Here’s Everything You Need to Know About the Web 3.0 Regulatory Sandbox by the Government of Telangana
The sandbox will help support firms in understanding the regulatory space and establish a structure for testing products.
by Noah Roy, investment analyst
Introduction
The government of Telangana recently announced the launch of a ‘Web 3.0 Regulatory Sandbox’ where both Indian and international firms or innovators wishing to test their products in a live environment can apply to participate. The state has officially opened applications for Telangana’s ‘Web 3.0 Regulatory Sandbox’ after they announced it at the closing ceremony of EthIndia in Bengaluru, one of the largest web3 hackathons with over 2,000 attendees from 30 countries building 459 projects.
The government aims to encourage innovation in the web3 industry by allowing firms to test and improve their products, services, solutions, business models, and policies in a real-world environment. To support this, the government will provide companies with testing mechanisms and assistance. The state of Telangana has set up a dedicated government division focused on emerging technologies with the goal of promoting their adoption within internal departments and developing a strong ecosystem in the state.
The sandbox will assist firms in understanding the regulatory landscape and provide a structured process for testing their products, leading to increased efficiency. It may also help regulators identify any existing barriers to innovative solutions. The sandbox will be beneficial not only to innovators, but also to regulators and the consumers of the products. It will operate on a continuous basis, allowing participants to exit once they have completed their testing.
What the Regulatory Sandbox will do:
Help firms to navigate the regulatory space
Provide definite structure to the product testing process
Help regulators identify barriers and devise strategies to foster innovation
Make observations on regulatory policies that will be passed on to the regulatory bodies, and wherever necessary state-level policies will be drafted to implement the findings from the sandbox.
How does the sandbox work?
Participants can exit the sandbox once they’ve completed the testing process
The testing period for a participant will not exceed six months
Applications to be a participant in the sandbox will open twice a year
Active participants in the sandbox will range from 10 to 15 at a time
The major stakeholders of the regulatory sandbox are:
The execution team
The execution team will consist of a governing council and an operations team. The governing council will be responsible for making high-level decisions about the management of the sandbox, and will include representation from the state government, industry experts, academia, venture capital firms, and other domain experts. The operations team will handle the day-to-day activities of the sandbox, and will include program managers who are responsible for evaluating and selecting applicants for the sandbox, preparing use cases for each cohort, regularly monitoring the sandbox, and consulting with experts and regulators to ensure smooth operation.
Program managers
The program managers will support the projects in the cohort by coordinating their activities within the sandbox and providing assistance with access to the sandbox, access to industry experts, and resolution of issues.
Test users
During the testing period, a group of users will participate in the sandbox and use the solution in real-time to assess its reliability and compliance with regulations. These test users will be protected from any personal losses or legal issues that may arise. Test users will play a critical role in helping web3 companies understand the real-world impact of their products on consumers. The sandbox will also require certain infrastructure, such as physical space, data, and technology support, which will be provided by suitable service providers selected through consultation.
Investors
Funding for the day-to-day operations of the sandbox will be provided by the government and other interested investors.
Web3 companies
The companies will be engaging with the sandbox to develop the solutions according to the use cases selected for each cohort. Viable solutions will later be developed for real life deployment.
Regulatory bodies
The sandbox will be consulting with governmental regulatory bodies such as the Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), and the Real Estate Regulatory Authority (RERA) to develop regulatory policies as per the suggestions and findings derived following each cohort.
Cohorts
The sandbox will operate in a cohort format. There will be two cohorts each year and each one will run for a period of six months. Each one will consist of 10 to 15 startups and will be given different use cases to work on and develop solutions for. At the end of each cycle, the companies with the most viable solutions will be considered by the government for real-world expansion. The observations on regulatory policies will be passed on to the regulatory bodies and wherever necessary, state-level policies will be drafted to implement the findings of the sandbox. Cohorts will commence their activities in June to July and January to February of every year and will have four internal stages.
Application stage
The execution team will choose relevant web3 use cases to deploy in a cohort and publish them on the Web 3.0 Regulatory Sandbox portal. Projects can then apply to participate in the sandbox by submitting their business plan and pitch deck. The execution team will review the applications and select a group of companies to participate.
Authorization stage
The regulations that will apply to the current cohort will be determined in this stage. Shortlisted companies must adhere to the sandbox rules and have legal capability in their overall strategy. The governing council, using its statutory power, will make a final decision. Web3 companies can present their business plan and solution to the council and seek mentorship, at which point the council’s feedback should be incorporated into the business plan. This stage allows companies to improve their solution to meet the cohort regulations. Special advisors will be present to assist with domain knowledge of a particular use case whose guidance can be sought throughout the cycle duration.
Testing stage
Projects in the cohort will receive anonymized data, test users, and other technological support to test their solutions. They will be evaluated on the robustness and regulatory compliance of their solutions. Consumer protection is a top priority, and measures will be taken to prevent fraud or harm during testing. Solutions will also be checked for compliance with laws outside the sandbox's regulatory scope. Companies have a high degree of freedom in designing their test plans as long as they meet all testing criteria.
Exit stage
The last stage in the cohort will be used to compile findings and recommendations that arose through the lifecycle of the cohort. The regulatory changes that were implemented in the cohort will be compiled and shared with regulatory bodies as recommendations. State level regulations or policy changes will be considered for implementation by the government.
Governing council for the sandbox
The governing council will be leading the efforts of running the sandbox successfully and will meet once every quarter to take decisions on the cohort topics and evaluation of applications. The council will have representation from all stakeholders in the web3 space as detailed below:
Chairperson: The position of chairperson of the governing body will be assumed by the Principal Secretary of the ITE&C Department of the Government of Telangana. The chairperson will lead the governing council to quick and effective decision-making and will support the sandbox by interacting with the relevant government stakeholders for regulatory support.
Government innovation stakeholders: Two members of the governing council will be representatives of the Government Innovation Ecosystem, namely from the Emerging Technologies Wing and T-HUB.
Industry representatives: The government, post consultation with start-ups in the web3 ecosystem, will choose one representative from the heads of industry bodies to represent the interests of the industry that will be part of the governing council of the web3 sandbox.
Venture capital firms: VC firms that are actively supporting start-ups in the web3 ecosystem will be given a position on the governing council to represent the interests of the investors in the sector.
Academics: One or two academics that have extensive experience working on web3 technologies and policy will be part of the governing council.
Law representative: A lawyer experienced in the web3 environment and regulatory challenges will be part of the governing council and will enable the government stakeholders to support the expected regulatory relaxations and outcomes.
Special advisors/regulators: Once the theme for each cohort is decided, relevant regulatory stakeholders and subject matter experts will be invited to be part of the governing council meetings in the role of a special advisor.
Conclusion
Overall, the ‘Web 3.0 Regulatory Sandbox’ is a positive step forward for the web3 ecosystem in India. It provides a safe and supportive environment for innovation and experimentation, while also ensuring that new technologies are developed and implemented in a way that is compliant with relevant regulations. By fostering collaboration between regulators, industry leaders, and startups, the sandbox will help to drive the growth and development of the blockchain space in India. As a result, it has the potential to drive significant benefits for both the industry and technology as a whole.