By Farlina Md Said, Fellow, Institute of Strategic & International Studies (ISIS) Malaysia
In January, Tech For Good Institute’s “Sandbox to Society: Fostering Innovation in Southeast Asia” report offered penetrating insights into the sandbox ecosystem across the region. The report delineated two primary categories within these initiatives in Indonesia, Malaysia, the Philippines, Singapore, and Thailand: commercial and regulatory. Commercial sandboxes typically center on business development or the refinement of technology, constituting the primary focus of a company’s involvement. In contrast, regulatory sandboxes address legal impediments to technology deployment, often involving regulatory bodies such as the Ministry of Finance or Ministry of Transport. Notably, the report underscored that nearly 90% of the region’s sandboxes concentrate on commercial endeavors, with only a minority targeting policy or regulatory outcomes.
Furthermore, the report highlighted that the financial technology sector spearheads sandbox initiatives in the region, often in collaboration with authoritative financial bodies such as securities commissions or central banks. Beyond the countries mentioned, examples from Cambodia and Laos underscore this trend, with financial and regulatory sandboxes emerging under the purview of securities regulators and ministries.
However, despite the proliferation of sandboxes geared towards innovation and commercialisation, regulators often adopt advisory roles rather than actively shaping regulations to facilitate seamless deployment of innovations.
In the context of emerging technologies like artificial intelligence and drone technology, regulatory sandboxes face the challenge of delineating legal frameworks to prepare for their commercialisation. For instance, considerations may include liability in the event of drone crashes or jurisdictional issues concerning micromobility infrastructure. While both innovation and regulatory sandboxes are crucial for facilitating deployment, the integration between these processes remains less pronounced in Southeast Asia, including Malaysia.
Malaysia’s Sandbox Landscape
In Malaysia, several sandbox initiatives have been established, exemplifying a concerted effort to foster innovation and address regulatory challenges. Notable among these is the Central Bank’s Regulatory Sandbox, which focuses on financial technology deployment while fostering innovation in the finance sector. Additionally, universities drive some sandbox initiatives. On national initiatives, the National Technology Innovation Sandbox (NTIS) led by the Ministry of Science, Technology and Innovation (MOSTI) stands out as a prominent commercial sandbox.
NTIS is an interagency effort involving the Malaysian Technology Development Corporation (MTDC) for funding, Malaysian Institute of Microelectronic Systems (MIMOS) for expertise in microelectronics, Futurise for regulatory areas, and the Malaysian Research Accelerator for Technology and Innovation (MRANTI) for testing facilities and infrastructure. NTIS runs approximately 10 sandboxes on agriculture, robotics and automation, logistics, urban drone delivery and drone technology, high-tech education, sports tech, smart highways, digital IoT, sustainable smart cities, healthtech hubs, and construction. Recently, NTIS announced the AI Sandbox Pilot program with MRANTI and NVIDIA in April 2024.
The second sandbox of note is the National Regulatory Sandbox (NRS), which places a strong emphasis on regulation. Driven by Futurise and linked to the Ministry of Finance, the National Regulatory Sandbox provides an environment to test regulatory requirements and limitations. Its outputs range from guidelines for testing facilities, usable by NTIS, to suggestions for regulatory amendments. Consequently, the sandbox has introduced regulatory guidelines such as those for Public Road Trials of Autonomous Vehicles or Mobile Childcare Services. The NRS encompasses seven sandbox sites covering drone technology, autonomous vehicles, mobile childcare services, online healthcare services, cyclotourism, e-sports, and micromobility. Presently, Futurise is tasked by the Ministry of Digital to produce seven guidelines, including those for data breach notification, data portability, cross-border data transfer, data protection impact assessment, privacy by design, profiling, and automated decision-making. Notably, the NRS often features government bodies or sectors as primary clients, ensuring that regulatory considerations are conveyed to the right stakeholders in time for the deployment of innovations.
Malaysia’s sandbox initiatives are propelled by the National Science, Technology, and Innovation (STI) Policy and the 10-10 MySTIE Framework, as well as socio-economic drivers identified in current economic and research policies. The TFGI report identified Malaysia’s active sandbox environment in fintech or drone technology, possibly attributed to interest from stakeholders such as the government, banking, or the private sector. For example, Malaysia’s central bank was eager to place policymaking in a proactive and agile environment, particularly where technology would shape financial activities. The 2017 central bank governor expressed willingness to change policies, especially if innovations benefit the economy, even if it means challenging the status quo. On the other hand, the drone industry was projected to have the potential to generate RM50.71 billion to the Gross Domestic Product (GDP) and create 100,000 jobs by 2030. This announcement was made by the then Prime Minister of Malaysia during the launch of the Malaysia Drone Technology Action Plan 2022-2030 to foster the sector.
Challenges in Malaysia’s Sandbox Environment
Malaysia’s sandbox ecosystem has experienced growth. For instance, NTIS approved 139 companies in mid-2021, which increased to 169 by 2023. Funding support also surged to RM79.2 million by 2023. However, despite these advancements, the ecosystem still faces gaps. One significant issue is the emerging but underdeveloped linkages between innovation and regulatory testing, potentially indicating inadequate national preparation for emerging technologies.
It is noteworthy that both NTIS and the NRS encompass commercial and regulatory aspects. NTIS, for instance, has facilitated up to 43 regulatory cases within its sandbox, collaborating with 18 ministries. Meanwhile, the NRS has not only established a drone testing site but has also finalised guidelines for autonomous vehicles, which facilitate the operation of testbeds in sites like Iskandar Puteri and MRANTI Park. However, streamlined processes, particularly regarding stakeholder engagement to shape national laws on incoming technologies, remain unclear. This ambiguity could stem from issues related to mandate, resource constraints, or insufficient stakeholder involvement in the sandbox process. There is a pressing need for an entity to streamline processes while actively seeking engagements with various stakeholders to discuss future regulatory changes.
Drone testing stands out as an exception, with the NRS operating the drone testing zone. This initiative encouraged Futurise, the sandbox owner, to propose a paper to the Ministry of Transportation and the Civil Aviation Authority on the use of unmanned aerial systems in Malaysia. Other sectors may require similar mechanisms to include relevant stakeholders in discussions about existing regulatory gaps or future regulations.
Recommendations
In order for Malaysia to effectively advance its national economic and STI goals, it is advisable to align approaches between innovation and regulation sandboxes. The country’s diverse array of innovation and regulation sandboxes, including the NTIS, NRS, as well as private-sector and university-led initiatives, demonstrate a keen interest in sandbox methodologies. However, to enhance the potential for commercialisation and synergy among these efforts, greater attention is needed. One approach could involve integrating regulator participation into commercial sandboxes while concurrently addressing pending regulatory issues through a structured pipeline of action, drawing insights from the drone-testing experience. Malaysia may also benefit from developing sector-based or thematic approaches that streamline regulator involvement.
Furthermore, effective change requires ownership. Suggestions originating from regulator sandboxes may fail to materialise if regulators are not actively engaged or lack the authority to effect changes in legislation or guidelines. Thus, where feasible and resource-permitting, regulators should establish formal regulatory sandbox processes, particularly if they align with Malaysia’s STI and economic development objectives. Moreover, leveraging bodies like the National Digital Economic and 4IR Council, with agile regulation driven by the Malaysia Productivity Corporation (MPC), could enable Malaysia to proactively govern emerging technologies while fostering an environment conducive to innovation. Regulatory ownership facilitates internal deliberations and provides momentum for enacting necessary changes.
Lastly, Malaysia’s national sandboxes should explore the creation of platforms serving as repositories of evidence or databases cataloging regulatory obstacles affecting specific innovations. Given the often sluggish pace of legislative and regulatory adjustments, particularly in embracing nascent technologies with limited immediate commercial impact, documented evidence, reports, and recommendations can propel discussions forward and facilitate consensus-building on complex legal or regulatory issues.
In conclusion, sandboxes provide an ideal environment for testing future technologies, offering ample opportunities to uncover and address potential regulatory challenges that may impede their deployment. Furthermore, regulatory sandboxes play a crucial role in preventing accidents or injuries by identifying and mitigating risks before technologies are deployed without adequate safeguards. While the temptation may arise to restrict or prohibit technology outright, exploring regulatory conditions is essential for fostering innovation. Given the anticipated contributions of the digital and emerging technology sectors to Malaysia’s economic growth, it is imperative for the nation to cultivate an ecosystem that encourages innovation rather than stifling it. By embracing innovation-friendly policies and frameworks, Malaysia can position itself as a leader in technological advancement and economic prosperity.
About the writer:
Farlina Said is Fellow in the Institute of Strategic and International Studies (ISIS) Malaysia’s Cyber and Technology Policy division. She is interested in crafting discussions on technology policy, cybersecurity and digital development initiatives.
The views and recommendations expressed in this article are solely of the author/s and do not necessarily reflect the views and position of the Tech for Good Institute.
