On February 19, the European Commission published its visionary strategy paper: Shaping Europe’s Digital Future. A burst of activity from the Commission has resulted in consultations and reports on many different aspects of that digital future, including artificial intelligence, digital financial services, crypto-assets and retail payments as well as a Digital Services Act covering content moderation and rules seeking to level the playing field between major platforms and other digital players.
European policy makers are right to look at these issues because the digital world they envision is already here. As they look at digitalization of commerce, communications, financial services and recreation, they would do well to adopt laws and rules that create the conditions, tools and incentives for good actors to thrive, which will marginalize bad actors and result in a positive, healthy environment.
Three lodestar concepts should guide policy makers: transparency, creativity and empowerment. Let’s delve a bit into each.
To achieve transparency means to provide disclosures that facilitate informed decision-making by stakeholders. Good transparency also should include the ability to audit activities and enable the building of participatory or complementary technologies.
Transparency starts with knowing (1) who is doing what, (2) how they are doing it (3) what their compensation model is and (4) what level of liability they have.
The who/what reveals the different participants and users of the platform and what capabilities they have or activities they can conduct. It will tell stakeholders about the intermediaries involved, whether there are different levels of participation or activity, and more generally who controls the platform or particular aspects or activities. Transparency should also describe digital agents (like smart contracts, artificial intelligence/machine learning and bots), as well human actors.
The how would disclose the technical detail of how things work on the platform or for particular activities, which includes systems and digital agent programming. The best disclosures will include the codebase in order to allow true scrutiny of functionality and the possibility to permit stakeholders to add participatory or complementary programs to the platform (which would be subject to the same transparency disclosures). This capability requires a level of openness that may not be what the operator or creator desires; a closed platform controlled entirely by one party should be permitted but this fact should also be disclosed for transparency’s sake.
The third and fourth transparency points around compensation and liability are designed so that users know who is profiting from participant activities and how those persons or entities can be held responsible for fraud, unlawful manipulation and other prohibited conduct. This knowledge can guide user choices and loyalties.
Above all, policymakers should not underestimate the power of transparency to drive innovation and change by allowing new and existing participants to compete to provide what consumers truly want.
Policies should seek to unleash this power in as many players as possible because it will spark the competition and diversity of actors that drive new and better ways of doing things. The world moves forward when new ideas supplant old ways of thinking and doing. History has more examples than we can count, including the move from barter to money, live-only music to live or recorded, steam to electricity, tubes to microprocessors, and centralized computers to decentralized networks.
There are many ways to encourage creativity with tax breaks, funding programs and grants, both to academia and businesses. Government agencies also can use funding mechanisms to encourage public-private partnerships that build and run incubators and accelerators of all types focused on diverse areas of research and product development.
Funding is certainly not the only way. Well-fitted regulation needs to be crafted to avoid snuffing out innovation and entrenching permanent incumbents. Policy makers should recognize that regulatory goals can be achieved without the extensive regulatory and licensing regimes that inhibit new entrants and experimentation. Replacing costly and burdensome regulation with fit-for-purpose rules is perhaps more effective than grants, funding and tax breaks. Regulation that focuses on principles and outcomes, rather than detailed prescription and proscription, will allow start-ups to enter the market and provide competition, while still protecting stakeholders. The transparency concepts explained above will contribute to these goals.
Finally, governments should focus on empowering stakeholders, which comes from policies designed for transparency and creativity leavened with strong enforcement rights for both government and platform participants. The key here is enforcement in a timely, efficient manner. Errors need to be quickly corrected, recompense quickly disbursed, and justice quickly dispensed. People become frustrated when they know that a wrong has occurred but that it will not be resolved without a labyrinthine process with uncertain results.
Here is where policy makers and platform operators need to exercise their creative muscles and design corrective mechanisms that work swiftly and accurately. Technology can no doubt help. For example, one of the benefits of second and third generation blockchains is the ability to program smart contracts that transfer value from one party to another upon the occurrence of certain events. The triggering events are notified to the blockchain through trusted oracles to ensure valid transfers.
It will take care and thought to develop “enforcement smart contracts” that balance interests appropriately, but platforms spend much time programming their functionality and features and there is every reason to include these types of smart contracts as part of platform design, especially for well-defined, well-known situations. As part of a pantheon of measures, this type of insurance-like schema can function as one of the enforcement mechanisms that empowers stakeholders.
* * *
Lee A. Schneider is a financial services and technology lawyer with extensive experience in blockchain. Lee co-hosts the Appetite for Disruption podcast with Troy Paredes and is the contributing editor for the Chambers and Partners Fintech Practice Guide. Lee serves as General Counsel for block.one but has written this article in his personal capacity and it reflects only his personal views and not those of Troy, Chambers, or block.one or its directors, officers or employees. This article does not constitute legal, investment or any other type of advice. Lee would like to thank several people who reviewed drafts and gave thoughtful comments.