The Amsterdam Law & Technology Institute’s team is inviting external faculty members to publish guest articles in the ALTI Forum. Here is the latest contribution authored by Ross P. Buckley (University of New South Wales).
There is an interesting conundrum at the heart of the regulation of the impacts of technology. The creators of the technology that is revolutionising how we each live our lives think BIG, with few limits, and the impact of their technology is so fundamental as to be changing us as human beings. For example, I sub-contract much of my memory to the Calendar and Notes functions on my phone; and comfort myself with the thought that this, not ageing, is the reason for the decline in my short-term memory. A smartphone, by design, is one of the most distracting, concentration-damaging devices in history. I look at my phone to send an email, see the Whatsapp and text messages, respond to them, and put down the phone having not sent the email.
In my lifetime, the speed of professional life has been multiplied by perhaps a full order of magnitude by emails and smartphones. I began my career as a lawyer pre-email. Work arrived mostly by courier and traditional mail. One became aware of what the new challenges of the day would be after one arrived at work and checked the mail and voice messages – what bliss! A lawyer sent off their advice secure in the knowledge that it would take a day or two to reach the client, whose response, in the usual course, would take another few days. This speed of interaction set expectations. Faster progress by phone was of course possible, but there was no expectation one would always be at one’s phone. The world was literally a much slower place which was certainly better for everyone’s stress levels and, I would argue, their mental health. Indeed, the impact of social media on the mental health of all who use it, and especially upon young women, is well documented and bordering on the catastrophic.
Furthermore, the individual curation of news feeds has polarised our societies. Twenty years ago we all read much the same news and began each day with a largely agreed set of facts. Individual curation of information flows through social media is literally undermining the capacity for civil discourse and threatening the stability and very existence of democracies. All of these issues have been well analysed. I mention them to demonstrate the impact of the technological revolution. And how do those charged with regulating the impacts of this technological revolution respond? Is it with similar boldness and ambition?
No. Regulators and legislators typically think SMALL and incrementally when striving to deal with these new developments. Regulators invariably seek to force these new developments into established regulatory categories. There is good reason to do this. It ensures continuity in the law. It enables a relatively swift response to major changes in industry. It may be do-able by regulators and courts without legislative action. It is a step-by-step response to a phenomenon the full dimensions of which most of the people who work in regulators and courts know they do not fully understand. My son understands much more about technology than me. Indeed, my attempts to do so provide endless hilarity for him. Yet of course one rarely finds find 21-year-olds in regulatory agencies and one never finds them on court benches.
So, in 2017 and 2018 when an abundance of Initial Coin Offerings (ICOs) issued tokens the ICO-promoters considered beyond the purview of financial regulation, some regulators responded by classififying tokens as one of investment tokens, currency tokens or usage tokens. Investment tokens typically attracted regulation as securities or collective investment schemes. Currency tokens sometimes attracted regulation as currency. Usage tokens, properly so conceived as the right to use a service or a piece of software often yet to be developed, were beyond the perimeter of financial regulation. This was an expedient response to an immediate challenge. In time it served to curb the worst excesses of token offerings in 2017 and 2018 – profoundly inadequate disclosure often extending to outright fraud. However, since then the regulatory approach hasn’t evolved much. This too is understandable, regulators worldwide are typically under-funded and for this and other reasons often lack access to the calibre of human capital required to deal with such seminal change.
However, while ICOs in many places have mostly morphed into STOs (securities token offerings) which are content to be subject to the securities laws, tokenisation has continued apace. Our future is one in which the rights to assets will increasingly be tokenised, with all the efficiencies around record-keeping and transfers that this typically brings. And here lies the interesting conundrum at the heart of the regulation of the impacts of technology.
For while industry innovators think big, regulators and legislators tend to think small and incrementally, which is deeply problematic for this technological revolution challenges financial regulation and consumer protection in utterly unprecedented, foundational ways. An experience from early in my academic career is highly instructive here. Back in the day, Australia had a personal property security regime that was, basically, a mess. One could secure credit over personal property by way of a bill of sale, lease, fixed or floating charge, hire-purchase agreement, chattel mortgage, pledge, retention of title arrangement or other means. Each took a different form. Each attracted different priority rules. The legal regime we’d inherited from Britain gave primacy to the legal form of the security instrument, and many disparate consequences flowed from the form chosen. Yet all of these arrangements were security interests in personal property. Widely divergent legal arrangements produced the same commercial outcome – moneys were secured over personal property.
The Americans in the 1940s in their magisterial Uniform Commercial Code had solved the problem and it only took Australia half a century or so to fully appreciate, and embrace, the elegance of their solution. For the American Law Institute, the National Conference of Commissioners on Uniform State Laws, and the many other expert lawyers in the US who participated in creating Article 9 of the UCC, that deals with personal property securities, the solution to the mess of legal structures and consequences they had inherited was not to look to the form of the arrangements but to their function. The solution was to disregard the legal form, treat all functional security interests equally, and provide for the registration of all security interests by way of a simple one-page form with, subject to various policy-based exceptions, priority to date from the time of registration of the interest. When Australia eventually adopted this approach, over 70 different State and Federal laws (administered by around 30 government agencies) were replaced with one statute and one on-line, real time register for the vast majority of security interests affecting personal property. America achieved this most elegant and efficient solution by assembling a group of genuine experts and giving them the freedom, and the brief, to start from scratch with a blank sheet of paper and devise a legal regime freed from the dictates of history.
We need to do the same today with respect to regulating the impacts of the technological revolution. The process will not be swift, such processes never are. But the best time to begin is now. The global regulatory community is working diligently on regulatory reforms through initiatives such as GFIN, the Global Financial Innovation Network. However, what I am calling for is something more radical than I, at least, am yet to see happening – which is to assemble genuine experts and give them one of the greatest gifts one can perhaps give to seriously talented people – the freedom to think utterly afresh and start from scratch.
The Markets in Crypto-assets Regulation (MICA) in the EU is a case in point. It competently fills in the gaps in existing financial regulation by clearly articulating the regulatory treatment of crypto-assets not covered by existing EU financial services legislation. This sensible incremental approach adds considerably to regulatory complexity. Indeed, most people seeking to navigate the MICA regime for the first time will probably consider it an example of regulatory opacity.
The alternative is to accept the use of crypto-assets and tokens will continue to grow rapidly, free our minds, and dare to imagine new, simple ways to regulate them. Trying to apply existing law to the regulation of crypto markets will either, most likely, regulate them out of existence or leave consumers investing in them without proper protection. If the crypto-asset qualifies as a security, a very heavy regulatory burden attaches to it which will often make it utterly uneconomic. If the crypto-asset is not a security, in some jurisdictions, consumers will quite unwittingly be in an unregulated world of pump and dump schemes, front running, and all forms of market manipulation. The impact of such activities is often magnified as many market participants are young, and their crypto investments are often their first substantive exposure to any financial market.
Crypto tokens can fulfill functions that are transformative, useful and beneficial or be highly exploitative. Tokenisation is coming in a wave that will be an unstoppable. President Biden’s Executive Order No 14067, issued on March 9 this year, acknowledges this, and charges the US regulatory community with devising appropriate responses. The incremental, relatively modest responses we have seen so far to this challenge in many jurisdictions around the world have been both understandable and necessary as interim measures. However, now is the time to begin a fundamental rethinking of how we approach the regulation of tokens — time to start brainstorming in groups, and conceiving of entirely new approaches.
It may be that this work is best done in one of the profession, the regulators or the academy. Probably, as with the example of the UCC in America, it will be best done by groups of experts drawn from all three constituencies and from a range of countries. This exercise needs to be guided by the conviction that the technologies transforming our lives are tremendously powerful for both good and ill, and that seeking to adapt old laws and regulatory schemas to them will almost certainly fail to realise their potential upsides and adequately mitigate their downsides.
Ross P. Buckley
Citation: Ross P. Buckley,Time to Think Big on Regulating the Impacts of the Technological Revolution, ALTI Forum, May 16, 2022.
Invited by Thibault Schrepel