Playing in the Sand: Israel and the Open Fintech Sandbox and Regional Innovation

In an era of rapid technological disruption, regulatory sandboxes have become essential to fintech evolution. These frameworks provide a structured yet flexible environment for innovators to test products under regulatory oversight. Increasingly, jurisdictions are embracing the open fintech sandbox model—permitting both domestic and foreign companies to experiment, scale, and deploy innovations with fewer frictions. Among the standout participants in this shift is Israel, whose trajectory combines tech excellence, cautious reform, and global ambition.

What Is an Open Fintech Sandbox?

At its core, an open sandbox provides a controlled space for financial innovation with temporary regulatory relief. It is “open” in the sense that it allows international participation, enabling cross-border testing of fintech solutions under specified conditions—typically involving licensing recognition, cybersecurity standards, and anti-money laundering compliance.

These sandboxes serve three critical functions:

• Encourage regulatory harmonization
• Accelerate product-market fit
• Facilitate foreign direct investment and regulatory diplomacy

Israel’s Sandbox Strategy: Opening with Precision

Israel has adopted a measured yet strategic approach to fintech regulation. Key developments include:

• Access to Infrastructure: In 2023, the Bank of Israel granted licensed foreign payment providers access to its supervised payment systems. Entities licensed in the US, UK, or EU can now operate in Israel before acquiring a domestic license.

[https://herzoglaw.co.il/en/news-and-insights/international-payment-service-providers-are-provided-access-to-israeli-payments-systems/]

• Multi-Agency Pilot Programs: The Israel Securities Authority (ISA) and Israel Innovation Authority have jointly tested regulatory relief programs for blockchain, regtech, robo-advisory, and tokenized assets.
• Regulatory Centralization Proposal: A policy paper from the Ministry of Finance is needed to propose a single point of contact for fintech firms to reduce compliance duplication—a move still pending legislative input and approval.

However, access is conditional, and sandbox participation is largely limited to well-capitalized or foreign-licensed firms. Emerging market fintechs and non-bank financial startups face substantial entry barriers.

Regional Context: The UAE as a Sandbox Leader

To fully appreciate Israel’s progress, it’s instructive to compare it with the United Arab Emirates (UAE)—particularly the Dubai Financial Services Authority (DFSA) and Abu Dhabi Global Market (ADGM):

The UAE is more proactive, hosting regular international cohorts and facilitating multi-jurisdictional pilots. Israel, while technically capable, remains more selective and inward-looking.

Missed Opportunities and Blind Spots

Despite strong foundations, Israel’s sandbox approach could benefit from:

• Greater Cross-Border Coordination: While the UAE, Bahrain, and Singapore have initiated interoperable sandbox alliances, Israel remains regionally siloed.

• Diaspora Engagement and Soft Power: Israel’s global fintech diaspora—from Tel Aviv to Toronto and New York—remains an underutilized asset. Sandbox diplomacy could be a new channel of influence.
• Future-Proofing for AI and Quantum Finance: As fintech increasingly intersects with AI/ML and post-quantum cryptography, regulatory infrastructure must become predictive, not just permissive.

Policy Recommendations

To elevate its status as a sandbox leader, Israel should consider:

1. Establishing a single fintech regulator akin to the UK’s FCA Innovation Hub.[https://www.fca.org.uk/firms/innovation].
2. Joining a regional sandbox alliance with the UAE, Bahrain, and Saudi Arabia to test cross-border payment, remittance, and DeFi protocols.
3. Launching a Global Israel Sandbox Fellowship to connect diaspora fintech founders with domestic testing environments, as well as academia.
4. Expanding to include AI/quantum-native fintechs, with ethical guardrails built-in.

Conclusion: The Sandbox as Strategy

Israel’s inclusion in the global sandbox movement is not incidental—it is strategic. Yet to realize its full potential, the country must expand its vision from regulatory enablement to geoeconomic leadership. In doing so, Israel won’t just participate in the future of finance—it will help define it.

In a volatile world, sandboxes are more than test beds—they are diplomatic, economic, and technological bridges. It’s time for Israel to walk boldly across.