top of page

Negativing the ‘Negative List’ – Evaluating RBI’s Regulatory Sandbox Policy

The author is Priyansh Dixit, second year student at National Law School of India University, Bangalore.


Fintech refers to the use of technology to provide financial services. Undoubtedly, it has immense potential to revolutionise the state of global finance but its disruptive potential has also simultaneously been a concern. A regulatory solution that is being used internationally by financial regulators is the ‘Regulatory Sandbox’, which refers to live/simulated testing of Fintech products with certain limitations to assess the viability of them being introduced into the market. The ‘regulatory sandbox’ model has also been adopted by the RBI.

A peculiar element of RBI’s regulatory sandbox policy is the ‘negative list’ – which refers to a list ousting certain Fintech products from being seriously considered for testing in the regulatory sandbox. Crypto products are one example of products that have been ousted. This article argues against the exclusion of crypto products from the model. It posits that crypto’s disruptive nature and the uncertainty that looms around it, which have conventionally been viewed as reasons for excluding them, create a compelling case to include it in the regulatory sandbox instead of excluding it. To that end, this article uses Law and Economics’ cost-benefit model.

The ‘Cost-Benefit’ Model

This section begins with an explanation of what is the cost-benefits model, followed by an explanation of the relevance of using the model. Then, it constructs the model for the purposes of this article.

In Law and Economics, such cost-benefit analysis is specifically used to analyse regulatory decisions/frameworks. It entails defining what constitutes ‘costs’ and ‘benefits’ within a specific context to assess the efficacy of a regulatory decision through a particular lens.[1] This article defines these terms from the perspective of the RBI. This means that ‘benefits’ are what help the RBI achieve its self-identified goals through the use of the regulatory sandbox while ‘costs’ constitute whatever would harm such goals.

The key advantage of this model is that it allows more systemic analysis. By pegging these terms to the RBI’s lens, we can determine specifically the results of a cost-benefit analysis that would help the RBI achieve its goals. Otherwise, if these terms are not defined, something that is a benefit for one stakeholder can be a cost for some other stakeholder. For instance, one can deem the policy of limiting the entry of Fintech products unless they meet a very high threshold of risk mitigation as a benefit since it would protect consumer interests. However, that can also be a cost imposed on Fintech businesses. Distilling any proper conclusion becomes hard. The instant approach allows us to view the issue and its solution in a more pointed manner.

Now, what is specifically understood by benefits and costs in our instant case?

An important rationale for regulatory sandboxes has been enabling regulators to support innovation in financial services by collaborating with the Fintech industry. By engaging with these companies, the regulator learns the market dynamics of Fintech, which enables better and more specific policymaking in the future. The regulatory sandbox allows Fintech’s growth while enabling regulators to pilot a proportionate and data-driven regulatory architecture. Concomitantly, it promotes innovation and protects consumers. The RBI has endorsed similar goals in its 2019 Enabling Framework for Regulatory Sandbox’. Both of these documents flagged the need to be able to understand Fintech products through the said model so that innovation and consumer protection can be promoted. So if a policy can contribute to the same, it would count as a ‘benefit’.

But if that is the case, testing any product would result in such benefits. Then, why has the RBI banned crypto products at all? In its Statement on Development and Regulatory Policies of 2018, the RBI said that bitcoins (and other crypto assets, by extension) “raise concerns of consumer protection, market integrity, and money laundering, among others.” These factors – such as consumer protection, market integrity, etc, if negatively affected would cause harm to the economy, thus diluting the goals that the RBI fundamentally aims to propound through the regulatory sandbox. While crypto’s intrinsic benefits and harms can be normatively argued for, it must be recognised that the possibility of risk that the RBI invoked has some merit. An appropriate illustration would be the recent Three Arrows controversy, where a Singapore-based crypto hedge fund crashed, losing millions of dollars to its investors. Such harm would constitute our costs.

The next section systemically analyses these costs and benefits by pitting them against each other and explains why there would be greater net benefits in the paradigm where crypto products are not excluded from the regulatory sandbox.

Analysing RBI’s Regulatory Sandbox Policy

As explained, admission into the market is not necessary to reap benefits from the regulatory sandbox. Even the testing process, which facilitates discussion between regulators and Fintech companies, allows regulators to understand market dynamics. This means that even if a crypto-related product does not pass the tests, at the very least, there is value in letting them in the regulatory sandbox. But why should regulators bother learning about crypto-related Fintech products at all? It is because the alternative, the ‘wait-and-see’ approach, which entails a laissez-faire policy towards Fintech, results in uncontrollable financial disruptions. Substantial research has critiqued such an approach for leaving countries unarmed in cases where markets take a plunge. With crypto, where the disruptive potential is incredibly high, there is all the more incentive to learn to avoid such future contingencies. Thus, regulators would be more equipped to contain the disruptiveness of crypto by testing it in a regulatory sandbox. The World Bank has also recommended such an approach. In a 2020 report, it suggested using thematic sandboxes to ask specific questions regarding blockchain issues. The report provided examples of Malta and Lithuania having worked with such sandboxes and reaped beneficial results.

A ‘literal’ cost might be the additional funds to test these products. These funds represent opportunity costs that can alternatively be used to run different cohorts. So one can argue that if these funds are applied to other products that are more likely to enter the market, benefits would be larger since they would not only be restricted to more information. However, this misses the fact that crypto, at the end of the day, is a growing industry that, even without authorisation, is disrupting India’s financial landscape. As explained, there is value in learning about it, else unexpected disruptions can occur. So, if not on a regulatory sandbox, funds would ideally have to be spent in the future. However, since regulatory sandboxes provide a holistic way of learning about Fintech products better than other alternatives, this paper submits that these funds should ideally be spent on running a regulatory sandbox.

Therefore, mere testing of crypto products has some benefits that are not overridden by the opportunity costs of diverting resources away from non-crypto products. However, the possibility of such crypto products going through the regulatory sandbox needs to be considered. One possibility is that products that are beneficial to the public and the economy enter the market. Sufficient examples can illustrate this point. For instance, Disberse- a crypto service provider which distributes and tracks development and humanitarian finance- was part of FCA’s second cohort. After getting approval, it has helped over forty aid agencies reduce money lost to banking fees, poor exchange rates, and currency fluctuations, thus helping humanitarian institutions. CryptoGarage in Japan and HydraX in Singapore have been similarly beneficial.

But what if a product that gets approval proves disruptive to the market, thereby damaging the economy? The costs that such a possibility imposes are severe. Since this paper has relied on crypto’s disruptive capabilities to argue for the need to learn about it, it also concedes that if products with such capabilities enter the market with the RBI’s approval, they can pose significant harm. While such situations would impose high costs, there are good reasons to believe such situations would not occur in the first place.

A regulatory sandbox enables a regulator to create ad-hoc thresholds for different cohorts. This can exist at two levels. Firstly, criteria can be customised when selecting products to test in the regulatory sandbox. So while checking if products provide innovative solutions or if they sufficiently mitigate risks, a higher degree of scrutiny can be applied to a cohort that has crypto products. Secondly, while testing viability in the regulatory sandbox, the thresholds to be met can be increased. A situation in which a product can fail to pass through the regulatory sandbox is when its risks exceed benefits. So, the threshold for the desired benefits can be set high enough to ensure that only genuinely helpful and stable products get approval. Therefore, ad-hoc thresholds can ensure that the costs of approving disruptive crypto products into the market are minimised.

Therefore, even when the possibility beyond the mere testing of crypto products is considered, there are more benefits than costs. This is because we know there is some benefit that can be derived from beneficial products. This can be offset by harmful products but as explained, the possibility of such costs being imposed and offsetting the accrued benefits is militated by virtue of the ad-hoc nature of regulatory sandboxes.


The regulatory sandbox, while a good model, is liable to have design flaws that can inhibit innovation and growth, contrary to its objectives. This article highlights that the ‘negative list’ is one such flaw in the design of RBI’s regulatory sandbox and posited that removing the same would have more benefits than costs which would ultimately help the RBI’s goals. This article proves the author’s hypothesis using the Law and Economics model of cost-benefits. It demonstrates that the addition of crypto products within the ambit of the regulatory sandbox would have more benefits than costs as compared to the extant paradigm when seen from the lens of the RBI as a stakeholder.

[1] Mariano-Florentino Cuéllar, and Jerry L Mashaw, 'Regulatory Decision-Making and Economic Analysis, in Francesco Parisi (ed.), The Oxford Handbook of Law and Economics: Volume 3: Public Law and Legal Institutions (OUP 2017) 59.

429 views0 comments


bottom of page