Sen. Ted Cruz proposes federal regulatory sandbox to encourage AI innovation, development

Sen. Ted Cruz (R-Texas) has introduced draft legislation to create a program that would allow artificial intelligence (AI) pilot projects to operate under temporary exemptions from certain federal rules. The bill, known as the Strengthening Artificial Intelligence Normalization and Diffusion by Oversight and Experimentation (SANDBOX) Act, would allow innovators to obtain temporary regulatory waivers for AI technologies from federal agencies. Developers could commercialize their product for a specified period, subject to added oversight from regulators and reporting requirements.

The bill would authorize the creation of a federal program to oversee pilot projects of AI tools in sectors such as energy, infrastructure, healthcare, and education, allowing them to apply for temporary liability protections. Administered by the White House Office of Science and Technology Policy (OSTP), this program would enable AI users and developers to request waivers or modifications to existing federal rules and regulations. OSTP would route applications to the appropriate agencies and work in collaboration with them to determine whether to accept or reject an application, based on an evaluation of the risks and benefits to consumers.

As an example, AI-enabled medical devices may currently require Food and Drug Administration (FDA) approval for minor adjustments. However, by design, the benefits of AI are that it regularly learns from the experience of user data. A device that analyzes images of the heart to diagnose cardiac risk better could improve rapidly every time it receives data from more patients. The FDA has acknowledged that the approval process is a problem and is currently developing more effective rules for AI-enabled devices.

Under Cruz’s plan, the FDA could create a new rule that would only apply temporarily to a specific product. This is more politically palatable than revising rules for the entire industry.

Once an application is approved, developers and their products receive certain specific legal protections. Per the draft bill:

No existing right of action of a consumer to seek actual damages or an equitable remedy may be waived or modified under the Program. (2) While a waiver or modification is in effect, and the person is in compliance with the written agreement entered into pursuant to subsection (e), the person shall not be subject to the criminal or civil enforcement of a covered provision specifically identified in the waiver or modification.

Under this framework, developers would apply to release a product or service that requires a waiver from a specific federal regulation or rule under an agency’s jurisdiction. The legislation would not override existing state or local regulations. For example, it would not preempt state laws targeting fraudulent videos or so-called “deep fakes,” or restrictions on using AI in mental healthcare like Nevada’s. Local ordinances, including zoning laws that limit data centers due to concerns about water or electricity usage, would also remain in effect.

To understand what kinds of AI applications might qualify for this type of legal protection, it is helpful to examine how similar programs, known as regulatory sandboxes —hence the bill’s acronym —have evolved and the range of technologies they have enabled in practice.

Regulatory sandboxes have been in operation for several years, enabling a range of innovative financial services. One of the early motivations for sandboxes started with the United Kingdom’s Financial Conduct Authority, which sought to address a surge of financial technology (fintech) startups encountering unclear or overly burdensome rules. This allowed firms like MarketFinance to trial peer-to-peer business lending under supervised conditions. In Singapore, the Monetary Authority’s sandbox supported projects such as Project Ubin, a blockchain-based cross-border payment trial with Standard Chartered and local banks.

Following these pioneers, jurisdictions around the world rolled out ideas similar to sandboxes. Australia set up an Innovation Hub in 2016 to support fintech and insurance technology (Insurtech) pilots. Canada’s Ontario Securities Commission introduced LaunchPad in 2017, and Abu Dhabi established a sandbox in 2018 to spur financial technology growth in the United Arab Emirates. Each program shares the core feature of time-limited, supervised testing under regulatory relief, tailored to local market needs.

Public reports of sandboxes rarely look at the long-term success of products or companies in which they were incubated. One standout example is Zilch, a medium-sized fintech company that credits the UK’s sandbox for helping it navigate the complex regulation of its buy-now-pay-later approach to credit and consumer purchasing.

Stanford’s Center on Philanthropy and Civil Society notes that “a well-designed and executed sandbox can facilitate innovation and protect consumers, avoiding the pitfalls that concern many critics.” The center also observes that “one of the benefits of a regulatory sandbox is that it has the potential to provide clear rules of the road for market participants, particularly where new technologies or new products and services pose challenging questions with respect to regulatory requirements and ensuring consumer protection.”

A World Bank review similarly highlights the impact of sandboxes on financial innovation: “In only four years, sandboxes have become synonymous with fintech innovation, offering the unique benefit of providing the empirical evidence needed to substantiate decisions in the field.”

Regulatory sandboxes have expanded well beyond their origins in fintech to encompass a wide array of industries. Sandboxes now operate in the insurance industry, allowing new underwriting models to be tested under relaxed rules. In the health sector, national data institutes like Health Data Research UK have used sandboxes to pilot data-driven diagnostics and patient-monitoring services in a controlled setting.

Interest in AI sandboxes is now rising in Europe under the proposed AI Act. Article 57 of the AI Act requires each European Union member state to establish at least one AI regulatory sandbox by Aug. 2, 2026, creating controlled environments for the development and validation of AI systems before market launch.

In the United States, Utah stands out for its approach to AI. The state’s Office of Regulatory Relief oversees technology sandboxes. One early sandbox pilot involved a product called ElizaChat, an AI-powered mental health chatbot designed for teenagers. Dave Barney, CEO of ElizaChat, reports:

“The AI Policy team engaged with us, understood our business needs, and crafted a regulatory relief contract that freed us to explore creative products that will help teenagers improve their mental health, without fear of regulatory risk.”

In July, the White House released an AI action plan, which directed agencies to adopt a wide range of AI-related rules, including the creation of a regulatory sandbox. The SANDBOX Act would take Utah’s approach to the federal level and establish a more formal mechanism than outlined in the White House plan (the White House plan simply recommended the establishment of a sandbox without as much detail).

Sandboxes are new to the U.S. federal government, so it is unclear how willing agencies will be to consider waivers for AI products and services. We may learn more as the discussion around the SANDBOX Act progresses.

Still, sandboxes hold considerable promise. Total, permanent deregulation is often politically unpopular. Agencies may be more willing to experiment with temporary deregulation around AI products, which gives innovations an opportunity that they might not otherwise have.

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Source: https://reason.org/commentary/sen-ted-cruz-proposes-federal-regulatory-sandbox-to-encourage-ai-innovation-development/