As Xehanort is reenacting the KHUX Keyblade War in its entirety, even going so far as to make Kairi his fourteenth darkness in the place of Baldr, I believe KH3 and KH4 take place inside the Data Worlds.
This will be really short so don't be afraid of the read-more. I'm not going over every little detail as I feel this is a very simple "yes, this is clearly what's happening" situation.
https://lieserli.tumblr.com/post/728159454127964160/our-world-still-aches-and-your-next-road-still (gifset evidence of Dark Data Riku)
To start with, we see Darkness from the Data Worlds in KHUX, following Maleficent to Coded and taking over Data Riku's Data and arriving with mysterious intentions in KH3. To explain his personality, he's able to use the memory built within Data Riku in order to mimic KH1 Riku's behavior. Having a being that's only ever existed within the Data Worlds show up in KH3 should have people questioning the setting more.
Then we see the Xehanorts glitching in Scala Ad Caelum, something that's only been shown to happen inside the Data Worlds in KHUX.
A brand new world connects itself to their reality.
A world where the people inside it are aware they're characters in a video game. It all sounds so terribly familiar, doesn't it? Xehanort has truly done his homework in studying the Keyblade War.
And as KH3 has been theorized to take place inside two timelines (like KHUX), it would easily fit that the second timeline takes place within the Data Worlds. Sora, as the player character, not remembering a lick of the first one. This means the real worlds are in danger and everyone has been trapped inside a digital cage that looks like the real thing.
Finally, I'd be kinda curious who transferred everyone into the Data Realm if I were you. Since Darkness took over Data Riku and Data Riku has the very power to do this as shown in Coded, I believe it to be him at this moment. It's the most logical conclusion.
