NRB moves to launch regulatory Sandbox to accelerate fintech and digital banking innovation

KATHMANDU: Nepal Rastra Bank (NRB) is preparing to introduce a Regulatory Sandbox framework aimed at fostering innovation in the country’s banking, financial services, and digital payments ecosystem, while ensuring adequate consumer protection and regulatory oversight.

The central bank has drafted a Regulatory Sandbox Directive and invited feedback from stakeholders. Interested parties have been given until mid-September to submit suggestions on the proposed framework.

A regulatory sandbox is a controlled environment that allows financial institutions and technology companies to test new products, services, and business models with a limited group of customers under the supervision of regulators before a full-scale market launch.

According to NRB, the framework is designed to encourage innovation in Nepal’s rapidly evolving digital finance sector while helping regulators assess potential risks and ensure customer safety.

Nischal Adhikari, Executive Director of the Payment Systems Department at Nepal Rastra Bank, said the directive is intended to create a supportive environment for the introduction of new technologies and digital financial services.

“Any institution introducing a new technology requires regulatory clarity. Through the sandbox, we can evaluate regulatory and supervisory aspects before commercial deployment and determine whether the innovation can be approved. If necessary, certain regulatory relaxations can also be provided,” he said.

Once implemented, the framework will allow banks and financial institutions, Payment Service Providers (PSPs), and fintech companies to test innovative digital products and services under regulatory supervision.

Regulatory Flexibility for Innovation

As part of its effort to encourage technological innovation, the central bank plans to offer temporary regulatory flexibility during the testing phase.

Entities participating in the sandbox may receive exemptions or concessions related to minimum paid-up capital requirements, licensing fees, cash reserve obligations, escrow arrangements, and management experience criteria. They will also gain access to payment infrastructure at lower costs and greater freedom to develop technology-driven financial services.

Wide Range of Technologies Eligible

The draft directive allows testing of various emerging financial technologies and digital services, including:

• Mobile money solutions
• Digital payment systems
• Digital Know Your Customer (e-KYC) services
• Digital identity platforms
• Smart contracts
• Cybersecurity technologies
• Embedded finance solutions

However, several categories remain excluded from the sandbox framework. These include cryptocurrency-related services, digital currencies, Central Bank Digital Currency (CBDC) projects, online betting platforms, and gaming-related financial services.

Strong Consumer Protection Measures

Customer protection remains a key pillar of the proposed framework.

NRB has stipulated that participation by customers in sandbox testing must be voluntary and based on informed consent. Companies will be required to establish mechanisms for compensating users in case of financial losses arising during the testing period.

Participants must also comply with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations throughout the testing process.

Six-Month Testing Period

The Payment Systems Department will establish a dedicated committee to monitor and supervise sandbox operations.

NRB plans to invite applications annually through thematic cohorts focused on specific innovation areas. Selected participants will be permitted to conduct testing for up to six months, with the possibility of a six-month extension if required.

Following successful completion of the testing phase, participating institutions will be eligible to apply for the necessary licenses and regulatory approvals to launch their products commercially in Nepal’s financial market.

The proposed regulatory sandbox marks a significant step in Nepal’s digital finance transformation strategy and aligns the country’s regulatory approach with global best practices adopted by leading financial regulators to promote fintech innovation, digital banking, financial inclusion, cybersecurity, and modern payment systems.