Towards concrete fintech regulation

Trying to find the right balance between consumer protection and product innovation is a struggle for regulators when looking to govern the fintech space

Market players had been pushing for an extension (one extension was granted earlier by RBI), and this has now been granted.
Market players had been pushing for an extension (one extension was granted earlier by RBI), and this has now been granted.

By Shilpa Mankar Ahluwalia

The year 2021 has been a game-changer for fintech regulation in India, marked by three significant policy shifts: (i) the move away from a “light touch” regulatory approach, (ii) the recognition that existing laws are not able to keep up with disruptions caused by technology in the fintech ecosystem, and (iii) the focus on protecting consumer data. The licensing of payment aggregators, regulation of payments data, and discussions around regulating cryptocurrency & digital lending are all examples of this policy shift.

Cryptocurrency: The year that is ending saw a rapid increase in crypto adoption among Indian retail investors which has prompted the government to fast-track its regulation strategy. However, the timing of the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021 (Crypto Bill) is now unclear and there is some speculation regarding the contents of this piece of draft legislation. The expectation is that cryptocurrencies will be regulated as an asset, and the use-case for crypto as a medium of exchange (i.e. as a means of payment to buy and sell goods and services) is likely to be restricted.

The Crypto Bill may also include a framework for licensing of crypto exchanges and could require all trading to occur only on licensed crypto exchanges after proper KYC procedures have been completed. RBI has been in favour of a complete ban of private cryptocurrencies, citing macro-economic risks of the possible development of a parallel currency as a key concern. Anonymity, money laundering risks, and difficulty in implementing exchange control regulation are also known challenges with private cryptocurrencies. The final framework of the Crypto Bill is still not known and the market will need to wait and watch to see what use-cases of crypto will ultimately be permitted in India.

Today, the crypto economy includes products not only linked to crypto trading but also crypto lending, investment-linked crypto products and P2P transfer applications. It is unclear which of these use-cases will be permitted (if at all) under the new crypto law.

e-Rupi: Both the government and RBI have supported the idea of a RBI-backed digital currency and 2022 is likely to see a framework for the issue of e-Rupi. RBI will need to make several design choices in connection with the e-Rupi. For instance, will RBI take on the customer-facing role of being a digital e-Rupi wallet issuer, and will an interest be payable on e-Rupi deposits? If yes, how will a shift in deposits from commercial banks to RBI impact the banking system? If no, given the wide scale adoption of UPI-linked digital payment products, what can an e-Rupi achieve by way of digital payments that has not already been done to a large exent? Some of these questions have significant implications not just for digital payments but also for banking and financial systems on the whole.
While the decision to issue an e-Rupi seems to be a final one, the devil is in the details. The implications of an e-Rupi to India’s payment ecosystem will only really be known once we have answers to some of these questions.

Payments data: Growth in digital payments translates into a direct increase in digital data. Every consumer leaves a digital footprint as she navigates the digital financial ecosystem (spends, transfers money, borrows). What data is collected, how it is processed and where it is stored is not always entirely clear.
The risk of payment fraud and data leaks (magnified by the absence of a data privacy law) prompted RBI to put in place a ‘no storage of card data’ rule (other than the last four digits and the card-issuer’s name) applicable to all players in the payment ecosystem, to be effective as of January 1, 2022.

While card-issuers and card-network-providers have been permitted to offer tokenisation services (which allows merchants to be issued a tokenised version of a credit card or a debit card), the card payments industry was concerned that the end of 2021 does not give the market sufficient time to fully integrate and roll out a tokenisation program. The ability to integrate offers and discounts into tokenised card details is also proving to be a challenge. Market players had been pushing for an extension (one extension was granted earlier by RBI), and this has now been granted.

A balancing act
Trying to find the right balance between consumer protection and product innovation has been (and will be) a struggle for regulators when looking to govern the fintech space. Although RBI seems to be prioritising consumer protection in several areas of fintech regulation, only once the final laws on cryptocurrency and digital lending are known, can it be determined how effectively this balance has been achieved.

The author is Partner & head (fintech), Shardul Amarchand Mangaldas & Co

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