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4 ways regulators must keep up with the digital economy around the world

4 ways regulators must keep up with the digital economy around the world

Since the Industrial Revolution, governments have struggled with how to manage new and fast developing businesses while also protecting against possible threats. Governments in the 18th and 19th centuries had to promote the growth of totally new industries while also dealing with issues like child labor, sanitation, and air quality.

As a result of the industries’ tremendous economic and social effects, these issues needed to be addressed. The government had apparent advantages in supporting their development, but there were also significant risks in letting the market dictate terms.

Governments today must walk a similar line when it comes to governing the global digital economy generated by the Fourth Industrial Revolution. The public sector must make it possible for businesses to create innovative new digital products and services while also ensuring that regulatory safeguards against potential damages are in place and that clear parameters are in place within which businesses may operate securely.

The distinction is that, in the new digital economy, public-sector institutions built in the twentieth century and focused around regulating particular industries must be upgraded to keep up with giant corporations increasingly spanning numerous sectors. Take, for example, financial services:

Shopping and paying for things on social media are both retail and financial services activities that are regulated by a variety of organizations. As a result, new regulations are being implemented, overseen by various authorities, to cover new sectors, resulting in a patchwork of regulators both locally and internationally.

Even new cross-sector regulations frequently need to be broadened to meet the entire scope of fast developing digital activities fairly. For example, in Europe, the GDPR, a policy aimed at protecting consumers’ personal data, can make it difficult for start-ups and scale-ups to gain access to the massive volumes of consumer data owned by giant corporations. 

Larger companies, on the other hand, can frequently share data across their own platforms. This results in new competition problems that are governed by a distinct set of institutions. So, what are the options? Governments must rethink how they control the world’s quickly increasing digital economy in order to be effective, taking into account four new, concurrent digital issues.

1. Scope

Over the last century, regulators have identified market difficulties that have lent themselves to forming agencies or regulatory bodies that dealt with that particular industry, such as energy or telecommunications. Alternatively, they concentrated on a particular issue, such as how to cope with monopolistic power.

The biggest corporations in the digital economy, on the other hand, span everything from consumer goods and retail to telecommunications and energy. Regulatory authorities must also be refocused on concerns and markets that are more broadly defined.

The Competition and Markets Authority (CMA) and the Information Commissioner’s Office (ICO) of the United Kingdom, for example, are cross-sectoral competition and data protection bodies that set rules across the whole economy. The CMA has begun to redefine markets and market power in a recent study of digital markets.

The Federal Trade Commission in the United States regards data protection as part of its broader obligation to safeguard customers, and has examined automated decision-making before. Its new chair, a well-known player in antitrust circles, may take a more holistic approach to data security and competition.

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2. Scale

Regulators must also find a means to keep up with huge technological businesses’ extraordinary financial muscle, which allows them to outflank them on multiple fronts. The annual budgets of some of the world’s top corporations exceed the GDP of most countries.

The operations of significant digital actors are vital to the running of national digital economies, as digital services are integral to everything from how we shop to how we travel around to how our financial services are conducted. As a result, several policymakers are exploring regulating frameworks that include criteria for operational resilience.

Furthermore, many digital services are now available beyond national borders. As a result, in the absence of agreements among a broader variety of nations and governments, regulation in one domain may not provide a complete answer. Supranational bodies play a significant role in creating standards for national regulation and providing advice on global challenges such as cross-border data sharing in this area.

The Financial Stability Board, which monitors financial markets, organizes financial authorities, and sets international standards, is an example of international regulation in the financial services sector. Digital markets’ huge, global, cross-sectoral scale will bring new difficulties and make international cooperation impossible. However, this is no reason to avoid it in the short term, given that it may need to take the shape of regional, rather than global, cooperation of like-minded nations.

3. Digital products

Regulating digital data in comparison to other commodities also has to be rethought. Physical products offered on a digital platform are implicitly assumed to be covered by present regulatory systems. However, because no country currently has an explicit cross-sectoral consumer protection organization, consumers are vulnerable to the digital exploitation of rules that apply to products and services that fall between sectors. For example, consumers may mistakenly believe that food offered by online sellers meets national safety regulations.

Another is that an unregulated credit “Buy now, pay later” offer, similar to a charge card or bank overdraft, can feel like a loan to a consumer. While it may appear to a client to be the same, the protections provided are not. Even though businesses are governed by the same rules, the reality of day-to-day monitoring is that digital activities are not always evaluated in the same way and hence are not subject to the same level of oversight.

4. Digital behavior

Finally, policies that handle new forms of digital behavior must be developed. One of the most important lessons learned from previous regulatory reforms is that people don’t always respond the way authorities expect. When the UK government, for example, began to dramatically open up the electricity and gas markets, it was assumed that free markets would lead to people shopping around for better deals and switching suppliers.

Standard economic assumptions about how consumers attempt to optimize their own self-interest underpin these assumptions. However, the vast majority of individuals continued to use the existing supplier.

Even if consumers are not always aware of how their data is being used and its value extracted, digital regulatory approaches must be built around a more sophisticated understanding of what people are actually doing with new digital products and services, rather than how we might expect them to behave.

5. A sustainable digital economy

Technological innovations are becoming more and more integrated in our daily lives, resulting in enormous new opportunities as well as exponentially expanding digital risks. Governments will need to adopt a more modern, holistic regulatory framework to truly safeguard consumers while embracing technological progress.

As a starting point, policymakers can create regulatory colleges and cooperative forums to help provide solutions to some of the cross-sectoral difficulties that the new digital economy is presenting. This is beginning to happen, as evidenced by the Digital Regulation Cooperation Forum in the United Kingdom, which aims to identify where collaboration is needed and address it head-on.

But, in the digital economy, what’s really needed is a new, capable supervisory architecture. Such a digital economy regulatory framework should bring together and holistically manage newly arising cross-sectoral challenges in terms of breadth, scale, goods, and behavior.