This article is the first part of a series at the Tony Blair Institute for Global Change looking at the future of regulation. This article looks at the potential for innovation in rulemaking in the web3 era.
Rethinking our Rulemaking Process
In 2014, then Chief Economist of the Bank of England, Andy Haldane, laid out his idea for the future of global financial surveillance in a speech at Birmingham University, saying “I have a dream. It is futuristic, but realistic. It involves a Star Trek chair and a bank of monitors. It would involve tracking the global flow of funds in close to real time…, in much the same way as happens with global weather systems and global internet traffic.”
Haldane’s dream to enable real-time monitoring of the financial system was driven by frustration after one of the worst financial crashes ever.
In the aftermath of the 2008 recession, finance became one of the most heavily regulated industries, via the Dodd-Frank Act in the United States and other new regulatory structures imposed in countries round the world. This increase in regulation came at a cost.
Compliance costs for banks increased by more than 60 percent compared to pre-crisis figures. In Australia, for example, the combined annual cost of administering and complying with public and private sector bureaucracy stood at over $250 billion by 2014. Yet actual compliance fell, and banks globally raked up $36 billion in non-compliance fines from the end of the crisis to 2019.
Clearly, the process of rulemaking needs an overhaul. A situation in which regulation is both expensive and ineffective is not sustainable. In many key areas of our new economy and society, understanding what regulations are applicable, as well as interpreting and applying them requires expert help and a reliance on decades-old principles and a patchwork of guidance. Innovation is inherent in the digital economy, but not in regulation.
It is time for a big step forward, and not just in finance. Compliance gaps and regulatory inefficiencies pervade sectors ranging from pharmacy to energy. Mr Haldane may get his sci-fi chair yet, through a new era of tech-enabled rulemaking.
Bringing the Digital Revolution to Regulation
Fields like Regulatory Technology (RegTech), LawTech, and Computational Law are increasingly tackling this very issue. These areas of study adopt technology to process complex frameworks. Technology can be a tool to close the gap between regulatory intent and realised outcomes.
Imagine a world where firms can find out the biggest source of non-compliance that’s costing them time and money with a single click. Once you plug that gap, you can use the savings to think about expanding to a new market – and use technology to see which markets you’re already in compliance with. Perhaps you can model different horizon risk scenarios instead and see how your regulatory outlay changes if you add a new product to your portfolio.
Or imagine if regulators could use this tech-driven analysis to prioritise their scant resources – allocate more audit and oversight resources to the biggest offenders or run cost-benefit analyses to determine the best course of action. Technology can help streamline knowledge-gathering by providing transparency to how rules impact our lives.
Our rules and laws often remain unencoded and unable to parse through digital technology. Making regulations machine-readable has the potential to enhance international trade by breaking down barriers and identifying synergies. It provides national consumer protection authorities the opportunity to proactively identify and neutralise threats to users when transacting with cross-border services.
Our open internet model is borderless, yet our structures and rules have been designed for a world with clear and definitive borders in mind. For example, between the General Data Protection Regulation in Europe, the Personal Information Protection Law in China and individual state schemes in the US, the compliance landscape for personal data privacy is increasingly complex and varied, despite apps like Instagram functioning largely the same across markets.
Digitised regulations could offer a way for firms to assess where they are already in compliance and where they risk falling short, thus shortening time-to-market, and expanding geographic areas of operation. If we do this, and if we do this right, digitised regulations will form the foundation for our new digital society as we navigate domains such as web3 and the metaverse.
Progress Towards the Future of Regulation
There are several glimmers of light for tech-optimists:
RegTech firms such as Ascent are addressing compliance needs by streamlining the compliance discovery process using deep learning models. This can help make rules and regulations more explicit and codified, reducing the chance for errors in interpretation.
The Regulatory Genome Project is developing an open standard framework for classifying regulatory content to build a shared understanding between regulators in different financial markets. This has the potential to improve ease of doing business and enable international trade. It can also help regulators quantify and understand not just their own regulatory efficacy, but that of other markets too, as more regions adopt machine-readable regulations.
DataLex is creating a rule-based legal reasoning general platform to support rules as code and to allow less technical teams to develop applications on top of it. Increasing the accessibility of regulations through comprehensive databases also helps firms and people understand their compliance needs at an early stage, reducing the risks of non-compliance.
Governments are also throwing their hats in the ring. France set up Etalab to create an open data platform of public information and institutions. Singapore, responding to challenges that COVID-19 presented to the finance industry, committed $42 million to enable the uptake of digital solutions to risk management, cybersecurity, and compliance. The U.S. made a federal push to digitise the full Code of Federal Regulations.
Applying technology to rulemaking has the potential to break the historic trade-off between regulatory effectiveness and administrative burden. It reallocates resources from reinventing the wheel and replicating effort toward advancing regulatory goals.
Most importantly, it allows us to reclaim the best parts of living in a globalised world by breaking down invisible and unnecessary market barriers. However, this opportunity is not going to be realised overnight. Creating a regulatory regime for the future that is tech-forward and sector-agnostic is a huge undertaking that will involve pilot schemes, more research and development, and a new framework of thinking.
At the Tony Blair Institute for Global Change, we are looking toward the future to understand how to apply technology to leapfrog regulations into the 21st century. The regulatory system of our future requires steady investment, innovative thinking, and public-private collaboration over the long-term. Our upcoming work will explore what this could all look like, and the concrete steps that we can take to get there.