The idea of a Regulatory Sandbox is in vogue, with the RBI looking at regulatory sandboxes for fintech companies. Speaking at MediaNama’s PolicyNext conference on June 27th, Alok Prasanna Kumar, a senior resident fellow at Vidhi Centre for Legal Policy, said that the regulatory sandbox is used to encourage innovations by start-ups and allows outsiders an opportunity to participate in the policy-making process and suggest changes to a regulation as it is tested in a controlled setting. The Vidhi Centre for Legal Policy is working with the Karnataka Government on this, Kumar added: “They proposed something like a Karnataka Innovation Authority which will follow the regulatory sandbox option for any law that Karnataka Government has the constitutional power to change.”

Alok Prasanna Kumar, Senior Fellow, Vidhi Centre for Legal Policy

Regulatory Sandbox isn’t a substitute for consultation processes

But can it be a substitute for existing policy-making processes, like consultations? Malavika Raghavan of Dvara Research pointed out that the regulatory sandbox isn’t about policy-making as such: it’s a means for the regulator to understand emerging technologies and give them a little sandbox, which is a controlled environment, with an exit plan for all the customers who have been sold to. It’s not about regulation-making, she said. Kumar then clarified he hadn’t suggested the regulatory sandbox as a substitute for the consultation process. “The point being that if this gets approved right, this small regulation, you show that this change has actually made a difference, then you go to very different process to actually make the larger policy. So the point being that there can be things which can be used by regulators to learn from an iterated process.”

Malavika Raghavan, Dvara Research, asking the panel about regulatory sandbox.

Malavika Raghavan, Dvara Research, asking the panel about regulatory sandbox.

The advantages of a regulatory sandbox

Kumar highlighted the advantages of using a regulatory sandbox:

  1. Allows for greater participation and feedback from the stakeholders and outsiders: A regulatory sandbox “allow[s] outsiders an opportunity like if I, for instance, want and try to change its regulation, I create a process which says, ‘Can you please change this for me for this reason’ alright.  If you want to change something, you go there and say can you change this for me for some reason and you provide those reasons, provide why this is a good idea or why it should be done. It allows for more discussive way of making regulation and the point of who starts the conversation is important,” Kumar explained.
  2. Conversation between the regulator and the regulated entity happens in the open: “There is of course going to be scope for people to comment, to oppose to say why this will work and why this won’t work,” Kumar continued.
  3. Regulator evolves best practices in consultation with the relevant industries
  4. Allows for changes before the regulation is implemented at a large scale:  “It [regulation] works or it doesn’t work and, at least in this way, you can limit what is the consequence of this action. You can put a stop to the regulation at any point of time when you think it is going beyond a control or it is being misused,” Kumar said.
  5. Reformulates the idea of regulation as a whole of two components: feedback mechanism between the regulator and the regulated entity; and an iterative process that must keep evolving with time to remain relevant

This way, Kumar added, “we know that next time we need to make a change, this is probably the process which we need to be followed, and this is how it can be followed and maybe that change is not necessary and we need to go in a different direction. So this is something that if taken seriously, if more regulators adopted, can provide completely different way, in which we approach the whole question of process and how we approach the question of transparency.”

A policy change isn’t guaranteed, so why will businesses participate?

Smriti Parsheera of NIPFP, highlighted the risks for businesses when it came to the regulatory sandbox: “I think we need to make a distinction between something that Alok is describing as fresh slate rethinking versus putting a sandbox in an existing regulatory context where, even if I [as a business] have demonstrated for 6 months, 8 months that I have this viable business model, if there is no commitment, explicit or implicit from the regulator that they will revisit their regulations, it seems like a waste of time.”

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MediaNama’s first #PolicyNext conference, held in Delhi, was supported by Internet Society (APAC), OYO, Google, Amazon, and Facebook. Digital Empowerment Foundation was the community partner for the event.