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Technology / regulatory sandbox

How Regulatory Sandbox Ensures Precise Governance while Encouraging Innovations

Regulatory sandboxes refer to a special set of rules that encourages innovative companies to test their products and services in a controlled environment
How Regulatory Sandbox Ensures Precise Governance while Encouraging Innovations
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CEO and Founder, Lexplosion
5 min read
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We are living in an age where countries have started drafting regulations to account for the possibility of artificially intelligent robots’ civil rights. We have also found ourselves debating on the copyright being given to a monkey for a selfie clicked by it.

In this evolving world of technology and innovation, we are at a juncture where new innovations can possibly outpace rule-making. This is primarily because, in an attempt to capture all possibilities within the text of the rule making, Indian legislators end up using extensive constructions. To avoid such situations, the adoption of regulatory sandboxes is an idea that can save the repetitive requirement to update laws every time there is innovation and advancement in technology.

Regulatory sandboxes bring with it an effective solution to balance both ends. This platform provides a safe haven for innovations to be tested without breaching the existing set of laws. It will also help legislators to enact compact regulations minimizing the requirement of updating. 

What is a Regulatory Sandbox?

The term ‘regulatory sandbox’ can be etymologically derived from computer programming, where it referred to the practice of running a potentially unsafe code in an isolated environment to understand the negative impacts of such a code.

Drawing an analogy from this practice, the term regulatory sandboxes emerged to refer to a special set of rules that encourages innovative companies to test their products and services in a controlled environment. Post such phase of testing, the resultant solution may either be done away with, or if it is successful then it may be introduced to consumers, without restrictions on regulations.

‘Regulatory sandboxes’ are most commonly being used in the innovations of the financial services technology sector. Currently the Reserve Bank of India has set up an Inter-regulatory Working Group on Fintech and Digital Banking. This Working Group has been set up in view of the growing significance of Fintech innovations and their interactions with the financial sector as well as the financial sector entities. The purpose is to study the entire gamut of regulatory issues relating to Fin Tech and Digital Banking in India.

Regulatory Sandboxes in other Jurisdictions

The concept of regulatory sandboxes has been accepted by a limited number of Regulators. However, United Kingdom became the first country to create a regulatory sandbox for the financial market. In October 2014, the Financial Conduct Authority (FCA) launched Project Innovate, which helps innovative businesses understand the changing demands of regulation and bring innovative ideas to the market. Singapore competes with its neighbors for the title of the Asian innovation center. In 2014 the government launched 'Smart nation' initiative, a program to extensively use new technologies in multiple spheres from transportation to administration.

The reason why regulatory sandboxes are much sought after is because they enhance the access to investment by giving a chance to innovative ventures to falter and learn before being exposed to vigorous laws.

Do We Need Regulatory Sandboxes in India?

It is high time that Indian laws adopt a standard method to keep pace with technology rather than resorting to repeated amendments. This can be explained with the help of an example from the Indian taxi aggregator industry. Initially, Ola and Uber had been categorized as radio taxi service provider for various purposes such as, service tax, STAs, etc., merely due to the lacuna of legislation in India for such advanced technologies in our country. In the US and UK, standard operator’s license is required to be taken for private taxicabs.

These companies had initially blissfully maintained that they do not classify under any existing legislation. Uber’s services were contrary to the Motor Vehicles Act, 1988 (“Act”) but they stated that these do not apply to them, since they are not taxi operators. Initially, the Regulators were silent on provisions with respect to taxi aggregators. It was only after a series of unfortunate safety issues for women, that Karnataka drafted the “Karnataka On-Demand Transportation Technology Aggregators Rules, 2016”, which is effective 2nd April, 2016.At present, the Motor Vehicles (Amendment) Bill, 2016, proposing several amendments to the Act is pending before the Parliament.Once the amendment is enforced, app-based cab aggregators will be formally classified as a sector separate from that of a taxi operator.

We have often witnessed the usual practice of Regulators to frame rules only after an issue arises. There is a need to ensure that in future, companies using advanced technologies do not get the opportunity to use an excuse of lacunae in Indian legislations. Hence, regulatory sandboxes can be an effective solution to curb such a problem.

Regulatory Sandboxes: A Cause of Concern or an Encouraging Reassurance?

The adoption of regulatory sandboxes by the government shows its progressive and proactive approach towards innovation. There is no cause of concern for either the companies or the regulators, since both are the in the winning end. Regulators will be in a better position to offer proportional and adequate legislation, when they are exposed to valuable information on new business models. At the same time innovators getan opportunity to adopt the basic rules.

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