Russia’s New Blockchain Sandbox

Paul Goncharoff

The week started in Moscow with an email containing a PWC survey that concluded 84% of companies are dabbling in blockchain. The next email was from the Central Bank of Russia inviting me to a small seminar unsurprisingly covering a very similar theme. The decisive factor was the fetchingly named seminar: ‘The Work of the Regulatory Sandbox’… who could refuse?

As I do not believe in coincidences this started my mercantile brain to whirr. The conclusion was that I would be a fool not to attend and perhaps I will not only learn a bit more, but flesh out my personal understanding of blockchain technology applications. More to the point I advise a US company through its Russian registered arm in Vladivostok which is now going through this ‘sandbox’ (an analog old-school ‘platform’) for approval.The term ‘Blockchain’ is on everyone’s lips these past few years, yet unsurprisingly when I talk with my business acquaintances I hear any number of explanations and variations of just what blockchain is, and for whom. In short, few people are entirely conversant in the concept, but none is willing to be seen as being slow, uninformed or not on the blockchain bandwagon.In short, Blockchain is the technology that forms the foundation allowing cryptocurrencies and far more. It records transactions on a public, distributed ledger (DLT) and mostly obviates the need for a third party role. The technology is fast, predominantly secure, and applications are broadly tested for just about everything transactional. From property title, health records, asset control – just about anything involving the secure transmission and exchange of functional data, such as traditional banking, e-commerce through to cryptocurrencies.

On the anxiety side, which applies to most every emerging technology, challenges plus doubts exist around blockchain’s reliability, speed, security and scalability. However, these same concerns are a daily challenge to businesses using established traditional systems, so I imagine it is a question of familiarity and comfort zones. The old beloved jeans vs. the new crisp ones.

If fear is defined by not knowing an outcome, then trust, which was named as a major roadblock to blockchain adoption, is a matter of educated familiarity. A kitchen culture example would be using a Cuisinart after years of wielding a hand whisk… It is a significant shifting of gears to open broad new culinary vistas.
At the practical level of adoption, the challenge worldwide for all users is regulatory uncertainty, legal position, compliance concerns, liability, and intellectual property risks as obstacles slowing blockchain adoption. This then was the crux of the sandbox seminar I was invited to this August 29 at the Corporate University of the Bank of Russia in the small town of Odintsovo just outside Moscow.

The Central Bank of Russia through its regulatory sandbox, welcomes all entities that develop or use innovative services whose implementation requires regulatory changes.

The sandbox works as a platform for modeling the processes of the use and application of innovative financial services, products and technologies. Checks, assessment and testing of the positive effects if implemented are performed. Based on the results of such assessment, if positive, the service will be approved and a plan put in place to implement this new service or process.

Any organization (foreign or domestic) registered to do business in the Russian Federation that has developed or plans to use an innovative financial service may initiate a pilot with the regulatory sandbox. To do that, it should file an application with the Central Bank. The application must be entirely completed with all information about the advantages of the use of the new product for financial market participants, as well as assessment of the impact that such a product might have on the financial market.

The Russian sandbox is in keeping with the key fintech priorities the Central Bank set out for 2018-2020, wherein it plans to transform the Russian digital environment for financial services. This will happen through the development of new infrastructure, including a platform-marketplace for financial products and services, a platform for the registration of financial transactions and a platform based on DLT.

When I arrived to the seminar at the Central Bank building, and after going through the usual security protocols I was surprised to see a completely packed room – not a single spare seat. The attendees were a literal who’s who of the Russian IT, Fintech and R&D elite. After all, this was an effort supported by the federal government, together with the Skolkovo Foundation (represented by Mr. P. Novikov) and companies like Fintec and Finteclab to streamline compress to absolute minimums time, headaches and cut through regulatory red tape wherever possible. It is a very serious hands-on effort to support innovative financial services, products, applications and technologies for use in Russia within its regulatory framework.

Mr P. Novikov

Since the sandbox started recently with very little fanfare, just over 20 projects are being ‘piloted’ and processed through the sandbox pipeline at this time. One has completed the cycle, unsurprisingly Sberbank, and is now operational, two more should finish by early September, and the rest are in various stages of interaction. Judging from attendee reactions, the sandbox pipeline will get crowded quickly now that the cat is out of the bag and the procedural process is known.

Cutting to the chase. The man in charge of this effort from the Central Bank is a Mr. I. Zimin who opened with a refreshing and clear description of the process allowing firms to make use of this new fast lane supportive ‘sandbox’ fast track to regulatory approval. In sum, there is a simple form with questions. These questions must all be answered clearly in exhaustive, expanded and specific detail. That is 60% of the challenge; the rest is procedural and interactive.

This was re-emphasized by all of the presenters. Once the form is submitted the clock starts ticking, and the expected completion term is 45 days.

Within this time, experts and specialists, supported by tasked teams from several ministries and regulatory organs working within the sandbox work interactively with requests for specific clarifications or additional information from the applicant/developer. The ministries involved would be those directly responsible for any aspects of the new technology, its regulation and its deployment inside Russia. The most frequent problems encountered by organizations applying for going through this fast track procedure are analyzed, and recommendations for successfully passing through it are interactively made.

Once this phase is completed, a decision to approve the project and support making the needed regulatory or legal changes so it can begin work unimpeded. It may also result in suggesting recommended changes, or even a refusal to work with the project and the specific reasons why.Denial to go through the ‘sandbox’ does not mean the project cannot work in Russia, it is mostly indicative that it is not considered sufficiently key to the needs of Russia for prioritisation through the ‘sandbox’. Such service or project can still apply to the specific regulatory agencies through normal channels for approval.

Nevertheless, there is benefit even in being denied as the reasons given serve as an invaluable roadmap (complete with potholes) to follow when addressing the normal channels of assessment and approval. By the way, it is important to note that the normal channels are not nearly as bureaucratic, nor as draconian, nor as slow as many assume. New e-monitoring and flagging systems have been put in place where decisions by regulators must be reached within predetermined timeframes for each step of the way.

The Russian ‘sandbox’ is open to all companies, startups and projects that are developing or have developed innovative financial services or technologies. Foreign companies are welcome provided they do so by registering and setting up a Russian company to deploy their service or technology in Russia. If this strikes a chord of interest, then I suggest the first step would be filling out the Bank of Russia application carefully as the devil here is truly in the details, and get cracking!

© Paul Gonacharoff, August 31, 2018