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RBI on Offensive: Blockchain In, Crypto Out! for Fintech Regulatory Sandbox

The Reserve Bank of India on Thursday proposed that FinTech startups can launch a regulatory sandbox allowing them to live-test new and innovative products with a limited number of people and relaxed regulations.

RBI’s proposal includes the use of innovative products in Retail payments, Lending, Digital KYC, Smart contracts, Financial inclusion to name a few. RBI also proposed use of innovative technologies such as Blockchain, Artificial intelligence, machine learning and more.

However, the central bank has specifically excluded products such as Crypto assets, Initial coin offerings, chain marketing services and other products that are currently banned by the Government of India.

What is a Regulatory Sandbox?

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.

For example, if a company is working on Digital KYC for opening bank accounts, but current regulations do not allow that, RBI will relax the rules for this company to test their products for a limited time with a limited number of people.

Highlighting the benefits of RS, the draft said the first and foremost is that it fosters “learning by doing”. The RS will allow regulators, developers and customers quantify the acceptance of a new technology as well as continually monitor it for risks.

Back in July 2016, RBI set up an inter-regulatory working group “to look into and report on the granular aspects of FinTech and its implications”. The recommendation of the sandbox is from the working group report published on February 08, 2018.

The report also mentioned Digital Currencies aka Cryptocurrencies and the existence of exchanges like Unocoin, Zebpay and Coinsecure. Today, two of them have shut shops and a third one is struggling to stay afloat. It is undeniable that these three exchanges were pivotal in bringing Bitcoin to India.

Eligibility Criteria

RBI’s draft proposes to create a few cohorts during a stipulated time period. Each cohort can have a few, possibly less than a dozen entities.

Firms willing to participate must be incorporated in India, have a net worth of at least 50 lakhs and should meet the criteria of a startup as per the government’s definition.

Applicants must share their Bank account details including those of Promoters/directors of the entity.

Besides this, entities must be able to showcase their product/service is scalable for a broader market and is built with optimum security. Not just that, entities must share the proof of concept test results as well. During the participation, each entity must mention the risks associated with the product and take explicit consent from customers.

Timeline for Cohort

There are five stages for each cohort lasting overall for about 26 weeks according to the draft.

  • Preliminary Screening – 4 weeks
  • Test Design – 3 weeks
  • Application Assessment – 3 weeks
  • Testing – 12 weeks
  • Evaluation – 4 weeks

If at all the intended results are not achieved, RBI may ask an entity to exit. If a company wants to exit on its own, they can, but they must inform RBI one week in advance.

What do the experts say?

The regulatory sandbox can become a great tool for innovation in India within the FinTech space, leveraging emerging technologies.

However, for the space that we are in, Blockchain and crypto assets, it is a mix of good and bad, say experts. Sainath Gupta, founder of PrimeTrade.AI – a Crypto exchange aggregator and oldest social trade platform is of the opinion that RBI blocked Crypto companies because of their own regulations. Gupta says the plan otherwise for regulatory sandbox “is excellent”, since it will help with faster testing leading to faster development.

Nischal Shetty, CEO of WazirX exchange is of the opinion that the draft is confusing for Blockchain enthusiasts as on one hand it is inviting applications for Blockchain Tech and Smart Contracts but on the other hand is keeping crypto assets excluded. “Without Crypto, Public Blockchain projects cannot be built. So this sandbox is practically useless for all public blockchain projects”, says Shetty.

Draft Open for Comments

The draft ‘Enabling Framework for Regulatory Sandboxis open for comments until May 08, 2019 from stakeholders. Fintech startups can send their comments RBI until this time. Do you think they should write about inclusion of Crypto assets?

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Cover Pic – modified version of Image by Joshua_Willson from Pixabay

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