Policy | SEBI’s Innovation Sandbox offers right balance between innovation and regulation

Sonam Chandwani

British writer Arthur C Clarke once said, “Any sufficiently advanced technology is indistinguishable from magic.”

Since the advent of technology, human life has undergone considerable changes that may be perceived as nothing short of magic. We saw a transition from barter system to a cash-dependent economy where citizens have further moved online for gold, savings, gift cards, loans, investments, etc. This change can be attributed to the confluence of finance and technology, also known as FinTech, a term used to describe new technology that seeks to improve and automate the delivery and use of financial-services.

However, with the advent of technological innovations comes an array of problems, such as determining the legal liability of robo-advisors that provide automated, algorithm-driven financial planning services with little to no human supervision, enforceability issues of smart-contracts, ambiguous and loosely-worded data protection laws, etc.

It is in this backdrop that we need to look at the concept of a regulatory sandbox, and more importantly, at the SEBI Innovation Sandbox. This regulatory sandbox is intended to serve as a testing ground for new business models and technologies that benefit investors, markets and the economy at large.

The emergence of the first regulatory sandbox concept was in the United Kingdom in 2015. By 2018, the concept was adopted in many countries such as Australia, Malaysia and Singapore.

Rapid, unchecked growth in the FinTech industry necessitates the need for regulation while promoting innovation. Realising this, the Securities and Exchange Board of India (SEBI) announced its approval of a regulatory sandbox for live testing of new products, services and business models by market players on select customers for a specified period of time, to ensure that the sandboxing environment has minimum regulatory burden. That said, no exemptions will be granted from existing principles of investor protection framework, know-your-customer (KYC) and anti-money laundering (AML) prescribed by SEBI.

Further, the SEBI lays down several eligibility criteria for testing a project, including a genuine need to test, direct benefits to customers, no risks to the financial system, to name a few. However, testing may not be permitted if the proposed FinTech solution is similar to those already being offered in the markets, or if the applicant has no intention to deploy the FinTech solution in India.

Once the eligibility criteria is met, the FinTech applicants are then given a testing ground for their new business models and are required to submit reports as prescribed by SEBI. Thereafter, concerned departments of SEBI may perform an initial evaluation of the sandbox applications and present their findings to a committee for final evaluation and confirmation. This process enables SEBI to gauge the readiness of the FinTech solution for the market.

While the Indian capital market participants have been early adopters of technology, the SEBI is of the view that adoption and usage of emerging financial technology can be a key instrument to further develop and maintain an efficient, fair and transparent ecosystem.

In fact, this new framework is likely to open a plethora of opportunities for the FinTech players in the securities and exchange market. SEBI’s Innovation Sandbox will help FinTech participants to test their solutions, foresee any hindrances and yet make a difference with innovative technologies. Hence, it allows the FinTech firms to bring their best to the table.

SEBI’s Innovation Sandbox might strike the right balance between encouraging emerging technological advancements and governing them accordingly. It is a step in the right direction by providing an environment of balanced innovation and regulation, which will enable India to emerge as a startup haven.

However, it is important to note that mere existence of a regulatory sandbox is not sufficient for multi-dimensional growth; implementation is the key. Although this appears to be a welcoming step towards encouraging innovation and technology in the financial sector, its effectiveness and success is largely dependent on its execution.

As rightly said by American author Simon Sinek: “What good is an idea if it remains and idea? Try. Experiment. Iterate. Fail. Try again. Change the world.”

Sonam Chandwani is Managing Partner at KS Legal. Views are personal.