How Should Governments Regulate Technology in a Post-Pandemic World?

Technology regulation needs a careful balance between protecting consumers and not stifling innovation. Photo: Jonas Leupe
Technology regulation needs a careful balance between protecting consumers and not stifling innovation. Photo: Jonas Leupe

By Abdul Abiad, Sameer Khatiwada

A flexible regulatory regime that can balance consumer protection with an openness to innovations that benefit consumers is key to regulating new technologies. 

Even before the COVID-19 pandemic struck, a combination of technological breakthroughs had been rapidly reshaping the way we lived and worked. We have been in the midst of the “Fourth Industrial Revolution” (4IR) for some time now, characterized by the rapid advancement and confluence of digital, physical, and biological technologies. In addition to the breadth of the changes underway, the pace of the current revolution is also more rapid than in past ones, making it even more difficult for governments to respond. The COVID-19 pandemic has in various ways increased our reliance on technology even further—for doing our work, living our lives, and staying in touch with people.

One of government’s key functions is to protect its citizens, including from the dark side of technology. The potential harmful effects of technological change, and the need to respond to it, has often generated the greatest public discourse. A sampling of articles from just one publication, The Economist, reflects the variety of concerns: “How to Tame the Tech Titans” on potential anti-competitive behavior, “Automation and Anxiety” on job loss and income inequality, and “Defending the Digital Frontier” on cybersecurity and privacy.

Given the prevalence of disruptive technologies—such as artificial intelligence, big data, and blockchain—and their rapid adoption across all spheres of life, it is key for governments to think of innovative ways to regulate technology. These technologies are so new and evolve so quickly that conventional regulatory tools of the past are ill-equipped to respond. There is a need for an approach to regulation that allows regulation itself to evolve and keep pace with new technology.

One pioneering industry where the challenge for regulation in the age of 4IR and new technology is most visible is fintech, an industry which leverages digital platforms and mobile technologies to offer inclusive financial services. According to a recent ADB study on financial innovation in Asia and the Pacific, fintech financing in the region has more than doubled in the last two years. Six of the seven largest fintech companies are from Asia, with most prominent hubs being Singapore, India, and the People’s Republic of China. One of the main drivers of this growth is because the Asia Pacific region remains underserved—there is a large unmet demand for financial services. Governments in the region have been quick to recognize the potential of new technology and have put in place smart policies to drive the fintech revolution.

  Fintech needs a careful balance between consumer protection and freedom to innovate.

The rapid growth of fintech regionally and globally has created innovations in regulation itself. One approach that has developed is the use of “regulatory sandboxes,” which allows firms to introduce new products and services at a small scale in a real-world environment, temporarily exempted from rules designed for old products and services but still under a regulator’s supervision. Regulators can then learn how to handle these new products and services. The Hong Kong Monetary Authority, Indonesian Financial Services Authority, Bank Negra Malaysia, the Bangko Sentral ng Pilipinas, and the Bank of Thailand have all implemented variants of this approach.

Moving beyond fintech, the main challenge with the regulating technology more generally is the same: technologies and processes change very rapidly, whereas regulatory processes and legislation can be very slow. As a result, regulators often attempt to pigeonhole new technologies and platforms into old categories (is Uber a taxi company? Is AirBnB a hotel?). Old regulatory tools, such as price caps used in traditional network industries like utilities, may be of little use in new markets where products and services are provided to consumers “for free.” Issues such as the collection of massive amounts of information on consumers—the real price consumers pay for using the service—and how this information can be used, require completely new regulatory thinking. 

Innovative approaches to regulation such as regulatory sandboxes can be explored in these other domains. But these must also go hand-in-hand with some basic principles of good regulation. The winner-take-all nature of network technologies often leads to dominance of a few firms, raising the potential for anti-competitive behavior (buying up of nascent competitors) or abuse of market power (using data collected from users to cement positions). Government regulation of technology must promote competition and protect consumers, without unduly restricting technological progress. Government must explicitly recognize the costs of regulation, particularly its potential to impede innovation. Many new technologies, after all, aim to improve public welfare, which is also the primary goal of regulators.

In short, as technology develops, regulation will need to play a careful balancing act in protecting consumers and not stifling innovations meant to benefit them. The pandemic may hasten more technology disruptions, which in turn may also usher in regulatory innovations. It is also time for regulators to catch up faster.