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How RBI is Hurting Indian Fintech: Govt on Future of Cryptocurrency Regulations in India, P2P Lending to E Payment and More

Founder and CEO, Transfin.
Apr 10, 2018 7:59 AM 3 min read
Editorial

An acquaintance and Founder of an up-and-coming digital lending startup said, "The Reserve Bank of India can be a very cruel regulator”.

 

That was April 2016. The central bank of India had just released its draft regulations for p2p lending platforms, pushing for heavy capital requirements and comically harsh restrictions over scope of business. In one stroke the right to underwrite a loan i.e. the most lucrative part of the credit value chain, was snatched away from the fintech entrepreneur. The preference for the usual suspects, banks and non-banking financial companies (NBFC), to continue doing what they do was clear.

 

The story repeated when payments companies faced the hard prospect of following a hard Know Your Customer (KYC) deadline or lose business. And most recently when the Reserve Bank of India (RBI) indirectly and brazenly announced a ban on cryptocurrency trading in India, restricting any regulated entity from conducting business with its proponents.

 

The concerns usually flagged by the central bank of India to justify such actions are always sensible. Consumer interest, security, regulatory prudence and what not. However, their love for encapsulating such nobel intentions in the form of blunt force trauma remain a mystery. Why does the RBI or for that matter any Indian regulator always overkill, before gaining the gift of common sense?

 

Any new technology or business model is bound to attract both genuine innovators as well as rogue prospectors. Consumer trust will be breached from time to time. The existing rules would most often not even apply. Companies will bypass accountability by arguing that they’re only acting as platforms or “facilitators” between two mutually agreeable parties. They’re wrong. But destroying the very model to put them in check (like done in case of the cryptocurrency market) is not the solution. That is how future innovation gets killed and we just maintain the status quo.

 

Digital lending, payments, cryptocurrencies, and the underlying blockchain are all nascent industries with the potential to permanently alter our financial ecosystem. They can bring in financial inclusion, reduce the cash economy, and become enablers of greater transparency and accountability in transactions. However, considering their technological backbone, the regulator would always play catch-up to understand their ever-changing nuances to figure safeguards.

 

The solution to this quandary may be to consider a regulatory sandbox, rather than blanket bans and restrictions. “A regulatory sandbox is a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question.” says the Financial Conduct Authority (FCA), UK’s financial regulator and one of the pioneers of this concept.

 

The idea is to allow first movers and innovators to gain a special status with which they can test new products and innovations against a limited number of consumers. They receive transitionary regulatory protection instead of facing the inadvertent risk of falling on the wrong side of existing rules. Regulatory uncertainty is reduced, and rules can be drafted in continuous dialogue with the industry. Investors gain more comfort.

 

The RBI has even expressed its inclination towards this idea, with its working group on Fintech suggesting an appropriate sandbox framework in its set of recommendations out in November 2017 (made public in February 2018). Recent actions however indicate that the intention will be in limbo for the time being.

 

Ease of doing business is not limited to a quick company registration or convenience to file a patent. That is where things only start. The bane of over-regulation making nascent sectors unattractive for entrepreneurs and investors is a much more alarming and real threat.