Context

The Reserve Bank of India released draft 'Enabling Framework for Regulatory Sandbox', enabling framework for regulatory sandbox for fintech firms, including an indicative list of relevant products and services and fit-and-proper criteria for participants in the RS.

About

What is regulatory sandbox?

• In the computer science world, a sandbox is a closed testing environment designed for experimenting safely with web or software projects.
• The concept of regulatory sandbox is used in a similar manner in the digital economy arena: testing grounds for new business models that are not protected by current regulation, or supervised by regulatory institutions.
• The indicative list of products, services and technologies where this concept could be applicable includes retail payments, money transfer services, marketplace lending, mobile technology applications, data analytics and application program interface (API) services.

Why it is used?

• The first and foremost use of this conceptis that it fosters "learning by doing".
• It will provide the requisite regulatory guidance to increase efficiency, manage risks and create new opportunities for consumers.
• Users of a sandbox 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 authorised and brought to the broader market more quickly.

How will it benefit fintech firms?

• These testing grounds are especially relevant in the fintech world, where there is a growing need to develop regulatory frameworks for emerging business models.
• The purpose of the sandbox is to adapt compliance with strict financial regulations to the growth and pace of the most innovative companies, in a way that doesn’t smother the fintech sector with rules, but also doesn’t diminish consumer protection.
• It 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.