If government regulators feel overwhelmed these days, you can hardly blame them. Advances such as artificial intelligence (AI), machine learning, big data analytics, distributed ledger technology, and the Internet of Things (IoT) are forcing regulators to re-examine the very foundations of their work. New technologies keep emerging and evolving, disrupting all manner of traditional business models. The speed and scale of this transformation pose dizzying challenges for regulatory agencies that strive to foster creativity while also protecting consumers and addressing the potential unintended consequences of disruption.
No longer can regulators craft rules slowly and deliberately, and then expect to keep the results in place, unchanged, for decades. New business models and services, such as ridesharing and initial coin offerings, challenge governments to create or modify regulations, enforce them, and communicate them to the public at a previously undreamed-of pace. And agencies must accomplish all that while working within legacy frameworks and trying to promote innovation.
As regulators wrestle with these new regulatory challenges, four foundational questions are critical to address:
1. What’s the current state of regulation? Before writing new rules, regulators should conduct a thorough review of pertinent existing regulations, looking for those that are applicable, those that might be blocking innovation, are outdated, or are duplicative.
Looking at the current state of regulations means the whole ecosystem of regulation that could apply: from vertical service or sector regulation (for example, for motor vehicles), to convergent regulation where multiple sectors are involved (e.g. telecommunications and transportation for self-driving cars), to lateral regulation such as employment or business licensing.
Often, such a review hasn’t been done in many years. A Deloitte analysis of the 2017 U.S. Code of Federal Regulations found that 68 percent of federal regulations have never been updated.
A retrospective review forces regulators to evaluate whether alternatives to regulation or adjustments to current rules could adequately address the perceived problem. In Denmark, for instance, Paolo Perotti, of the Ministry of Environment and Food, said officials there have used this process to cut the number of regulations in its portfolio by one-third.
2. What’s the right time to regulate? Regulators want to avoid the too slow or too fast problem, meaning regulating too quickly before the technologies and business models have matured. Or too slowly, which can create market uncertainty or potential harm to consumers. Some new regulatory strategies are starting to emerge that take an iterative, adaptive approach and encourage experimentation with new technologies. Regulatory sandboxes, for example, allow regulatory agencies to partner with private companies and entrepreneurs to experiment with relaxing requirements on new technologies in environments that foster innovation.
3. What’s the right regulatory approach? The spectrum of potential approaches ranges from heavy, precautionary regulation at one end, to little or no regulation on the other. For instance, when regulating unmanned aerial systems, or drones, some governments have opted for broad permissiveness, while others allow usage only within specified limits.
When answering the “what is the right approach” question, an important consideration is what regulation scholar Adam Thierer calls “global innovation arbitrage”: “Capital moves like quicksilver around the globe today as investors and entrepreneurs look for more hospitable tax and regulatory environments,” explains Thierer. “The same is increasingly true for innovation. Innovators can, and increasingly will, move to those countries and continents that provide a legal and regulatory environment more hospitable to entrepreneurial activity.” We’ve already seen this scenario play out with genetic testing, unmanned aerial systems, autonomous vehicles, and the sharing economy.
4. What has changed since regulations were first enacted? Considering the speed at which emerging technologies and business models evolve, it’s a good bet that to stay relevant, regulations applied today will need a second look in the next decade or so. There are many ways to institutionalize such automatic reviews. These range from regulatory sunsetting with periodic review to processes like the European Union’s Regulatory Fitness and Performance program, which conducts retrospective evaluations to look for laws that are obsolete or in need of revision.
As regulators move forward in their work, they should consider five basic principles to help them answer the “when to regulate” and “how to regulate” questions, and to set a foundation for rethinking regulation in an era of rapid technological change. These principles are: adaptive regulation, regulatory sandboxes, outcome-based regulation, risk-weighted regulation, and collaborative regulation. For a full discussion, see our recently published paper, “The Future of Regulation: Principles for regulating emerging technologies.”
William D. Eggers is the Executive Director of the Deloitte Center for Government Insights.