RBI’s Fintech Sandbox: Insurance Must For Cos But Crypto Startups Out

Announcing the framework for the fintech regulatory sandbox, the Reserve Bank of India (RBI) has said that no legal waivers will be given to the sandbox companies and companies will also be held liable for any consumer losses that might be incurred during the testing period. 

“Liability for customer or business risks shall be passed on to the companies entering the RS, ” the framework document added.

Further, RBI has also mandated companies to have insurance cover and a minimum net worth of INR 25 Lakh, among other criteria, to be accepted for testing under the regulatory sandbox (RS). 

“Sandbox entities shall be required to take liability/indemnity insurance of an adequate amount and period to safeguard the interest of the customers. The adequacy of indemnity cover shall depend on determination of the maximum liability based on, among others,” said RBI. 

“The policy cover shall begin with the start of testing stage and end three months after exit of the sandbox entity from the RS,” the regulatory body added. 

The general sandbox period is expected to be of six months but might vary on a company-to-company basis, according to the framework document. 

Other criteria to qualify for the regulatory sandbox include customer privacy and data protection, secure storage of and access to payment data of stakeholders, security of transactions, KYC/AML/CFT requirements, and statutory restrictions. 

However, certain regulatory relaxations such as  liquidity requirements, board composition, management experience, financial soundness and track record, will be offered to the companies. 

Interestingly, RBI has excluded cryptocurrency or crypto assets services related companies from the regulatory sandbox. 

The Regulatory Sandbox is expected to run a few cohorts (end-to-end sandbox process), with a limited number of entities in each cohort testing their products during a certain period of time. These cohorts will be spread across themes ranging from financial inclusion, payments and lending, digital KYC, among others. 

In April, RBI has released a draft ‘Enabling Framework for Regulatory Sandbox’ to get comments and feedbacks from the industry stakeholders. According to the regulatory body, 69 stakeholders, including Fintech entities, banks, multilateral agencies, industry associations, payment aggregators, legal firms, government departments, individuals and more, had responded to the draft. 

In the draft document, RBI had proposed to shortlist 10-12 fintech startups for its 26 week long regulatory sandbox. However, the final document did not announce the length of the testing period. 

“Further details in respect of the cohorts and the window for submission of applications shall be announced later,” RBI said in an official statement. 

Regulatory sandboxes typically involve temporary relaxation of regulations to foster a safe space for companies to test new technology-based financial services in a live environment for a limited amount of time, without having to undergo a full authorisation and licensing protocol.