Stop Talking, Start Testing: Why Cities Must Establish Innovation Sandboxes Now

By: Khahlil Louisy

For decades, conferences, white papers, and task forces have discussed how to get cities to work with the private sector and universities, which have generated countless frameworks, recommendations, and pilot programs. Yet here we are, still talking about collaboration while cities grapple with accelerating climate disasters, housing crises, failing infrastructure, and emerging public health threats.

The time for conversation has long passed given that the evidence is clear, the tools exist, and the urgency is undeniable. Cities must stop theorizing about innovation partnerships and start creating the regulatory architecture that makes them possible at scale. One such architecture is the regulatory sandbox and the data proves it works.

The Evidence Is There

Regulatory sandboxes aren't a long-shot theoretical concept or an untested idea. Peer-reviewed research across multiple sectors demonstrates their transformative impact on innovation output.

The evidence is particularly robust in financial technology. A 2024 study published in Review of Finance analyzed the UK's Financial Conduct Authority sandbox and found that firms entering the program experienced a 15% increase in capital raised: approximately $700,000 over two years, with their probability of raising capital increasing by 50%. These firms also showed significantly higher survival rates and increased patenting activity compared to similar firms outside the sandbox.

A comparative analysis across nine countries by Goo and Heo (2020) found that introducing regulatory sandboxes positively influenced FinTech venture investments, with adoptions having very positive impacts on both total investment amounts and average venture investment scale. A 2025 study published in Applied Economics used quasi-natural experiment methodology with panel data from 31 provinces and cities in China from 2011-2022 to examine China's regulatory sandbox system. The study found that implementing the regulatory sandbox system significantly improves financial efficiency, promotes innovation and competition in financial technology, and enhances financial market efficiency.

Beyond finance, systematic literature reviews have explored the growing potential for healthcare sandboxes to test digital health innovations and enable collaborative regulatory development, with sandboxes increasingly used within healthcare regulation according to research published in Applied Health Economics and Health Policy. In the energy sector, case studies in the Netherlands and Great Britain showed sandboxes successfully enabled testing of energy communities, peer-to-peer supply models, and new grid arrangements, with both countries' initiatives considered overall positive and quickly expanding based on learnings.

A 2025 systematic review in Cogent Business & Management analyzing 40 peer-reviewed articles from 2020-2024 established that regulatory sandboxes foster innovation, facilitate effective regulation, and create collaborative learning environments for regulators and innovators.

The verdict is in: sandboxes work. They increase investment, accelerate innovation, improve survival rates for new ventures, and create pathways for solutions that address complex societal challenges.

The Pandemic Proved Cities Can Move Fast

If the peer-reviewed evidence weren't enough, the COVID-19 pandemic provided a real-world, large-scale demonstration of what happens when governments create space for rapid innovation through regulatory sandboxes.

Per a detailed analysis in Issues in Science & Technology, federal agencies deployed sandbox frameworks at unprecedented scale during the pandemic. The FDA created regulatory sandboxes that authorized a record 132 novel medical devices in 2020, allowing its Digital Health Center of Excellence to expand regulatory flexibility for digital health technologies. The HHS Office for Civil Rights temporarily waived potential penalties for HIPAA violations related to telehealth, leading to a 63-fold increase in telehealth utilization among Medicare beneficiaries. The FDA issued nearly 400 emergency use authorizations for COVID-19 medical products between January 2020 and January 2021, often within weeks rather than the typical multi-year timeline that normally requires several years.

These regulatory adaptations didn't just respond to the crisis; they catalyzed systemic transformation and enabled the creation of the first genomic surveillance network in the United States, dramatically increasing the percentage of COVID-19 cases sequenced from 3,275 in early January 2021 to 25,000 by late April 2021. The CDC's National Syndromic Surveillance Program expanded emergency department coverage to all 50 states and Guam, with participation rising from 54% of emergency departments in 2018 to approximately 73% by 2022. New standards for large-scale public health data transfers were finalized, mandating adoption of standardized APIs for bulk data access based on the FHIR standard, enabling extraction of critical population-level information in single requests rather than manual queries.

Counties with limited public health data infrastructure experienced higher mortality rates not just from COVID-19 but from other conditions as well, demonstrating the life-and-death consequences of innovation capacity.

The lesson seems to be clear; when regulators create structured flexibility through sandbox frameworks, innovation accelerates dramatically while maintaining essential safeguards. We know this works because we've seen it work, so the question is whether cities will apply these lessons proactively or wait for the next crisis to force their hand.

The Stakes Are Too High for More Conversations

Climate change isn't a future threat, it's already causing billions in damage annually through floods, fires, and extreme weather. The housing affordability crisis is displacing families and destabilizing communities, aging infrastructure threatens public safety, digital divides exclude millions from economic opportunity, and public health systems remain fragile and underfunded.

These aren't problems that can be solved with incremental adjustments to existing systems, they require wholesale new approaches, including new materials, new technologies, new service models, and new governance structures. Yet, promising innovations remain trapped in pilot purgatory, unable to move from proof-of-concept to citywide implementation because regulatory frameworks designed for 20th-century challenges can't accommodate 21st-century solutions.

Consider the absurdity: We know that regulatory sandboxes increase venture investment by double-digit percentages, we know they improve survival rates for innovative firms, we know they accelerate time-to-market while maintaining safety standards, we know they work in finance, healthcare, energy, and public health, and we've proven cities can move fast when they choose to. Yet, we're still having conversations about whether cities should partner with innovators. Meanwhile, residents suffer in overheated homes during record heat waves because housing codes prohibit new cooling materials, traffic deaths continue because mobility departments can't test safer street designs, and floods destroy neighborhoods because infrastructure rules prevent deployment of innovative stormwater solutions. The cost of inaction compounds daily.

What Cities Must Do

Cities need to stop talking and start building systematic innovation capacity through formal regulatory sandbox programs. Here's what that means in practice:

Establish clear sandbox frameworks with defined scope. Identify specific challenge areas, for example, climate adaptation, affordable housing, mobility, public health, and digital services, where regulatory constraints prevent innovation. Set transparent criteria for what can be tested, what safeguards remain non-negotiable, and how decisions get made.

Create time-limited testing periods with rigorous evaluation. Set explicit timeframes, typically 6-24 months, with built-in assessment points. Partner with research institutions to measure outcomes against predetermined metrics. Generate evidence that informs policy and investment decisions.

Build pathways from sandbox to permanence. This is where most initiatives fail. Define clear criteria and processes for moving successful innovations from temporary testing to standard practice. Update procurement rules, revise ordinances, and create new financing mechanisms. Make graduation from sandbox status a systematic process, not an ad hoc political decision.

Enable cross-sector collaboration. Bring together city agencies, private companies, universities, community organizations, and residents. The pandemic's most successful innovations emerged from these partnerships: companies developing solutions, researchers generating evidence, communities identifying needs, and governments creating enabling frameworks.

Connect to broader networks. Individual city efforts are valuable, but systematic transformation requires coordination. This is precisely what The Public Innovation Institute's City as Innovation Lab (CAIL) initiative enables: transforming cities into living laboratories where solutions are designed, tested, and scaled through structured partnerships. 

Some cities have already signed on to CAIL, recognizing that mounting challenges require more than good intentions; they demand real-world testing, robust research, and clear pathways to implementation. But more cities are needed to build a network powerful enough to serve as a genuine driving force of innovation and invention in the public interest.

Stop Waiting for Permission

The most pernicious myth in urban governance is that cities need to wait for federal leadership, for perfect conditions, for consensus, or for more studies. This is nonsense because cities have legal authority to establish regulatory sandboxes in most domains under their control. They have models to learn from in finance, healthcare, and energy; have evidence that sandboxes work; and they have urgent problems that demand solutions. What they lack is political will.

City leaders must recognize that inaction is a choice and one with devastating consequences for residents. Every month spent in another planning meeting or convening about public-private partnerships is a month when families can't afford housing, when outdated infrastructure threatens safety, when inadequate climate adaptation leaves communities vulnerable, and when digital divides exclude residents from opportunity.

The cities that take the lead to establish regulatory sandboxes will accelerate innovation, attract investment, generate evidence, and build capacity to address complex challenges. Cities that continue talking will watch problems compound while solutions remain stuck in regulatory limbo. The choice is stark: Cities can approach innovation creatively and systematically through sandbox frameworks that enable responsible experimentation, or they can maintain status quo regulatory structures designed for challenges that no longer exist while new crises overwhelm their capacity to respond.

References:

Cornelli, G., Doerr, S., Gambacorta, L., & Merrouche, O. (2024). Regulatory Sandboxes and Fintech Funding: Evidence from the UK. Review of Finance, 28(1), 203-233. https://doi.org/10.1093/rof/rfad017

Goo, J. J., & Heo, J. Y. (2020). The Impact of the Regulatory Sandbox on the Fintech Industry, with a Discussion on the Relation between Regulatory Sandboxes and Open Innovation. Journal of Open Innovation: Technology, Market, and Complexity, 6(2), 43.

Lugo-Palacios, D.G., Cairns, J., Massey, J. (2021). The Sandbox Approach and its Potential for Use in Health Technology Assessment: A Literature Review. Applied Health Economics and Health Policy, 19, 665-676. https://doi.org/10.1007/s40258-021-00665-1

Louisy, K. (2025). Preventing the Next Public Health Emergency: During the pandemic, small shifts in health data regulation revealed big insights for disease prevention. Issues in Science & Technology. https://issues.org/public-health-data-louisy/