More than a year after the European Commission submitted the Proposal for the Artificial Intelligence Act (AI Act), the EU institutions are still working on adopting this
groundbreaking regulation. The Draft AI Act contains a uniform set of horizontal rules
for the development, marketing, and use of AI systems in conformity with the Union
values, applying the proportionate risk-based approach. The aim is to avoid regulatory
friction and fragmentation and to create a well-functioning internal market for AI systems and technologies. However, the policy and regulatory choices should not obstruct
the innovative potential and transformative impact of AI systems and technologies on
the society and economy. The Draft AI Act, therefore, introduces AI regulatory sandboxes, as a testing ground for deciding what to regulate and how. This is a novel regulatory approach, fostering innovation, development, and testing of AI systems under
strict regulatory oversight before these systems are placed on the market. The proposed
solution from the Draft AI Act has caused both excitement and criticism in the legal
doctrine and industry. This paper will explore the benefits and challenges of AI regulatory sandboxes. The draft provisions will be critically evaluated, drawing from the experience in the FinTech industry, especially considering the effect on SMEs. The EU’s
ambition is to set up a robust and disruption-resilient, yet flexible, innovation-friendly,
and future-proof regulatory framework for AI, and the intuitive appeal of AI regulatory
sandboxes for both regulators and innovators deserves an in-depth examination.
