RBI FinTech Regulatory Sandbox – An Analysis

The Reserve Bank of India’s (RBI) draft ‘Enabling Framework for Regulatory Sandbox’ offering an interface for testing scalability of financial technology (FinTech) based products or services proposed by companies, is an enabling infrastructure for innovators of tomorrow.

According to the draft, the proposed financial service to be launched under the auspices of the regulatory sandbox (RS) should inculcate new or emerging technology, or utilise incumbent technology innovatively and should address an issue, or be beneficial to the consumers. While the advent of the RS platform is welcomed by the players of the FinTech industry (since it is believed to strengthen the ecosystem), some concerns still remain regarding the draft.

First of all, the absence of cryptocurrency, initial coin offerings (ICOs), credit registry and allied sectors in the proposed RS is disappointing for some players. Given that the futuristic distributed ledger technology (DLT) is considered a revolutionary breakthrough in the domain of cryptocurrency, an address to the latter in the draft RS would have significantly boosted the prospects of growth for budding crypto entrepreneurs.

While the RBI has omitted (barred) the inclusion of cryptocurrency startups or entities in the draft RS, blockchain startups are still allowed to enrol in the RS. It is also worth noting that the RBI has prevented banks from entertaining cryptocurrency transactions or offer services to cryptocurrency business. As a result, without cryptocurrency support, public blockchain projects will also not materialise. Nevertheless, the decision of the Supreme Court of India in regards to cryptocurrency will also give the government an enhanced level of clarity to then possibly consider framing relevant crypto regulations.

The RBI draft consultation paper also states that testing under the RS will be for a select set of customers. It also makes it clear that, just ten to twelve companies will be sandboxing. The RBI draft has made it compulsory for companies to provide the “results of proof of concept (PoC) testing of use cases” prior to participating in the FinTech sandbox. It also makes it a must for companies to detail “an acceptable exit and transition strategy,” for the times when owing to some reasons the proposed (testing) service needs to be closed. But FinTech startups owners opine that companies generally opt for sandboxes for business concepts that have not laid down a definite exit strategy.

FinTech players also convey that the initial 5 years are meant to expose the (proposed) products to various required improvements and also inculcates learning from customer feedback. They also opine that the limited time period of the sandbox is not ample to develop a product competitive in nature. Hopefully, the RBI will opt to address these concerns in its future iterations of the enabling frameworks for the promising FinTech industry in India.