2015 Year in Review: Regulating the New Economy

This post is one in a series of reports on significant issues for startups in 2015. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2015, such as immigration and patent reform, remain unfulfilled. Check back for more year-end updates and continue to watch this space in 2016 as we follow policy issues affecting the startup community.

by Anna Duning and Evan Engstrom

The ever-increasing pace of technological development and expanding reach of innovative enterprises into well-regulated industries has put considerable strain on the nation’s policymaking apparatus. As new technologies (such as recreational drones) become more popular and new platforms integrate everyday activities (such as transit) with technology, policymakers are faced with difficulties in crafting forward-thinking policies or adapting existing regimes to new technologies. In 2015, we saw this phenomena play out in a variety of ways all across the country at the municipal, state, and federal levels.

New Devices, New Rules

In 2015, the drone market grew exponentially, with more than 400,000 drones sold. The increasing presence of unmanned aircrafts—and the corresponding rise in reports of rogue drones posing safety hazards to commercial aircrafts and stoking privacy concerns—prompted the Feds to introduce new regulations for recreational drones this year. The Federal Aviation Administration, along with the Transportation Security Administration, ultimately came up with a drone registry for hobbyists, requiring recreational pilots enter their devices into a new national database. Commercial drones from the likes of Google, Amazon, and even Wal-Mart are also expected to take to the skies in the new year. These companies have all been part of a lobbying effort to keep new regulations limited and reasonable.

As the age of widely-available autonomous vehicles nears (Tesla says within two years), state lawmakers are grappling with how to establish the appropriate safety and regulatory standards for what will surely be one of the most disruptive technologies deployed in recent memory. Cybersecurity, accident liability, and basic road rules are all pressing concerns. Several states have already approved the testing of autonomous vehicles with varying degrees of regulations. Most recently, California introduced proposed rules that would require a licensed driver to be present in the vehicle. This requirement could limit some of the more promising uses of these new vehicles (such as transportation for the young or disabled) and even threaten the vehicle’s safety, but the state will take comments before instituting the final standards. We’ll be monitoring closely as state governments continue craft new regulations. These new rules won’t just impact the big manufacturers, as autonomous vehicles could spawn an entirely new sector of startups creating software for these cars.

Blockchain Rising

Though Bitcoin and the blockchain technology that powers it are relatively old developments by tech standards (2009!), cryptographically-secure distributed ledger technologies came to the attention of the mainstream in a big way this year, drawing interest from large financial institutions and regulators alike. While this increased scrutiny may rankle some of Bitcoin’s techno-libertarian old guard, the relatively cautious approach policymakers have taken to regulating the Bitcoin sector is a promising sign for the future growth of cryptocurrencies and blockchain technologies.

As Federal regulators have been content to monitor the development of cryptocurrencies, state policymakers have taken more proactive steps to regulate the sector. New York enacted its BitLicense rules this summer, which obligate financial intermediaries that hold or control virtual currencies on behalf of New York residents to obtain a license and follow certain customer monitoring and reporting requirements. The rules were meant to apply to just those companies that handle funds on behalf of customers and not impact software developers and entrepreneurs that don’t actually control customer money, but since the Bitcoin system looks so radically different from traditional financial systems, the rules necessarily have created some confusion as to how they will apply in practice. Fortunately, New York regulators appear to be cognizant of the need to avoid overregulating this nascent industry and will hopefully work to rectify any overbroad regulatory issues that may arise. As other states begin to consider regulations like New York’s regime (California for one debated a similar Bitcoin license bill this year before it died in the legislature), the need for a more uniform Federal standard will quickly become a priority for the sector. With more and more money pouring into blockchain startups ($500 million in 2015 alone), digital currency regulation will likely become a more pressing issue in 2016 and beyond.

The New Sharing/Gig/On-Demand Economy

No one seems to have agreed upon the best term to describe the collection of technology startups building platforms that connect customers to workers, homeowners, and drivers. Call it the sharing economy, the gig economy, or the on-demand economy; regardless, this new technology is shaking up well-established industries and the regulatory frameworks in which they’ve long operated.

Startups including Uber, Lyft, TaskRabbit, Handy, and Instacart (to name just a few) are restructuring how a wide variety of services are provided, and with that, challenging the existing labor standards that by and large rely on two narrow designations—employee or independent contractor. Many of these companies now face a slew of lawsuits about that classification, including a class action against Uber in California. Just weeks ago, Seattle became the first city in the nation to allow on-demand drivers to unionize. This legislation, too, will likely be contested in courts. The outcomes of these cases could dramatically reshape the 1099 economy and will surely impact the startups who’ve built their companies around existing worker classification rules. We’ll be paying close attention as they’re debated into 2016 and beyond.

Beyond the labor market, many of these startups are providing new (and in many ways, better, faster, and more efficient) services within highly regulated industries. This year, ridesharing companies, came up against major challenges in cities throughout the world. The New York City Council proposed rules this summer that could have put a freeze on all for-hire vehicles. Another requirement—that ride-sharing apps pass government approval before making changes—was also floated, though ultimately struck down. Meanwhile, San Francisco voted on a ballot proposition to limit Airbnb rentals in the company’s home city, a measure that ultimately failed, but cost the company $8 million to fight.

Ultimately, the trend of startups beginning to compete in heavily-regulated sectors of the economy accelerated in 2015 faster than many had predicted, resulting in an all too common struggle to fit the square peg of new innovations into the round hole of existing regulations. Not surprisingly, given the slow pace at which our nation’s regulatory bodies operate, the many policy debates that came to the fore in 2015 are nowhere near resolution. Next year will almost certainly see these policy debates escalate, and it is imperative that the startup community engage in this policymaking to ensure that the incredible potential of new technologies isn’t stifled by ill-fitting regulations.

CISA Resurrected: Bad Policy, Broken Process

News yesterday that a dormant and much maligned cybersecurity bill—the Cyber Information Sharing Act—had not only resurfaced but was on a fast track towards becoming law by virtue of being appended to a large spending bill came as an unfortunate surprise for the tech sector, privacy advocates, and anyone who cares in transparent policymaking. In the last few weeks of 2015, all of Congress’s remaining legislative capacity was directed towards passing the bloated mish-mash of policies known as the “omnibus.” In theory, the omnibus is a “must-pass” spending bill (“must-pass” in the sense that signing it into law is necessary in order to fund the government) that combines a number of different appropriations bills into one, streamlining what could otherwise be a tedious effort to pass spending bills piece-by-piece. But, in what has become a commonplace practice in DC, this year’s omnibus crams in piles of unrelated legislation (more than 2,000 pages in all), effectively ensuring the passage of controversial bills that would likely have faltered if exposed to the normal legislative process, public debate, or a straightforward Presidential veto.

Ultimately, this means that groups and individuals without significant influence or lobbying power often find themselves pushed out of closed-door conversations about what unrelated bills get appended to the omnibus. While this closed process doesn’t always result in terrible legislation (the removal of anti-net neutrality riders to this year’s omnibus being a prime example of good policy emerging from the omnibus mess), when bad legislation does find its way into the omnibus, it’s almost impossible to get it out. It is through just this backwards process that the ill-fated Cyber Information Sharing Act (CISA) found its way into the omnibus and on a seemingly unstoppable course towards a Presidential signature.

CISA essentially creates a framework for companies to collect and share user data with government in a way that may circumvent basic privacy protections. While the bill is supposed to help government and industry cooperate to prevent cyber attacks like the high-profile hacks that targeted Sony, Target, and the federal Office of Personnel Management, critics argue that the bill creates more problems than it solves by jeopardizing user privacy, incentivizing companies to secretly monitor user activity, and allowing the government to obtain consumer data without a warrant. By moving CISA through the omnibus, these critics have been shut out of the recent negotiations. It’s no surprise then that the language that ultimately made it into the omnibus is worse in terms of privacy protections than other iterations of the bill.

For startups, CISA’s inclusion in the omnibus is bad for a few reasons. First, enacting significant legislation via amendment to unrelated must-pass bills limits the voice of small business in government. As this becomes more commonplace, startups who do not have the resources or relationships to participate in closed-door discussions are boxed out. Second, any bill that weakens privacy protections for user data threatens to undermine consumer confidence in Internet services. This, in turn, decreases the market for startups that provide such services. Finally, considering the European Court of Justice recently invalidated a crucial safe harbor by which US companies—startups included—were permitted to import EU consumer data precisely because of US laws that gave government access to user data without any real privacy protections, pushing a bill like CISA only threatens to make things harder for US companies operating overseas.  

As policymakers consider a variety of cybersecurity and privacy issues, it’s crucial that the startups and technologists that understand how key technologies actually work are a part of these conversations. Congress’s decision to move CISA through the omnibus spending bill is a move in the wrong direction for the startup sector’s participation in DC.

Senate Bill Requiring Terrorist Activity Reporting a Flawed Approach

As terrorists increasingly exploit Internet and social media platforms to mobilize followers, disseminate propaganda, and coordinate attacks, working to diminish militants’ capacity to organize through social media is critical. And in the wake of the recent, horrific attacks in Paris and California, a renewed push to improve these efforts is understandable. But the Requiring Reporting of Online Terrorist Activity Act, introduced by Senator Dianne Feinstein earlier this week, is not the answer.

Every day, startups and tech companies voluntarily work with law enforcement to combat terrorist threats. FBI Director James Comey noted in a July Congressional hearing that even absent a legal requirement to do so, Internet and technology companies “are pretty good about telling us what they see.”

Sen. Feinstein’s bill would require tech companies to report “any terrorist activity” they have knowledge of to law enforcement. This obligation seems innocuous on its face, but as often happens, difficulties arise in determining how to actually apply this standard. Crucially, nowhere in the three page bill is “terrorist activity” adequately defined. The legislation is modeled after a law requiring the reporting of child pornography, but unlike child pornography (which is intrinsically unlawful, generally easy to detect, and never constitutionally protected speech), “terrorist activity” is vague and undefined. Under the bill, companies would have to independently determine what “terrorist activity” encompasses—a difficult task for startups without large legal teams or a deep understanding of this complex landscape. Startups are neither qualified nor equipped to comply with these onerous requirements.

Beyond its burdens, the bill’s incentive structure is illogical. Because of the overbroad definition of “terrorist activity,” there will be a strong incentive for companies to over-report poor quality information, lest they miss something for which they will later be held liable. This will create a needle-in-the-haystack conundrum, swamping law enforcement with useless information.

On the flip side, the bill could also discourage some companies from reporting anything at all. The bill’s sponsors emphasize that the bill would not require companies to monitor customers or undertake any additional steps to uncover terrorist activity. But if companies are only required to report activity when they see it, there is an incentive for some to simply turn a blind eye, arguing that if they did not have “actual knowledge” of the activity, they were not obligated to report it.

Simply put, Sen. Feinstein’s bill could potentially do more harm than good. It would chill innovation and create a compliance nightmare for startups. The bill’s flawed approach has already been debated, and an almost identical provision was removed from the Intelligence Authorization Act earlier this year due to similar concerns.

The startup community stands at the ready to partner with the government to combat those who want to harm our nation. But any policy solution should be balanced, well defined in scope, and grounded in evidence that it will truly make Americans safer.

EU Commission Seeks Input on Major Policy Regarding Online Intermediaries

Though the EU’s economy is the largest in the world in terms of GDP, its innovation economy has historically lagged behind the US and other international peers. Investment in EU startups has risen slowly but steadily in the past decade, but, the EU is home to only four of the top 20 cities for startups in Compass’s 2015 rankings. This is not just bad news for the EU economy, but also for US startups looking to expand overseas.

The sluggishness of the EU’s startup sector is due in no small part to the significant regulatory burdens involved in conducting business across member state boundaries. In fact, our research shows that how a country regulates its technology sector has an enormous impact on early stage investment in startups. In a study we published earlier this year, 88% of worldwide investors said they would be uncomfortable investing in digital content intermediaries in countries with an unfavorable or murky regulatory environment.

Fortunately, the EU is already well underway in devising a fix for its complicated regulatory hurdles in the form of the proposed EU “Digital Single Market”—essentially a uniform, trans-Europe market for digital goods and services. As part of its effort, the EU Commission recently issued a consultation asking for information and commentary regarding the value of online platforms and intermediaries in promoting innovation and economic growth. Since the Commission’s Digital Single Market strategy is still somewhat in flux, there is no guarantee that the new regulations it puts in place will work if the Commission doesn’t receive enough feedback explaining how crucial online platforms are in a well-functioning Internet economy, and how dangerous restrictive regulations would be to the viability of the EU’s burgeoning startup sector.

To maximize the potential of the Digital Single Market and foster startup growth throughout Europe, the EU Commission should ensure that its Digital Single Market strategy focuses on policies that support online platforms and intermediaries. Online platforms are critical to a healthy Internet economy by virtue of the core services they provide in connecting Internet users and facilitating the flow of information, but as the US tech sector shows, their real economic value lies in their ability to support interoperable startups that use larger intermediaries to build and promote their services. The Google Play and Apple App stores feature more than 1.8 and 1.5 million apps, respectively—a great many of which were created by the startups responsible for virtually all new net job growth. The economic value of this market is significant; by 2017, worldwide mobile app revenue alone is projected to exceed $77 billion. Assuming the EU doesn’t hamper the growth of this market by crafting regulations that impose undue costs and restrictions on online platforms, Europe stands to gain a significant portion of the app economy’s growth. Projections estimate that employment from the app market in Europe will increase from 1.8 million in 2013 to more than 4.8 million in 2018.

Of course, the app market represents just a small fraction of the value that online intermediaries provide in spurring startup activity. Social media platforms and search tools allow startups to easily and cheaply connect with customers and online payment platforms help lower startup costs by outsourcing payment systems; together, these intermediaries give entrepreneurs the ability to reach customers and turn their ideas into business realities. Online platforms are the hubs off of which countless startups have built their businesses, and the low cost of operating a business in this symbiotic, open model of innovation allows new entrepreneurs to build ventures with few resources. In this sense, allowing online platforms to operate effectively across the EU is critical to growing the EU’s startup ecosystem, not to mention to US companies looking to expand into international markets. As the EU collects information regarding the role online intermediaries play in Europe’s startup market, it’s important that the Commission hear from entrepreneurs and innovators on the ground who can speak to the value freely operating intermediaries provide to fledgling enterprises. The consultation closes December 30; interested parties can fill out the EU’s survey here.

UPDATE: The EU Commission is holding an event this Thursday in San Francisco at the Consulate General of the Netherlands (120 Kearny St.) with key stakeholders to discuss the implications of its online platform regulation strategy. This is an incredible opportunity to help shape the future of EU tech policy, so sign up while there’s still space.