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Saturday, May 18, 2019

Fintech Startups- regulatory framework

On April 18, 2019, the RBI announced the Draft Enabling Framework for Regulatory Sandbox (“Proposed Framework”), detailing the proposed features of the sandbox. The Proposed Framework is a draft for public comments, and is not effective yet.
The Indian fintech sector has witnessed exponential growth and, by some accounts, is presently the world's second largest fintech hub with more than 2,000 entities operating in this sector.1 While the term “fintech” has emerged from a combination of the words “finance” and “technology”, there is no universal consensus on what innovations fall under the “fintech” umbrella. Some of the major products and services that are now synonymous with fintech innovations include the digital payments ecosystem, peer-to-peer lending platforms, crowd-funding, crypto-assets and blockchain technology, distributed ledgers technology, Big Data, smart contracts, robo-advisors and aggregators.
However, as traditional law and policy development is slow to catch up with the rapid pace of technological innovation, innovators look towards regulators to develop new approaches to support this rapid speed of growth.
In view of the growing significance of fintech innovations,2 the RBI set up an inter-regulatory ‘Working Group on FinTech and Digital Banking’ in July 20163 to study the regulatory responses to such innovations across the globe. The Group included representatives from the RBI, Securities Exchange Board of India (“SEBI”), Insurance Regulatory and Development Authority of India (“IRDAI”), and Pension Fund Regulatory and Development Authority (“PFRDA”), select financial entities regulated by these agencies, rating agencies and fintech consultants and companies.

On February 08, 2018, this Working Group released its report, which, among other things, recommended the formulation of an appropriate framework for a regulatory sandbox. The Working Group noted that sandboxes offered benefits including limited testing which would answer questions, before the product is made available more broadly, on the product’s concerns as well as its potential for success. It observed that the objective of a sandbox should be “to encourage more fintech experimentation within a well-defined space and duration where regulators will provide the requisite regulatory support, so as to increase efficiency, manage risks better and create new opportunities for consumers.”