In his Policy & Internet article “Platform Logic: An Interdisciplinary Approach to the Platform-based Economy“, Jonas Andersson Schwarz argues that digital platforms enact a twofold logic of micro-level technocentric control and macro-level geopolitical domination, while supporting a range of generative outcomes between the two levels. Technology isn’t ‘neutral’, and what designers want may clash with what users want: so it’s important that we take a multi-perspective view of the role of digital platforms in contemporary society. For example, if we only consider the technical, we’ll notice modularity, compatibility, compliance, flexibility, mutual subsistence, and cross-subsidization. By contrast, if we consider ownership and organizational control, we’ll observe issues of consolidation, privatization, enclosure, financialization and protectionism.

When focusing on local interactions (e.g. with users), the digital nature of platforms is seen to strongly determine structure; essentially representing an absolute or totalitarian form of control. When we focus on geopolitical power arrangements in the “platform society”, patterns can be observed that are worryingly suggestive of market dominance, colonization, and consolidation. Concerns have been expressed that these (overwhelmingly US-biased) platform giants are not only enacting hegemony, but are on a road to “usurpation through tech — a worry that these companies could grow so large and become so deeply entrenched in world economies that they could effectively make their own laws”.

We caught up with Jonas to discuss his findings:

Ed.: You say that there are lots of different ways of considering “platforms”: what (briefly) are some of these different approaches, and why should they be linked up a bit? Certainly the conference your paper was presented at (“IPP2016: The Platform Society”) seemed to have struck an incredibly rich seam in this topic, and I think showed the value of approaching an issue like digital platforms from multiple disciplinary angles.

Jonas: In my article I’ve chosen to exclusively theorize *digital* platforms, which of course narrows down the meaning of the concept, to begin with. There are different interpretations as for what actually constitutes a digital platform. There has to be an element of proprietary control over the surface on which interaction takes place, for example. While being ubiquitous digital tools, free software and open protocols need not necessarily be considered as platforms, while proprietary operating systems should.

Within contemporary media studies there is considerable divergence as to whether one should define so-called over-the-top streaming services as platforms or not. Netflix, for example: In a strict technical sense, it’s not a platform for self-publishing and sharing in the way that YouTube is—but, in an economic sense, Netflix definitely enacts a multi-sided market, which is one of the key components of a what a platform does, economically speaking. Since platforms crystallize economic relationships into material infrastructure, conceptual conflation of this kind is unavoidable—different scholars tend to put different emphasis on different things.

Hence, when it comes to normative concerns, there are numerous approaches, ranging from largely apolitical computer science and design management studies, brandishing a largely optimistic view where blithe conceptions of innovation and generativity are emphasized, to critical approaches in political economy, where things like market dominance and consolidation are emphasized.

In my article, I try to relate to both of these schools of thought, by noting that they each are normative — albeit in vastly different ways — and by noting that not only do they each have somewhat different focus, they actually bring different research objects to the table: Usually, “efficacy” in purely technical interaction design is something altogether different than “efficacy” in matters of societal power relations, for example. While both notions can be said to be true, their respective validity might differ, depending on which matter of concern we are dealing with in each respective inquiry.

Ed.: You note in your article that platforms have a “twofold logic of micro-level technocentric control and macro-level geopolitical domination” .. which sounds quite a lot like what government does. Do you think “platform as government” is a useful way to think about this, i.e. are there any analogies?

Jonas: Sure, especially if we understand how platforms enact governance in really quite rigid forms. Platforms literally transform market relations into infrastructure. Compared to informal or spontaneous social structures, where there’s a lot of elasticity and ambiguity — put simply, giving-and-taking — automated digital infrastructure operates by unambiguous implementations of computer code. As Lawrence Lessig and others have argued, the perhaps most dangerous aspect of this is when digital infrastructures implement highly centralized modes of governance, often literally only having one point of command-and-control. The platform owner flicks a switch, and then certain listings and settings are allowed or disallowed, and so on…

This should worry any liberal, since it is a mode of governance that is totalitarian by nature; it runs counter to any democratic, liberal notion of spontaneous, emergent civic action. Funnily, a lot of Silicon Valley ideology appears to be indebted to theorists like Friedrich von Hayek, who observed a calculative rationality emerging out of heterogeneous, spontaneous market activity — but at the same time, Hayek’s call to arms was in itself a reaction to central planning of the very kind that I think digital platforms, when designed in too rigid a way, risk erecting.

Ed.: Is there a sense (in hindsight) that these platforms are basically the logical outcome of the ruthless pursuit of market efficiency, i.e. enabled by digital technologies? But is there also a danger that they could lock out equitable development and innovation if they become too powerful (e.g. leading to worries about market concentration and anti-trust issues)? At one point you ask: “Why is society collectively acquiescing to this development?” .. why do you think that is?

Jonas: The governance aspect above rests on a kind of managerialist fantasy of perfect calculative rationality that is conferred upon the platform as an allegedly neutral agent or intermediary; scholars like Frank Pasquale have begun to unravel some of the rather dodgy ideology underpinning this informational idealism, or “dataism,” as José van Dijck calls it. However, it’s important to note how much of this risk for overly rigid structures comes down to sheer design implementation; I truly believe there is scope for more democratically adaptive, benign platforms, but that can only be achieved either through real incentives at the design stage (e.g. Wikipedia, and the ways in which its core business idea involves quality control by design), or through ex-post regulation, forcing platform owners to consider certain societally desirable consequences.

Ed.: A lot of this discussion seems to be based on control. Is there a general theory of “control” — i.e. are these companies creating systems of user management and control that follow similar conceptual / theoretical lines, or just doing “what seems right” to them in their own particular contexts?

Jonas: Down the stack, there is always a binary logic of control at play in any digital infrastructure. Still, on a higher level in the stack, as more complexity is added, we should expect to see more non-linear, adaptive functionality that can handle complexity and context. And where computational logic falls short, we should demand tolerable degrees of human moderation, more than there is now, to be sure. Regulators are going this way when it comes to things like Facebook and hate speech, and I think there is considerable consumer demand for it, as when disputes arise on Airbnb and similar markets.

Ed.: What do you think are the main worries with the way things are going with these mega-platforms, i.e. the things that policy-makers should hopefully be concentrating on, and looking out for?

Jonas: Policymakers are beginning to realize the unexpected synergies that big data gives rise to. As The Economist recently pointed out, once you control portable smartphones, you’ll have instant geopositioning data on a massive scale — you’ll want to own and control map services because you’ll then also have data on car traffic in real time, which means you’d be likely to have the transportation market cornered, self driving cars especially… If one takes an agnostic, heterodox view on companies like Alphabet, some of their far-flung projects actually begin to make sense, if synergy is taken into consideration. For automated systems, the more detailed the data becomes, the better the system will perform; vast pools of data get to act as protective moats.

One solution that The Economist suggests, and that has been championed for years by internet veteran Doc Searls, is to press for vastly increased transparency in terms of user data, so that individuals can improve their own sovereignty, control their relationships with platform companies, and thereby collectively demand that the companies in question disclose the value of this data — which would, by extent, improve signalling of the actual value of the company itself. If today’s platform companies are reluctant to do this, is that because it would perhaps reveal some of them to be less valuable than what they are held out to be?

Another potentially useful, proactive measure, that I describe in my article, is the establishment of vital competitors or supplements to the services that so many of us have gotten used to being provided for by platform giants. Instead of Facebook monopolizing identity management online, which sadly seems to have become the norm in some countries, look to the Scandinavian example of BankID, which is a platform service run by a regional bank consortium, offering a much safer and more nationally controllable identity management solution.

Alternative platform services like these could be built by private companies as well as state-funded ones; alongside privately owned consortia of this kind, it would be interesting to see innovation within the public service remit, exploring how that concept could be re-thought in an era of platform capitalism.

Read the full article: Jonas Andersson Schwarz (2017) Platform Logic: An Interdisciplinary Approach to the Platform-based Economy. Policy & Internet DOI: 10.1002/poi3.159.

Jonas Andersson Schwarz was talking to blog editor David Sutcliffe.

The growth of online gig work — paid work allocated and delivered by way of internet platforms without a contract for long-term employment — has been welcomed by economic development experts, and the world’s largest global development network is promoting its potential to aid human development. There are hopes that online gig work, and the platforms that support it, might catalyse new, sustainable employment opportunities by addressing a mismatch in the supply and demand of labour globally.

Some of the world’s largest gig work platforms have also framed their business models as a revolution in labour markets, suggesting that they can help lift people out of poverty. Similarly, many policymakers expect that regions like Sub-Saharan Africa and Southeast Asia can capitalise on this digitally mediated work opportunity as youth-to-adult unemployment rates hit historic peaks. More broadly, it has been suggested that online gig work will have structural benefits on the global economy, such as raising labour force participation and improving productivity.

Against this background, a new report by Mark Graham, Vili Lehdonvirta, Alex Wood, Helena Barnard, Isis Hjorth, and David Peter Simon, “The Risks and Rewards of Online Gig Work At The Global Margins” [PDF] highlights the risks alongside the rewards of online gig work. It draws on interviews and surveys, together with transaction data from one of the world’s largest online gig work platforms, to reveal the complex and sometimes problematic reality of this “new world of work”.

While there are significant rewards to online gig work, there are also significant risks. Discrimination, low pay rates, overwork, and insecurity all need to be tackled head-on. The report encourages online gig work platforms to further develop their service, policymakers to revisit regulation, and labour activists to examine organising tactics if online gig work is to truly live up to its potential for human development, and become a sustainable situation for many more workers.

The final section of the report poses questions for all stakeholders regarding how to improve the conditions and livelihoods of online gig workers, particularly given how these platforms have become disembedded from the norms and laws that normally regulate labour intermediaries. Specific questions that are discussed include:

• Is it necessary to list nationality on profile pages? Will online gig workers receive formal employment contracts in the future?
• What formal channels could exist for workers to voice their issues? Where should governments regulate online gig work in the future?
• Will governments need to limit online gig work monopolies? And how will governments support alternative forms of platform organisation?
• What online forms of voice could emerge for workers, and in what ways can existing groups be leveraged to promote solidarity?
• To what extent will companies be held accountable for poor working conditions? Do platforms need a Fairwork certification program?

The report also offers suggestions alongside the questions, drawing on relevant literature and referencing historical precedents.

Read the full report: Graham, M., Lehdonvirta, V., Wood, A., Barnard, H., Hjorth, I., Simon, D. P. (2017) The Risks and Rewards of Online Gig Work At The Global Margins [PDF]. Oxford: Oxford Internet Institute.

Read the article: Graham, M., Hjorth, I. and Lehdonvirta, V. (2017) Digital Labour and Development: Impacts of Global Digital Labour Platforms and the Gig Economy on Worker Livelihoods. Transfer. DOI: 10.1177/1024258916687250

The report is an output of the project “Microwork and Virtual Production Networks in Sub-Saharan Africa and Southeast Asia”, funded by the International Development Research Centre (IDRC), grant number: 107384-001.

As David Harvey famously noted, workers are unavoidably place-based because “labor-power has to go home every night.” But the widespread use of the Internet has changed much of that. The confluence of rapidly spreading digital connectivity, skilled but under-employed workers, the existence of international markets for labour, and the ongoing search for new outsourcing destinations, has resulted in organisational, technological, and spatial fixes for virtual production networks of services and money. Clients, bosses, workers, and users of the end-products of work can all now be located in different corners of the planet.

A new article by Mark Graham, Isis Hjorth and Vili Lehdonvirta, “Digital labour and development: impacts of global digital labour platforms and the gig economy on worker livelihoods”, published in Transfer, discusses the implications of the spatial unfixing of work for workers in some of the world’s economic margins, and reflects on some of the key benefits and costs associated with these new digital regimes of work. Drawing on a multi-year study with digital workers in Sub-Saharan Africa and South-east Asia, it highlights four key concerns for workers: bargaining power, economic inclusion, intermediated value chains, and upgrading.

As ever more policy-makers, governments and organisations turn to the gig economy and digital labour as an economic development strategy to bring jobs to places that need them, it is important to understand how this might influence the livelihoods of workers. The authors show that although there are important and tangible benefits for a range of workers, there are also a range of risks and costs that could negatively affect the livelihoods of digital workers. They conclude with a discussion of four broad strategies – certification schemes, organising digital workers, regulatory strategies and democratic control of online labour platforms — that could improve conditions and livelihoods for digital workers.

We caught up with the authors to explore the implications of the study:

Ed.: Shouldn’t increased digitisation of work also increase transparency (i.e. tracking, auditing etc.) around this work — i.e. shouldn’t digitisation largely be a good thing?

Mark: It depends. One of the goals of our research is to ask who actually wins and loses from the digitalisation of work. A good thing for one group (e.g. employers in the Global North) isn’t necessarily automatically a good thing for another group (e.g. workers in the Global South).

Ed.: You mention market-based strategies as one possible way to improve transparency around working conditions along value chains: do you mean something like a “Fairtrade” certification for digital work, i.e. creating a market for “fair work”?

Mark: Exactly. At the moment, we can make sure that the coffee we drink or the chocolate we eat is made ethically. But we have no idea if the digital services we use are. A ‘fair work’ certification system could change that.

Ed.: And what sorts of work are these people doing? Is it the sort of stuff that could be very easily replaced by advances in automation (natural language processing, pattern recognition etc.)? i.e. is it doubly precarious, not just in terms of labour conditions, but also in terms of the very existence of the work itself?

Mark: Yes, some of it is. Ironically, some of the paid work that is done is training algorithms to do work that used to be done by humans.

Ed.: You say that “digital workers have been unable to build any large-scale or effective digital labour movements” — is that because (unlike e.g. farm work which is spatially constrained), employers can very easily find someone else anywhere in the world who is willing to do it? Can you envisage the creation of any effective online labour movement?

Mark: A key part of the problem for workers here is the economic geography of this work. A worker in Kenya knows that they can be easily replaced by workers on the other side of the planet. The potential pool of workers willing to take any job is massive. For digital workers to have any sort of effective movement in this context means looking to what I call geographic bottlenecks in the system. Places in which work isn’t solely in a global digital cloud. This can mean looking to things like organising and picketing the headquarters of firms, clusters of workers in particular places, or digital locations (the web-presence of firms). I’m currently working on a new publication that deals with these issues in a bit more detail.

Ed.: Are there any parallels between the online gig work you have studied and ongoing issues with “gig work” services like Uber and Deliveroo (e.g. undercutting of traditional jobs, lack of contracts, precarity)?

Mark: A commonality in all of those cases is that platforms become intermediaries in between clients and workers. This means that rather than being employees, workers tend to be self-employed: a situation that offers workers freedom and flexibility, but also comes with significant risks to the worker (e.g. no wages if they fall ill).

Read the full article: Graham, M., Hjorth, I. and Lehdonvirta, V. (2017) Digital Labour and Development: Impacts of Global Digital Labour Platforms and the Gig Economy on Worker Livelihoods. Transfer. DOI: 10.1177/1024258916687250

Read the full report: Graham, M., Lehdonvirta, V., Wood, A., Barnard, H., Hjorth, I., Simon, D. P. (2017) The Risks and Rewards of Online Gig Work At The Global Margins [PDF]. Oxford: Oxford Internet Institute.

The article draws on findings from the research project “Microwork and Virtual Production Networks in Sub-Saharan Africa and South-east Asia”, funded by the International Development Research Centre (IDRC), grant number: 107384-001.

Mark Graham was talking to blog editor David Sutcliffe.

I recently gave a talk at the Alan Turing Institute (ATI) under the title The Problem of Governance in Distributed Ledger Technologies. The starting point of my talk was that it is frequently posited that blockchain technologies will “revolutionize industries that rely on digital record keeping”, such as financial services and government. In the talk I applied elementary institutional economics to examine what blockchain technologies really do in terms of economic organization, and what problems this gives rise to. In this essay I present an abbreviated version of the argument. Alternatively you can watch a video of the talk below.

[youtube https://www.youtube.com/watch?v=eNrzE_UfkTw&w=640&h=360]

First, it is necessary to note that there is quite a bit of confusion as to what exactly is meant by a blockchain. When people talk about “the” blockchain, they often refer to the Bitcoin blockchain, an ongoing ledger of transactions started in 2009 and maintained by the approximately 5,000 computers that form the Bitcoin peer-to-peer network. The term blockchain can also be used to refer to other instances or forks of the same technology (“a” blockchain). The term “distributed ledger technology” (DLT) has also gained currency recently as a more general label for related technologies.

In each case, I think it is fair to say that the reason that so many people are so excited about blockchain today is not the technical features as such. In terms of performance metrics like transactions per second, existing blockchain technologies are in many ways inferior to more conventional technologies. This is frequently illustrated with the point that the Bitcoin network is limited by design to process at most approximately seven transactions per second, whereas the Visa payment network has a peak capacity of 56,000 transactions per second. Other implementations may have better performance, and on some other metrics blockchain technologies can perhaps beat more conventional technologies. But technical performance is not why so many people think blockchain is revolutionary and paradigm-shifting.

The reason that blockchain is making waves is that it promises to change the very way economies are organized: to eliminate centralized third parties. Let me explain what this means in theoretical terms. Many economic transactions, such as long-distance trade, can be modeled as a game of Prisoners’ Dilemma. The buyer and the seller can either cooperate (send the shipment/payment as promised) or defect (not send the shipment/payment). If the buyer and the seller don’t trust each other, then the equilibrium solution is that neither player cooperates and no trade takes place. This is known as the fundamental problem of cooperation.

There are several classic solutions to the problem of cooperation. One is reputation. In a community of traders where members repeatedly engage in exchange, any trader who defects (fails to deliver on a promise) will gain a negative reputation, and other traders will refuse to trade with them out of self-interest. This threat of exclusion from the community acts as a deterrent against defection, and the equilibrium under certain conditions becomes that everyone will cooperate.

Reputation is only a limited solution, however. It only works within communities where reputational information spreads effectively, and traders may still defect if the payoff from doing so is greater than the loss of future trade. Modern large-scale market economies where people trade with strangers on a daily basis are only possible because of another solution: third-party enforcement. In particular, this means state-enforced contracts and bills of exchange enforced by banks. These third parties in essence force parties to cooperate and to follow through with their promises.

Besides trade, another example of the problem of cooperation is currency. Currency can be modeled as a multiplayer game of Prisoners’ Dilemma. Traders collectively have an interest in maintaining a stable currency, because it acts as a lubricant to trade. But each trader individually has an interest in debasing the currency, in the sense of paying with fake money (what in blockchain-speak is referred to as double spending). Again the classic solution to this dilemma is third-party enforcement: the state polices metal currencies and punishes counterfeiters, and banks control ledgers and prevent people from spending money they don’t have.

So third-party enforcement is the dominant model of economic organization in today’s market economies. But it’s not without its problems. The enforcer is in a powerful position in relation to the enforced: banks could extract exorbitant fees, and states could abuse their power by debasing the currency, illegitimately freezing assets, or enforcing contracts in unfair ways. One classic solution to the problems of third-party enforcement is competition. Bank fees are kept in check by competition: the enforced can switch to another enforcer if the fees get excessive.

But competition is not always a viable solution: there is a very high cost to switching to another state (i.e. becoming a refugee) if your state starts to abuse its power. Another classic solution is accountability: democratic institutions that try to ensure the enforcer acts in the interest of the enforced. For instance, the interbank payment messaging network SWIFT is a cooperative society owned by its member banks. The members elect a Board of Directors that is the highest decision making body in the organization. This way, they attempt to ensure that SWIFT does not try to extract excessive fees from the member banks or abuse its power against them. Still, even accountability is not without its problems, since it comes with the politics of trying to reconcile different members’ diverging interests as best as possible.

Into this picture enters blockchain: a technology where third-party enforcers are replaced with a distributed network that enforces the rules. It can enforce contracts, prevent double spending, and cap the size of the money pool all without participants having to cede power to any particular third party who might abuse the power. No rent-seeking, no abuses of power, no politics — blockchain technologies can be used to create “math-based money” and “unstoppable” contracts that are enforced with the impartiality of a machine instead of the imperfect and capricious human bureaucracy of a state or a bank. This is why so many people are so excited about blockchain: its supposed ability change economic organization in a way that transforms dominant relationships of power.

Unfortunately this turns out to be a naive understanding of blockchain, and the reality is inevitably less exciting. Let me explain why. In economic organization, we must distinguish between enforcing rules and making rules. Laws are rules enforced by state bureaucracy and made by a legislature. The SWIFT Protocol is a set of rules enforced by SWIFTNet (a centralized computational system) and made, ultimately, by SWIFT’s Board of Directors. The Bitcoin Protocol is a set of rules enforced by the Bitcoin Network (a distributed network of computers) made by — whom exactly? Who makes the rules matters at least as much as who enforces them. Blockchain technology may provide for completely impartial rule-enforcement, but that is of little comfort if the rules themselves are changed. This rule-making is what we refer to as governance.

Using Bitcoin as an example, the initial versions of the protocol (ie. the rules) were written by the pseudonymous Satoshi Nakamoto, and later versions are released by a core development team. The development team is not autocratic: a complex set of social and technical entanglements means that other people are also influential in how Bitcoin’s rules are set; in particular, so-called mining pools, headed by a handful of individuals, are very influential. The point here is not to attempt to pick apart Bitcoin’s political order; the point is that Bitcoin has not in any sense eliminated human politics; humans are still very much in charge of setting the rules that the network enforces.

There is, however, no formal process for how governance works in Bitcoin, because for a very long time these politics were not explicitly recognized, and many people don’t recognize them, preferring instead the idea that Bitcoin is purely “math-based money” and that all the developers are doing is purely apolitical plumbing work. But what has started to make this position untenable and Bitcoin’s politics visible is the so-called “block size debate” — a big disagreement between factions of the Bitcoin community over the future direction of the rules. Different stakeholders have different interests in the matter, and in the absence of a robust governance mechanism that could reconcile between the interests, this has resulted in open “warfare” between the camps over social media and discussion forums.

Will competition solve the issue? Multiple “forks” of the Bitcoin protocol have emerged, each with slightly different rules. But network economics teaches us that competition does not work well at all in the presence of strong network effects: everyone prefers to be in the network where other people are, even if its rules are not exactly what they would prefer. Network markets tend to tip in favour of the largest network. Every fork/split diminishes the total value of the system, and those on the losing side of a fork may eventually find their assets worthless.

If competition doesn’t work, this leaves us with accountability. There is no obvious path how Bitcoin could develop accountable governance institutions. But other blockchain projects, especially those that are gaining some kind of commercial or public sector legitimacy, are designed from the ground up with some level of accountable governance. For instance, R3 is a firm that develops blockchain technology for use in the financial services industry. It has enrolled a consortium of banks to guide the effort, and its documents talk about the “mandate” it has from its “member banks”. Its governance model thus sounds a lot like the beginnings of something like SWIFT. Another example is RSCoin, designed by my ATI colleagues George Danezis and Sarah Meiklejohn, which is intended to be governed by a central bank.

Regardless of the model, my point is that blockchain technologies cannot escape the problem of governance. Whether they recognize it or not, they face the same governance issues as conventional third-party enforcers. You can use technologies to potentially enhance the processes of governance (eg. transparency, online deliberation, e-voting), but you can’t engineer away governance as such. All this leads me to wonder how revolutionary blockchain technologies really are. If you still rely on a Board of Directors or similar body to make it work, how much has economic organization really changed?

And this leads me to my final point, a provocation: once you address the problem of governance, you no longer need blockchain; you can just as well use conventional technology that assumes a trusted central party to enforce the rules, because you’re already trusting somebody (or some organization/process) to make the rules. I call this blockchain’s ‘governance paradox’: once you master it, you no longer need it. Indeed, R3’s design seems to have something called “uniqueness services”, which look a lot like trusted third-party enforcers (though this isn’t clear from the white paper). RSCoin likewise relies entirely on trusted third parties. The differences to conventional technology are no longer that apparent.

Perhaps blockchain technologies can still deliver better technical performance, like better availability and data integrity. But it’s not clear to me what real changes to economic organization and power relations they could bring about. I’m very happy to be challenged on this, if you can point out a place in my reasoning where I’ve made an error. Understanding grows via debate. But for the time being, I can’t help but be very skeptical of the claims that blockchain will fundamentally transform the economy or government.

The governance of DLTs is also examined in this report chapter that I coauthored earlier this year:

Lehdonvirta, V. & Robleh, A. (2016) Governance and Regulation. In: M. Walport (ed.), Distributed Ledger Technology: Beyond Blockchain. London: UK Government Office for Science, pp. 40-45.

While these problems could be addressed by new approaches and technologies for financing dynamism in Europe’s economies, financing of (potentially risky) innovation could also be held back by financial regulation that focuses on stability, avoiding forum shopping (i.e., looking for the most permissive regulatory environment), and preventing fraud, to the exclusion of other interests, particularly innovation and renewal. But the role of finance in enabling the development and implementation of new ideas is vital — an economy’s dynamism depends on innovative competitors challenging, and if successful, replacing complacent players in the markets.

However, newcomers obviously need capital to grow. As a reaction to the markets having priced risk too low before the financial crisis, risk is now being priced too high in Europe, starving the innovation efforts of private financing at a time when much public funding has suffered from austerity measures. Of course, complementary (non-bank) sources of finance can also help fund entrepreneurship, and without that petrol of money, the engine of the new technology economy will likely stall.

The Internet has made it possible to fund innovation in new ways like crowd funding — an innovation in finance itself — and there is no reason to think that financial institutions should be immune to disruptive innovation produced by new entrants that offer completely novel ways of saving, insuring, loaning, transferring and investing money. New approaches such as crowdfunding and other financial technology (aka “FinTech”) initiatives could provide depth and a plurality of perspectives, in order to foster innovation in financial services and in the European economy as a whole.

The time has come to integrate these financial technologies into the overall financial frameworks in a manner that does not neuter their creativity, or lower their potential to revitalize the economy. There are potential synergies with macro-prudential policies focused on mitigating systemic risk and ensuring the stability of financial systems. These platforms have great potential for cross-border lending and investment and could help to remedy the retreat of bank capital behind national borders since the financial crisis. It is time for a new perspective grounded in an “innovation-friendly” philosophy and regulatory approach to emerge.

Crowdfunding is a newcomer to the financial industry, and as such, actions (such as complex and burdensome regulatory frameworks or high levels of guaranteed compensation for losses) that could close it down or raise high barriers of entry should be avoided. Competition in the interests of the consumer and of entrepreneurs looking for funding should be encouraged. Regulators should be ready to step in if abuses do, or threaten to, arise while leaving space for new ideas around crowdfunding to gain traction rapidly, without being overburdened by regulatory requirements at an early stage.

The interests of both “financing innovation” and “innovation in the financial sector” also coincide in the FinTech entrepreneurial community. Schumpeter wrote in 1942: “[the] process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.” An economy’s dynamism depends on innovative competitors challenging, and if successful, taking the place of complacent players in the markets. Keeping with the theme of Schumpeterian creative destruction, the financial sector is one seen by banking sector analysts and commentators as being particularly ripe for disruptive innovation, given its current profits and lax competition. Technology-driven disintermediation of many financial services is on the cards, for example, in financial advice, lending, investing, trading, virtual currencies and risk management.

The UK’s Financial Conduct Authority’s regulatory dialogues with FinTech developers to provide legal clarity on the status of their new initiatives are an example of good practice , as regulation in this highly monitored sector is potentially a serious barrier to entry and new innovation. The FCA also proactively addresses enabling innovation with Project Innovate, an initiative to assist both start-ups and established businesses in implementing innovative ideas in the financial services markets through an Incubator and Innovation Hub.

By its nature, FinTech is a sector that can benefit and benefit from the EU’s Digital Single Market and make Europe a sectoral global leader in this field. In evaluating possible future FinTech regulation, we need to ensure an optimal regulatory framework and specific rules. The innovation principle I discuss in my article should be part of an approach ensuring not only that regulation is clear and proportional — so that innovators can easily comply — but also ensuring that we are ready, when justified, to adapt regulation to enable innovations. Furthermore, any regulatory approaches should be “future proofed” and should not lock in today’s existing technologies, business models or processes.

Read the full article: Zilgalvis, P. (2014) The Need for an Innovation Principle in Regulatory Impact Assessment: The Case of Finance and Innovation in Europe. Policy and Internet 6 (4) 377–392.

Pēteris Zilgalvis, J.D. is a Senior Member of St Antony’s College, University of Oxford, and an Associate of its Political Economy of Financial Markets Programme. In 2013-14 he was a Senior EU Fellow at St Antony’s. He is also currently Head of Unit for eHealth and Well Being, DG CONNECT, European Commission.