulatory obstacles can present serious obstacles for businesses wanting to expand their commercial operations beyond international borders. This is where regulatory framework harmonization becomes essential.
The establishment of standardized regulatory sandboxes offers several advantages in this regard. Firstly, it provides fintech companies with a predictable and transparent regulatory framework that spans multiple jurisdictions. This clarity significantly reduces the compliance burden and legal uncertainties of navigating diverse regulatory landscapes.
By streamlining regulations and harmonizing standards, these sandboxes create a conducive environment for experimentation, growth and ensures a more consistent and equitable treatment of fintech companies across borders. This consistency facilitates fair competition by eliminating regulatory arbitrage opportunities that may arise from varying regulatory requirements in different jurisdictions. Fintech companies can operate on a level playing field, free from the burden of complying with significantly different rules when expanding their services internationally. Global examples, such as the Global Financial Innovation Network (“GFIN”)’s cross-border testing pilots, demonstrate feasible collaboration.
While regulatory framework harmonization is necessary, respecting each nation’s sovereignty and particular regulatory landscape is also essential. A certain amount of flexibility and coordination is required to ensure that regulatory frameworks are adaptive to many settings and do not impede innovation or raise consumer risks.
3. Is India Leading the Charge in Embracing Regulatory Sandboxes?
In the Indian context, the RBI has already taken the initiative to develop regulatory sandboxes. RBI released its final regulations for a regulatory sandbox specifically created for fintech companies in August 2019, which was a significant breakthrough. These guidelines created a comprehensive framework that enables fintech companies to test their cutting-edge goods and services in a controlled setting while maintaining legal compliance and customer safety. The comprehensive guidelines for the fintech regulatory sandbox provide a comprehensive framework for companies to test their solutions within defined boundaries.
Additionally, India’s support for regulatory sandboxes goes beyond the RBI. Both the IRDAI, which oversees the insurance and reinsurance sectors, and the SEBI, which is the regulator for the securities markets in India, have made plans to introduce their respective regulatory sandboxes[1]. This spread of sandboxes among various financial regulators portrays a thorough and well-researched strategy for promoting innovation throughout the financial sector and reducing regulatory uncertainty.
The IRDAI has gone one step further to verify the efficacy of regulatory sandboxes by creating a panel tasked explicitly with reviewing applications submitted to its sandbox. This panel is essential in determining whether suggested innovations are appropriate and ensuring they comply with legal requirements.
4. Jurisdictional Challenges for Cross-Border Operation
Regulatory law does not operate in independent silos, it is however, an interplay between each other. When participants in a sandbox operate across multiple jurisdictions, jurisdictional challenges and potential conflicts may arise.
Fintech companies offering products or services in multiple sectors, such as banking, securities, and insurance, may have to navigate different regulatory frameworks, varying compliance requirements, reporting standards, and disclosure obligations, making it complex and burdensome to simultaneously ensure adherence to all the regulations.
The conflicting requirements imposed by multiple regulators can lead to confusion and uncertainty. They may need help understanding and interpreting the various regulations, resulting in potential compliance gaps and legal risks.
Furthermore, the lack of standardized regulations and harmonization among regulatory bodies can hinder the growth and expansion of such fintech companies. It may deter innovation and investment as companies face uncertainties and additional costs associated with complying with different rules. The regulatory complexity can also act as a barrier to entry for new players, limiting competition and stifling the development of the fintech ecosystem.
Another significant challenge faced by companies operating in multiple jurisdictions is the variation in data privacy and security laws across different regions. Each jurisdiction may have specific regulations and requirements regarding data collection, storage, processing, and transfer, which can lead to complexities and compliance difficulties for businesses.
5. How Can Cross-Border Sandboxes Handle Data Sharing Without Compromising Privacy?
Cross-border regulatory sandboxes require careful consideration of data sharing and privacy concerns. Firstly, there is a recognized need for international frameworks and guidelines to facilitate international cooperation in cross-border regulatory sandboxes specifically focused on privacy. Establishing such frameworks can ensure that data sharing and privacy considerations are handled consistently and efficiently across different jurisdictions.
Secondly, a regulatory sandbox provides a controlled environment where organizations can collaborate with Data Protection Authorities to evaluate privacy implications. This collaborative approach enables a thorough examination of data-sharing practices and privacy concerns, leading to effective mitigation strategies.
Thirdly, implementing cross-border regulatory sandboxes faces challenges related to data sharing and geopolitical realities. Sensitivities surrounding data sharing, including privacy and security concerns, must be carefully addressed. Additionally, geopolitical factors can influence the design and success of these sandboxes, requiring stakeholders to navigate these complexities effectively[2].
Lastly, valuable insights can be derived from the experiences of existing regulatory sandboxes worldwide. The World Bank has compiled data on various regulatory sandboxes, offering critical metrics on their design and operations. Analyzing these insights can help policymakers and organizations understand how data sharing and privacy considerations have been addressed in different contexts.
Establishing Data-Sharing Agreements
Establishing data-sharing agreements for cross-body application of regulatory sandboxes requires careful planning and coordination between regulatory bodies and financial institutions.
Firstly, the regulatory bodies involved must be identified, including state or federal regulators and other relevant entities. Once identified, the scope of the sandbox should be determined, specifying the financial products or services to be tested and the duration.
Subsequently, a data-sharing agreement must be developed, outlining the types of data shared and the procedures for transferring and protecting that data. Legal approval must then be obtained for the deal, ensuring compliance with applicable laws and regulations.
Finally, after receiving the necessary legal clearance, the sandbox can be launched, involving collaboration with financial institutions to test new products or services and closely monitoring the results to ensure compliance with relevant regulations.
Anonymization and Pseudonymization Techniques
Anonymization and pseudonymization techniques are essential for maintaining individual’s privacy in regulatory sandboxes, facilitating the testing of new financial products and services while protecting sensitive information. Anonymization involves removing personally identifiable information (“PII”) from datasets, making it impossible to identify individuals. Anonymized data can be used and shared without restrictions as it no longer contains personal information. Pseudonymization, on the other hand, replaces identifying details with unique identifiers or pseudonyms allowing data to be used for research and testing without revealing individuals’ true identities. These techniques balance data utility and privacy, enabling practical innovation in a secure environment.
Additionally, data trusts are another effective way to manage and safeguard data within regulatory sandboxes. Data trusts serve as legal structures that securely hold and control data. They ensure that data is appropriately collected, protected, and utilized only for approved purposes, providing an added layer of privacy and governance.
Informed Consent and Transparency
In regulatory sandboxes, promoting informed consent and transparency is crucial to ensure individuals are fully aware of how their data is being used and to foster trust in the sandbox process. Several approaches can be employed to achieve these goals.
First, open communication channels should be established to inform the public about the sandbox process, including details on the data collected and its intended use. Second, involving the public in the sandbox process through consultations and engagement allows their concerns to be heard and addressed, fostering transparency and accountability.
A standardized framework for handling innovations should be established and made publicly available. This framework facilitates clear and transparent communication between regulators and sandbox entities, ensuring individuals understand how their data will be used and promoting trust. Clear leadership within the government and inter-agency cooperation are also essential for effective regulatory sandboxes.
Collaboration with Data Protection Authorities is necessary to address privacy implications and protect individuals’ data.
Cross-Border Data Transfers and Data Sovereignty
Data Sharing and Privacy Considerations: Analyzing the legal and policy considerations surrounding cross-border data sharing within regulatory sandboxes, including data protection, privacy laws, and ensuring appropriate data governance mechanisms. DPDPA operationalized via the Digital Personal Data Protection Rules, 2025 (“DPDP”) governs personal data processing, consent, breaches, and transfers. Key features include phased rollout, immediate Board establishment, consent managers by November 2026, core obligations such as notice, safeguards, rights, transfers by May 2027. Regulators must ensure sandbox compliance with DPDPA, akin to EU’s General Data Protection Regulation safeguards for transfers.[3]
Regulators should also take into consideration data standardization for cross-border data sharing. Data standardization would allow greater data interoperability across different frameworks and enable a seamless data transfer between regulatory sandboxes. To facilitate interoperability, standard data formats, and protocols could be developed to ensure the privacy and security of data across different jurisdictions. Furthermore, participants’ data sovereignty must be protected.
6. How Do We Protect Consumers When Innovation Crosses Borders?
Addressing cross-border consumer protection in regulatory sandboxes requires considering legal and policy aspects to ensure consistent safeguards regardless of participant jurisdiction.
Firstly, by aligning regulations, regulators can ensure that consumers are equally protected regardless of the sandbox participant’s location. By defining clear boundaries, regulators can ensure that consumer rights are upheld, and appropriate safeguards are in place for interacting with sandbox participants[4].
Robust monitoring and evaluation mechanisms are vital to oversee consumer protection within regulatory sandboxes. Regulators must have the authority and capabilities to closely monitor sandbox participants’ activities. This allows them to assess whether consumer protection standards are being met and take prompt action if consumer harm is identified.
Sandbox participants should be obligated to disclose relevant information about their products or services, including potential risks and limitations. Transparent disclosure allows consumers to make informed decisions and safeguards against potential harm. Consumer feedback mechanisms provide consumers with a voice in the sandbox process.
7. Can Regulatory Arbitrage Be Tamed? Learning from Global Best Practices
Regulatory arbitrage, exploiting regulatory differences between jurisdictions, poses risks within cross-border regulatory sandboxes designed to foster financial innovation. These risks stem from the fragmentation of regulatory frameworks, regulation inconsistencies, static regulatory stances, misconceptions about regulatory approval, and excessive levels of trust.
The existence of multiple sandboxes without practical cross-jurisdictional cooperation can lead to the fragmentation of regulatory frameworks. Firms may exploit regulatory gaps or differences to gain a competitive advantage. Static regulatory stances regarding sandbox scope can create vulnerabilities. Markets and technologies evolve rapidly, and rigid sandbox scopes may need to be updated or accommodate emerging innovations[5]. Misconceptions about regulatory approval within sandboxes can lead to risks. It is essential to clarify that participation in a regulatory sandbox does not equate to regulatory endorsement or approval of a firm’s FinTech offering.
Solid cross-jurisdictional cooperation is crucial to reduce the opportunities for firms to exploit regulatory differences. Further, Regular reviews of sandbox scope are essential to prevent regulatory arbitrage.
Regulatory sandboxes are a relatively new concept, and there is still much to learn about their design and implementation. They can incorporate measures from experiences in other jurisdictions, to prevent regulatory arbitrage and establish robust monitoring mechanisms to prevent misuse, ensuring that sandboxes operate in a controlled and responsible manner.
By sharing international best practices, regulators can adopt approaches that facilitate creation while maintaining appropriate safeguards. This includes designing sandbox frameworks that provide sufficient flexibility for experimentation, streamlining regulatory processes, and ensuring compliance requirements are proportionate to the risks involved. Learning from successful innovation-promoting practices in other jurisdictions can accelerate the development of vibrant and dynamic fintech ecosystems.
Additionally, sharing best practices and knowledge exchange helps build trust between regulators and firms. By exchanging insights on regulatory approaches, authorities can align their practices, ensuring that sandboxes are transparently governed and consistently implemented and provide equal opportunities for all participants[6].
8. Conclusion
Cross-border collaboration mechanisms play a pivotal role in facilitating the success and effectiveness of regulatory sandboxes, particularly in cross-border fintech innovation. Collaboration and knowledge sharing enable regulators to create sandbox environments that effectively support innovation, protect consumers, and maintain the financial system’s stability.
For example, Regulators may enter Memorandums of Understanding that outline guidelines for cross-border collaboration and data sharing, which will delineate the terms of cooperation, regulatory requirements, data protection guidelines, and dispute resolution mechanisms.
Regulators can coordinate with one another to establish common regulatory frameworks that foster innovation and economic growth with Regular meetings and seminars to discuss emerging industry trends and regulatory changes.
Compliance with DPDPA, anonymization, and transfer safeguards is mandatory. India’ maturing sandboxes position it to lead regional harmonization, provided multi-regulator and global coordination advances. Cross-border data transfers are generally subject to additional legal requirements, such as those outlined in the GDPR. Regulators must ensure that sandbox participants comply with these requirements when transferring personal data across borders, providing adequate safeguards to protect privacy. Sandbox participants must be informed of their obligations under these laws and implement appropriate measures to safeguard personal data.
[DISCLAIMER]
All information, authorities, and sources referenced in this blog have been duly cited in the footnotes for your reference. The content of this publication is provided solely for general informational and educational purposes and does not constitute legal, professional, financial, consulting, or any other form of advice. No attorney-client or any other professional relationship is created by your access to this material. The information may not reflect the most updated legal or industry developments and should not be relied upon as a substitute for personal advice from a qualified professional. For any clarifications, questions, or discussions regarding the topics addressed, please contact the author(s) directly.
*Yash Patel, Advocate at Supreme court of India and Delhi High Court, Former Senior Associate at Khaitan & Co.
**Akarsh Anand, Final Year Student at Dr. Ram Manohar Lohiya National Law University, Lucknow.
[1] Shashidhar K.J, Regulatory Sandboxes: Decoding India’s Attempt to Regulate Fintech Disruption, 361 ORF Issue Brief (2020).
[2] Jon Truby et al., Sandboxes in the Desert: Is a Cross-Border ‘Gulf Box’ Feasible, 14 Law, Innovation and Technology (2022).
[3] Digital Personal Data Protection Rules, 2025 (notified November 13–14, 2025); phased enforcement (MeitY/PIB notifications).
[4] Hilary J Allen, Sandbox Boundaries, 22 Vanderbilt Journal of Entertainment & Technology Law (2020).
[5] Deirdre Ahern, Regulatory Lag, Regulatory Friction and Regulatory Transition as FinTech Disenablers: Calibrating an EU Response to the Regulatory Sandbox Phenomenon, 22 European Business Organization Law Review 395–432 (2021).
[6] Giulio Cornelli, Regulatory sandboxes and fintech funding: evidence from the UK, (Nov. 9, 2020),