The Reserve Bank of India recently published the draft ‘Enabling Framework for Regulatory Sandbox’ (April, 2019). In light of the growing importance of FinTech inventions and their interface with the financial industry in addition to financial industry entities, the Financial Stability and Development Council – Sub Committee had determined to prepare a Working Group (WG), to research and report on the granular areas of FinTech and its consequences which includes Blockchain technology but not Cryptocurrencies and ICOs, in order to examine and reorient suitably the regulatory frame and answer the dynamics of this rapidly evolving FinTech situation. Among the recommendations of this WG was to present a proper frame for a ‘Regulatory Sandbox’ inside length and a distance.
RBI with a direction issued in April 2019 has planned to set up an inter-regulatory WG under the chairmanship of Executive Director, Department of Banking Regulation (DBR) to research and report to the granular Elements of FinTech, to influence the improvements in FinTech area. The WG included agents from pick banks RBI, SEBI PFRDA IDRBT and rating agencies.
As reported by Inc42,
The Institute for Development and Research in Banking Technology (IDRBT), under RBI, is working on a model platform for blockchain applications for the government in banking. It will be documented and developed next year, AS Ramasastri, Director, IDRBT said. The platform will list all available blockchain applications for vendors or banks with interoperability parameters, among other tools. The plan opens up a new wave of opportunity for blockchain startups in India. According to Inc42’s Blockchain Technology India Report 2018, India has currently around 100 active blockchain startups.
What is a Regulatory Sandbox?
As per the definition given by RBI in the direction (Para 2.1):
A regulatory sandbox (RS) usually refers to live testing of new products or services in a controlled/test regulatory environment for which regulators may (or may not) permit certain regulatory relaxations for the limited purpose of the testing. The RS allows the regulator, the innovators, the financial service providers (as potential deployers of the technology) and the customers (as final users) to conduct field tests to collect evidence on the benefits and risks of new financial innovations, while carefully monitoring and containing their risks. The RS is potentially an important tool which enables more dynamic, evidence-based regulatory environments which learn from, and evolve with, emerging technologies.
Benefits of the Regulatory Sandbox as per RBI
RBI in the report has listed many benefits which can arise out of the setting up of the RS (Regulatory Sandbox), the details of which have been listed below:
1. First and foremost, the RS fosters ‘learning by doing’ on all sides. Regulators obtain first-hand empirical evidence on the benefits and risks of emerging technologies and their implications, enabling them to take a considered view on the regulatory changes or new regulations that may be needed to support useful innovation, while containing the attendant risks. Incumbent financial service providers, including banks, also improve their understanding of how new financial technologies might work, which helps them to appropriately integrate such new technologies with their business plans. Innovators and FinTech companies can improve their understanding of regulations that govern their offerings and shape their products accordingly. Finally, feedback from customers, as end users, educates both the regulator and the innovator as to what costs and benefits might accrue to customers from these innovations.
2. Second, users of an RS can test the product’s viability without the need for a larger and more expensive roll-out. If the product appears to have the potential to be successful, the product might then be authorized and brought to the broader market more quickly. If any concerns arise, during the sandbox period, appropriate modifications can be made before the product is launched in the broader market.
3. Third, FinTechs provide solutions that can further financial inclusion in a significant way. The RS can go a long way in not only improving the pace of innovation and technology absorption but also in financial inclusion and in improving financial reach. Areas that can potentially get a thrust from the RS include microfinance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments.
4. Fourth, by providing a structured and institutionalized environment for evidence-based regulatory decision-making, the dependence of the regulator on industry/stakeholder consultations only is correspondingly reduced.
5. Fifth, the RS could lead to better outcomes for consumers through an increased range of products and services, reduced costs and improved access to financial services.
Regulatory Sandbox: Eligibility Criteria for Participating in the Sandbox as listed by RBI
As per the report, the target applicants for entry to the RS are FinTech firms which meet the eligibility conditions prescribed for start-ups by the government. The focus of the RS will be to encourage innovations where
- there is absence of governing regulations;
- there is a need to temporarily ease regulations for enabling the proposed innovation;
- the proposed innovation shows promise of easing/effecting delivery of financial services in a significant way.
RBI has also stated in the report that it shall consider the following key design features for the RS and has mentioned that it may run a few cohorts (end-to-end sandbox process), with a limited number of entities in each cohort testing their products during a stipulated period with Blockchain being a part of the Innovative Technology (as can be seen from the picture below, para 6.1.2). The RS shall be based on thematic cohorts focussing on financial inclusion, payments and lending, digital KYC, etc. The cohorts may run for varying time periods but should ordinarily be completed within six months.
The only industry which RBI is still sceptical about is the cryptocurrency industry and the Initial Coin Offerings because of all the scams which have happened in the past. (See Exclusion from Sandbox Testing, Para 6.3)