Don’t Let Regulation Stunt Innovation

I’m optimistic about the future of Internet technology software, because the innovation potential keeps blossoming and accelerating.

But I’m worried that local, global or national regulation could easily stunt the creation and emancipation of some of the most exciting and useful technological innovations that are yet to emerge. Specifically, let’s take the case of cryptography-based software technologies, also called blockchain, along with new services of the peer-to-peer variety.

The blockchain has fundamental characteristics that puzzle regulators, central authorities and large corporations because it challenges centrally orchestrated trust, and enables a new kind of trust: one that is decentralized and not centrally controlled.

And peer-to-peer services, such as UBER or Airbnb sit squarely in the permissionless innovation category, where services are paid for and rendered via methods that start off by circumventing conventionally regulated ones.

The school of regulation believes in applying constraints and preventative measures, as a way to license or control usage, even before adoption is allowed to exist. But the school of innovation prefers to wait and see the shape and implications of widespread adoption, before regulations are even discussed. In those cases, premature regulation wrongfully targets areas that may appear as the most obvious, but not as the most useful.

There is yet another school of thought coming from already regulated corporations that proposes to make regulators as co-operating partners, and purports that innovation can be guided to live within the regulators satisfaction zones. But that is also a flawed conclusion because innovation tends to always emerge from outside existing regulation, and large companies typically apply such innovation, and don’t create it.

As it turns out, the blockchain brings some solutions to the dilemma of juggling data, identity and transactions privacy and security.

The old ways of securing data was to centrally protect it, but central trust is eroding, in light of security breaches from large/central corporations such as Target, Sony, Blue Cross, and Ashley Madison. These incidents are making us wonder if large companies are fit to store our data, yet alone manage increasingly large transaction databases.

With the blockchain and decentralized applications based on it, data is manipulated via cryptographically secured encryption schemes, as a standard practice. In the blockchain world, each user can and should own their data, and “central” players are less vulnerable to data losses and breaches.

That said, there is a flipside to platform success, because monopolies also exist in the online world. As platforms get big, their operations tend to become a black box that holds customers hostage to usage addiction and data opacity. Whether they are older online platforms (Google) or newer ones (Facebook), these companies retain our data and don’t tell us exactly what they do with it, while creating high switching costs for users. Even UBER stores data that could get a driver booted out of their system for low satisfaction ratings.

In the increasingly digital world, data is a valuable currency, yet as consumers, we control and own little of it. As consumers, we must ask what big companies do with our data, a question directed to both the online and traditional ones. Can we take our data and move it to another provider, like we might take our medical record to another doctor? Do we know what they know about us or how they are using our data? Do we have a say into it? Can we commingle our data with other data to extract meaningful intelligence?

Today, data can also be a pivot point for regulatory decision-making. Maybe there is a case for regulating big companies so they give more control of the data to their users and customers, especially when the aggregate data offers insights for a public benefit.

From the startup world, entrepreneurs are developing decentralized applications where users are in control of their data, their transactions and their privacy; and they decide what to do with it, and what to commingle it with. This will turn a lot of centrally controlled businesses on their head.

Regulation has a role, but it might come later to protect consumers, not large companies. Today’s big monopolies hide behind regulations or lack thereof, to protect their business models, but future intermediaries have data as a trump card. If regulators were proactive, they could turn their attention to studying that, and proposing interesting solutions that enable users to have more ownerships and freedoms in moving their own data around while providing policymakers with useful insights.

Regulators should re-shuffle their attention to being a check-point on companies that are already big, not a choke-point on startups that are trying to get big.

We are lucky that online technologies are quite permeable, and we need to be reminded that bits travel well afar and across boundaries. Online services are our only chance to efficiently spread positive opportunities around the world.

Rethinking regulation is a global message, not a North/South American, European, African or Asian one. The Internet is supposed to be that global platform, destined to level the playing field for all involved. We just need a dose of common understanding about its intended usage.

For the sake of online technologies, let’s lead with innovation and lag with regulation. The only type of innovation that knows how to thrive is the permissionless type. And the only type of sound regulation is the one that comes after innovation, way after.

Regulation is not a starting point. It’s an ending footnote.

(A longer version, Rethinking Regulation To Lag Innovation appeared on the Startup Management blog)

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