The Reserve Bank of India (RIB) has announced in a statement of 18 April 2019 the terms of its regulatory sandbox relating to FinTech.
The proposed Regulatory Sandbox will accept Blockchain but exclude Cryptocurrencies and ICOs.
The creation of a framework was one of the recommendations contained in the February 2018 report of the inter-regulatory working group established by the RBI in July 2016, and was intended “to increase efficiency, manage risks and create new opportunities for consumers.”
The objective of the Regulatory Sandbox is that “[t]he proposed financial service to be launched under the RS should include new or emerging technology, or use of existing technology in an innovative way and should address a problem, or bring benefits to consumers.
The stated benefits of the Regulatory Sandbox are that “[i]ncumbent 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”.
Furthermore, “[i]nnovators 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.”
The draft identifies that FinTechs can provide solutions that further financial inclusion and that the Regulatory Sandbox can improve the “pace of innovation and technology absorption” and improve financial reach, particular in areas such as “microfinance, innovative small savings and micro-insurance products, remittances, mobile banking and other digital payments.”
The draft acknowledges that the Regulatory Sandbox process may result in less flexibility and more time being spent by innovators, and notes that even post-Sandbox participants “may still require regulatory approvals before the product/services/technology can be permitted for wider application.”
The framework identifies products, services and technology that may be eligible for testing within the Regulatory Sandbox. The list includes products and services such as Money Transfer Services, Digital Identification Services, and Smart Contracts, as well as Innovating Technology such as Mobile Technology Applications (payments, digital identity, etc.) and Applications under ‘block chain’ technologies.
The framework notes that although some regulatory requirements may, on a case-by-case, basis be relaxed where appropriate, certain requirements will remain mandatory, i.e.:
- Customer privacy and data protection
- Secure storage of and access to payment data of stakeholders
- Security of transactions
- KYC/AML/CFT requirements
- Statutory restrictions
Crucially, the framework also identifies entities that are excluded from testing within the Regulatory Sandbox, including:
- Crypto currency/Crypto assets services
- Trading/investing/settling in crypto assets
- Initial Coin Offerings, etc.
- Chain marketing services
- Any product/services which have been banned by the regulators/Government of India