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Regulation Tomorrow What Happens When Technology Is Faster Than the Law
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TILEC DP 2016-024 **TILEC Discussion Paper** **Regulation Tomorrow: What Happens when Technology is Faster than the Law?** By Erik Vermeulen Mark Fenwick Wulf A. Kaal October 2016 ISSN 1572-4042 ISSN 2213-9419 http://ssrn.com/abstract=2834531 # **_Regulation Tomorrow: What Happens When Technology is Faster than the Law?_** # **MARK FENWICK** _Kyushu University (Fukuoka, Japan)_ # **WULF A. KAAL** _University of St. Thomas School of Law_ _(Minneapolis, USA)_ # **ERIK P.M. VERMEULEN** _Tilburg University_ _Tilburg Law and Economics Center_ _Philips Lighting (Netherlands)_ ABSTRACT In an age of constant, complex and disruptive technological innovation, knowing _what_ , _when,_ and _how_ to structure regulatory interventions has become much more difficult. Regulators can find themselves in a situation where they believe they must opt for either reckless action (regulation without sufficient facts) or paralysis (doing nothing). Inevitably in such a case, caution tends to trump risk. But such caution merely functions to reinforce the status quo and the result is that new technologies struggle to reach the market in a timely or efficient manner. The solution: lawmaking and regulatory design needs to become more proactive, dynamic and responsive. So how can regulators actually achieve these goals? What can they do to promote innovation and offer better opportunities to people wanting to build a new business around a disruptive technology or simply enjoy the benefits of a disruptive new technology as a consumer? **_Keywords_** _: Airbnb, Artificial Intelligence, Big Data, Drones, FinTech, Principles, Regulation, Regulatory Sandbox, Robotics, Rules, Uber,_ **_JEL Classification_** _: E22, G2, K2, K22, K32, K40, L26, L43, L51, O3, O30, O31, O33_ # TABLE OF CONTENTS |I.<br>|REGULATIONTOMORROW: _WHATHAPPENSWHENTECHNOLOGY ISFASTER THAN THELAW?_........ 4| |---|---| |II.|THEFACTUALBASIS OFMODERNREGULATION....................................................................................... 5| |_1._|_Facts Today ................................................................................................................................................. 10_| |_2._|_A “Post-Fact Society”? ............................................................................................................................. 16_| |III.|THREEPRINCIPLES FORREGULATIONTOMORROW............................................................................. 18| |_1._|_Data Driven Regulatory Intervention .............................................................................................. 19_| |_2._|_A Principle-Based Approach ................................................................................................................ 23_| |_3._|_The Minimum Regulatory “Sandbox” ............................................................................................... 25_| |IV.|CONCLUSION................................................................................................................................................. 28| # **I. Regulation Tomorrow:** **_What Happens When Technology is Faster than the Law?_** Imagine the following near future experience of shopping online: _You are sat in a café thinking about a last minute birthday present for a friend or relative who you will be meeting later that day._ _Using your smartphone, you find something suitable via Amazon or similar webbased retailer. You place the order, paying a slight premium for instant delivery._ _Twenty minutes later you receive a notification that a drone will be arriving shortly at a delivery-port close to the café. You make the five minutes’ walk to the designated meeting point._ _A drone then swoops down beside you and releases the package having confirmed your identity and location via phone connection._ Most commentators seem to agree that this combination of online transaction and drone delivery represents the future of fast, clean, and efficient shopping.<sup>1</sup> And yet, for the moment, this type of service is not available. Thinking about some of the reasons why it is not available can teach us something important about how we currently deal with disruptive technology and how we might want - or need - to adapt our approach to a new world in which innovation cycles are shorter and new technology is constantly being developed. Returning to the example of drone-based delivery: a major reason why this type of service is not currently available is technological. Clearly, there are technological issues that need to be overcome. Ensuring that the service is reliable and safe is obviously crucial, before fleets of drones are released on to the world. But even when all of the main technology issues are resolved there is a second set of obstacles that can prevent consumers and entrepreneurs from enjoying the benefits and opportunities offered by new technologies or services, such as drone delivery. > 1 Tom Simonite, _Amazon Lays Out Its Vision for a Sky Thronging with Delivery Drones_ , MIT TECH. REV. (Jul. 28, 2015), https://perma.cc/D9AR-DA4J; Sally French, _Drone delivery is already here- and it works_ , MARKETWATCH (Dec. 15, 2015 7:32 AM ET), https://perma.cc/57XC-EBT7. These obstacles are not the result of technological limitations, but human choice. The law - and other regulations - can often prohibit, or otherwise limit, commercial exploitation of, and public access to, new technology. And as disruptive technologies arrive more frequently and at a faster pace, debates around such regulatory constraints on new technologies become more pressing.<sup>2</sup> # **II. The Factual Basis of Modern Regulation** Designing a regulatory framework that ensures the safety of users and the public, whilst facilitating the commercial use and consumer enjoyment of disruptive innovation is by no means easy.<sup>3</sup> This is particularly true in contemporary settings, where innovation is quicker and the global dissemination of that technology is much faster.<sup>4</sup> In such circumstances, regulators can often struggle to keep up.<sup>5</sup> The last two decades offer multiple examples of such regulatory struggles: genetically modified food, artificial intelligence, and, of course, driverless cars.<sup>6</sup> > 2 Wulf A. Kaal, _Dynamic Regulation for Innovation_ , in PERSPECTIVES IN LAW, BUSINESS & INNOVATION (Mark Fenwick et al. eds., forthcoming 2016). > 3 Anna Butenko & Pierre Larouche, _Regulation for innovativeness or regulation of innovation_ ?, 7 L. INNOVATION & TECH. 52, 72 (2015). > 4 Rita McGrath, _The Pace of Technology Adoption is Speeding Up_ , HARV. BUS. REV. (Nov. 25, 2013), https://perma.cc/DA8M-7QQV; Drew Desilver, _Chart of the Week: The ever-accelerating rate of technology adoption_ , PEWRESEARCHCENTER (Mar. 14, 2014), https://perma.cc/F5SY-HMAS; Bronwyn H. Hall & Beethika Khan, _Adoption of New Technology_ (NBER Working Paper No. 9730), http://www.nber.org/papers/w9730. > 5 Braden A. Allenby, _Governance and Technology Systems: The Challenge of Emerging Technologies, in_ THE GROWING GAP BETWEEN EMERGING TECHNOLOGIES AND LEGAL-ETHICAL OVERSIGHT: THE PACING PROBLEM 3 (Gary E. Marchant et al. eds. 2011) (“Moore’s Law notoriously states that the ‘functional capacity of ICT products roughly doubles every 18 months’, with the same dynamics manifesting in biotechnology, and namely in sequencing human genome. As a result, regulating innovation involves what is called a ‘pacing problem’ in the academic literature from the US, or the ‘challenge of regulatory connection’ or ‘regulatory disconnection’ in European-based scholarship.”); Butenko & Larouche, _supra_ note 4, at 66 (“The ‘pacing problem’ commonly refers to the situation when technology develops faster than the corresponding regulation, the latter hopelessly falling behind. The metaphor of ‘the hare and the tortoise’ is often conjured up. As summed up by Marchant and Wallach, ‘at the rapid rate of change, emerging technologies leave behind traditional governmental regulatory models and approaches which are plodding along slower today than ever before’.”) 6 Gregory N. Mandel, _Emerging Technology Governance_ , in INNOVATIVE GOVERNANCE MODELS FOR EMERGING TECHNOLOGIES 44, 45 (Gary E. Marchant, Kenneth W. Abbot & Braden Allenby eds. 2013) (“One obstacle to this goal is that new technologies are often met with highly polarized debates over how to manage their development, use and regulation. Prominent examples include nuclear energy and genetically modified foods.”); Gary E. Marchant & Wendell Wallach, _Governing the Governance of Emerging Technologies_ , in INNOVATIVE GOVERNANCE MODELS FOR EMERGING TECHNOLOGIES 136 (Gary E. Marchant, Kenneth W. Abbot & Braden Allenby eds. 2013) (“Emerging technologies such as nanotechnology, biotechnology, personalized medicine, synthetic biology, applied neuroscience, geoengineering, social media, surveillance technologies, regenerative medicine, robotics and artificial intelligence present complex governance and oversight challenges. These technologies are characterized by To take a simple, but nevertheless important, example: current rules in many jurisdictions do not allow self-driving cars on the roads. Making this change is relatively simple. For example, the 1968 _Vienna Convention on Road Traffic,_ to which 72 countries are party, was amended in March 2014 to take such new technologies into consideration.<sup>7</sup> However, there are many other more complex regulatory issues that will need to be addressed. The driverless car will generate an enormous amount of data for possible alternative usage, which is likely to create new issues related to data security and privacy concerns.<sup>8</sup> In a tort context, questions will need to be resolved as to who is at fault in the event of an accident involving driverless cars.<sup>9</sup> a rapid pace of development, a multitude of applications, manifestations and actors, pervasive uncertainties about risks, benefits and future directions, and demands for oversight ranging from potential health and environmental risks to broader social and ethical concerns. Given this complexity, no single regulatory agency, or even group of agencies, can regulate any of these emerging technologies effectively and comprehensively.”); Tracy Hresko Pearl, _Fast & Furious: The Misregulation of Driverless Cars_ (SSRN Working Paper, Aug. 5, 2016), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2819473 (“The United States is on the cusp of a revolution in transportation. The sale and widespread use of both semiautonomous and fully autonomous vehicles, also known as ‘driverless cars,’ are both imminent and likely to significantly change the way in which citizens commute, interact, and travel.”) 7 Vienna Convention on the Law of Treaties, art. 31, May 23, 1969, 1155 U.N.T.S. 331, 8 I.L.M. 679; Working Party on Road Traffic Safety, Sixty-eighth Session, March 24-26, 2014, Geneva, Report of the Sixty-eighth Session of the Working Party on Road Traffic Safety, http:// www.unece.org/fileadmin/DAM/trans/doc/2014/wp1/ECE-TRANS-WP1-145e.pdf; Press Release, UNECE, UNECE paves the way for automated driving by updating UN international convention (Mar. 23, 2016), https://perma.cc/KDG6-8G2J. > 8 Mark van Rijmenam, _Self-driving Cars Will Create 2 Petabytes of Data, What Are The Big Data Opportunities for the Car Industry?,_ DATAFLOQ (July 19, 2016), https://datafloq.com/read/self-drivingcars-create-2-petabytes-data-annually/172 (“The self-driving car from Google already is a true data creator. With all the sensors to enable the car to drive without a driver, it generates nearly 1 Gigabyte every second. It uses all that data to know where to drive and how fast to drive. It can even detect a new cigarette butt thrown on the ground and it then knows that a person might appear all of a sudden from behind a corner or car. 1 Gigabyte per second, imagine the amount of data that will create every year: On average, Americans drive 600 hours per year in their car. That equals 2.160.000 seconds or approximately 2 Petabyte of data per car per year. With the amount of cars worldwide to surpass one billion, it is almost unimaginable how much data will be created when Google’s self-driving car will become common on the streets.”); Adrienne LaFrance, _How Self-Driving Cars Will Threaten Privacy,_ THEATLANTIC (Mar 21, 2016), http://www.theatlantic.com/technology/archive/2016/03/self-driving-cars-and-the-looming-privacyapocalypse/474600/ (“The companies building self-vehicles have been cagey, so far, about how they’re thinking about using individual data.”) > 9 _See_ Adam Thierer & Ryan Hagemann, _Removing Roadblocks to Intelligent Vehicles and Driverless Cars_ , 5 WAKE FOREST J.L. & POL'Y 339, 340 (2015) (“Living in fear of hypothetical worst-case scenarios and basing policy on them will mean that the best-case scenarios associated with intelligent vehicles will never come about. Thus, patience and regulatory forbearance are generally the wise policy dispositions at this time, bearing in mind that the tort system will continue to evolve to address harms caused by intelligentvehicle systems.”); Bryant Walker Smith, _Proximity-Driven Liability_ , 102 GEORGETOWN L.J. 1777 (2014) (“This Article first describes how companies are embracing new technologies that expand their information, access, and control, with primary reference to the increasingly automated and connected motor vehicle. It next analyzes how this proximity to product, user, and use could impact product-related claims Moreover, driverless cars will need to communicate both among themselves and with the transport infrastructure to be most effective in their operation. To facilitate this, regulators will need to safeguard telecommunication frequencies and protect against security threats, most obviously the possibility of “car-hacking”.<sup>10</sup> This all seems fairly obvious. But a less-documented aspect of this issue concerns what we might think of as the basis or foundation of any regulation, namely some empirical facts about that technology and its likely social, economic or health effects.<sup>11</sup> In this respect, regulation is always premised on a selection of relevant facts about a particular technology. Crucially, the selected facts are those that are seen as relevant by the regulators in deciding _what_ , _when_ and _how_ they should make a regulatory intervention. The “what question” concerns identifying the disruptive technology that must be regulated or requires regulatory reform.<sup>12</sup> Demarcating the scope of a technology may not always be self-evident. For example, when should a car be thought of as autonomous, rather than merely providing driver-assistance? Facts about a particular technology are crucial for this kind of definitional judgment. for breach of implied warranty, defect in design or information, post-sale failure to warn or update, and negligent enabling of a third-party’s tortious behaviour.”). > 10 Jeffrey K. Gurney, _Driving into the Unknown: Examining the Crossroads of Criminal Law and Autonomous Vehicles_ , 5 WAKE FOREST J.L. & POL'Y 393, 433 (2015) (“In addition to physically interfering with an autonomous vehicle, people will be able to virtually interfere with the operation of an autonomous vehicle, also known as hacking.”); _see also_ Tom Simonite, _Your Future Self-Driving Car Will Be Way More Hackable_ , MIT TECH. REV. (Jan. 26, 2016), https://www.technologyreview.com/s/546086/yourfuture-self-driving-car-will-be-way-more-hackable/ (“’We are a long way from securing the nonautonomous vehicles, let alone the autonomous ones,’ said Stefan Savage, a computer science professor at the University of California, San Diego, at the Enigma security conference in San Francisco on Tuesday. The extra computers, sensors, and improved Internet connectivity required to make a car drive itself increase the possible weak points, he said. ‘The attack surface for these things is even worse,’ said Savage.”). > 11 Andrew Askland, _Why Law and Ethics Need to Keep Pace with Emerging Technologies, in_ THE GROWING GAP BETWEEN EMERGING TECHNOLOGIES AND LEGAL-ETHICAL OVERSIGHT. THE PACING PROBLEM xiii, xix (Gary E. Marchant et al. eds. 2011) (“Accelerating advances in science and technology exacerbate the problem of unrevised statutes, but the crux of the problem is the same: a dissymmetry between law and newly arising facts because the law has not anticipated these new facts and attempts to govern them with an antiquated grasp of their meaning. Reprising the description of law as the matching of facts and principles, the challenge for law is to be keenly attentive to new facts in order to fashion principles that will sort out the challenges that they present.”). > 12 Alberto Alemanno et al., _Conclusions_ , _in_ BETTER BUSINESS REGULATION IN A RISK SOCIETY 285, 287 (Alberto Alemanno et al. eds, 2013) (“The concept of trust shapes not only the relationship between regulators and regulated (e.g. pharmaceutical industry), but also the very object (i.e. the ‘what’ question) of policies.”). The “when question” concerns the timing of any regulatory intervention.<sup>13</sup> This entails ensuring that regulation is not adopted too soon and stifles or distorts technological development, but not so late that problems arise as a result of the absence of effect regulation. The “how question” is about the form and substance of the regulation.<sup>14</sup> Should the technological innovation be encouraged, prohibited or restricted in some way? And what substantive rules or principles should be adopted to achieve this regulatory goal? In each case, these policy judgments are made by politicians and bureaucrats based – in large part - on facts provided by experts. The delegation of regulatory decisions to a combination of democratically chosen politicians and bureaucrat-experts is one way of conceptualizing the distinctiveness of political modernity. In this context, however, we are more interested in the identification of the relevant facts. Some of the relevant facts may be obvious. The fact that drones may interfere with low flying planes or inadvertently land on innocent bystanders, for example, makes establishing reliable information on the likelihood of such occurrences vital. However, there are various potential problems with this fact-identification exercise. Some facts may be difficult to empirically establish or contested, even amongst experts in that > 13 Lyria Bennett Moses, _Agents of Change: How the Law ‘Copes’ with Technological Change_ , 20 GRIFFITH L. REV. 763, 768 (2011) (“The urge for legal change in response to technological change has a greater sense of _timing:_ laws regulating railroads are only needed after track is laid; uncertainties relating to the split of genetic and gestational motherhood need only be resolved _in response to_ the availability of _in vitro_ fertilisation. There is no doubt that legal change may be demanded as a result of changes in our collective knowledge and beliefs, or social change more broadly, but differences in how such changes are timed and perceived (as well as limitations of space) explain why this article focuses only on part of the story (which is not to say that it might not, in some places, have a broader resonance); Shrupti Shah, Rachel Brody & Nick Olson, _The Regulator of Tomorrow_ , GOVLAB REPORT, DELOITTE FUTURE OF GOVERNMENT SERIES (June 11, 2015), https://perma.cc/9E5T-SQSV (“The exponential pace of technological change. New technologies that used to have two-year cycle times now can become obsolete in six months, and the pace of change is not slowing. Moore’s Law posits that computer processing power will double every two years, and this exponential rate of increase has also been shown to hold true in industries beyond computing. When combined with software that is ‘eating the world,’ new technologies can be developed, deployed, and iterated faster than ever. This presents a unique timing challenge for regulatory agencies: Regulate too early and you risk stymieing innovators; wait too long and you risk losing the opportunity to regulate a technology or service before it becomes widespread, potentially harming consumers or markets in the interim.”) > 14 Julia Black, _Forms and Paradoxes of Principles Based Regulation_ 14 (LSE Law, Society and Economy Working Papers 13/2008), http://eprints.lse.ac.uk/23103/1/WPS2008-13.pdf (“A rule, any rule - legal or non-legal, issued by a regulator or formed within a firm - has a number of different dimensions. These are first its substance: what it concerns. Second, its status: whether it is legally binding or not, and the sanction, if any, which attaches to its breach. Third, its character, whether it prohibits, permits, discourages or mandates certain behaviour. Fourth, its linguistic structure: whether the language which the rule uses is vague or precise, whether the rule is simple or complex in its requirements, whether its language is clear and easily understood, or opaque.”) field. The task of establishing facts about new technology may be made difficult by the lack of an adequate sample or other reliable data on the effects of new technology.<sup>15</sup> Identification of relevant or irrelevant facts may also be distorted or otherwise influenced by the concerns of entrenched interests about new (and commercially threatening) technologies. Finally, other facts may be - to quote Donald Rumsfeld - “unknown unknowns”.<sup>16</sup> We simply lack the experience or imagination to predict what negative possibilities may be associated with a piece of new technology.<sup>17</sup> In this respect, the “relevant facts” that form the basis of regulation are never going to be obvious or settled. The regulation of any disruptive new technology is always going to be reactive and based on an uncertain and politicized factual basis. We need to be careful not to overstate the newness of this issue. To some degree, these kind of difficulties have always been around, at least since the rise of industrial capitalism and the acceleration in technological advancement that it facilitated.<sup>18</sup> 15 Gregory N. Mandel, _Emerging Technology Governance_ , in INNOVATIVE GOVERNANCE MODELS FOR EMERGING TECHNOLOGIES 44, 62 (Gary E. Marchant, Kenneth W. Abbot & Braden Allenby eds. 2013) (“Given the uncertainty surrounding an emerging technology's development and risks, there will be inherent limitations concerning how specific a framework can be developed at early stages.”). 16 Press Conference, Donald Rumsfeld, U.S. Sec’y of Defence, NATO HQ, Brussels (June 6, 2002), http://www.nato.int/docu/speech/2002/s020606g.htm (“The message is that there are no "knowns." There are thing we know that we know. There are known unknowns. That is to say there are things that we now know we don't know. But there are also unknown unknowns. There are things we don't know we don't know. So when we do the best we can and we pull all this information together, and we then say well that's basically what we see as the situation, that is really only the known knowns and the known unknowns. And each year, we discover a few more of those unknown unknowns.”). 17 Wulf A. Kaal, _Dynamic Regulation of the Financial Services Industry_ , 48 WAKE FOREST L. REV. 791, 799 (2013) (“Anticipation of unknown future contingencies and the preemption of possible future crises do not play a significant role in the current regulatory framework or in the literature on financial regulation.”). 18 Schumpeter described as early as the 1940s the “gaels of creative destruction,” often unleashed by technology, that periodically sweep through industries and sink weak and outdated firms. JOSEPH A. SCHUMPETER, CAPITALISM, SOCIALISM, AND DEMOCRACY 83-84 (3rd ed. 1962) (“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This 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. . . . Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. It must be seen in its role in the perennial gale of creative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull.”); _see also_ John Komlos, _Has Creative Destruction Become More Destructive?_ (NBER Working Paper No. 20379), http://www.nber.org/papers/w20379 (suggesting that the creative destruction aspect of capitalism is being amplified, especially in labor markets, by the exponential pace of technology). An obvious solution to this regulatory dilemma might be to adopt some form of policy experimentation, i.e., testing different regulatory schemes and then comparing the results. But such experimentation poses a problem for regulators. Too often, “success” for regulators is defined in negative terms as the avoidance of catastrophe.<sup>19</sup> Avoiding grounds for criticism inevitably results in an overly cautious approach (the “precautionary principle”).<sup>20</sup> From the perspective of entrepreneurs and consumers, such caution can be a “disaster” or at least less preferable. The result is that, all too often, there is a disconnect between regulation and commercial and consumer access to that innovation. # _1. Facts Today_ In spite of these problems, a fact-based approach to regulation may have worked relatively well in the past when innovation cycles were longer and the pace of disruptive innovation occurred over decades. Regulators had time necessary to get their facts in order before making a regulatory intervention.<sup>21</sup> > 19 Noah M. Sachs, _Rescuing the Strong Precautionary Principle from Its Critics_ , 2011 U. ILL. L. REV. 1285, 1298 (2011) (“One defining feature of the Strong Precautionary Principle is that it places a governmental entity in a role as a risk gatekeeper. Implicit in the Principle is the idea that there must be a “decider” who will determine whether the proponent of the activity has met its burden of proof on safety. The preventive thrust of Strong Precaution further implies that this review of risks should occur before the activity commences or the potentially risky product reaches the market.”). 20 Term used prominently by the UN on declaring regulatory policy on environmental issues. United Nations Conference on Environment and Development, Rio de Janiero, Braz., June 3-14, 1992, The Rio Declaration on Environment and Development, U.N. Doc. A/CONF.151/5/Rev.1 (Jun. 13, 1992), reprinted in 31 I.L.M. 874, 879 (1992). _See also_ Robert W. Kahn & Cass R. Sunstein, _The Precautionary Principle As a Basis for Decision Making,_ 2 ECONOMISTS' VOICE 1, 1 (2005) (“We argue that the precautionary principle does not help individuals or nations make difficult choices in a non-arbitrary way. Taken seriously, it can be paralyzing, providing no direction at all.”); John D. Graham, The Perils of the Precautionary Principle: Lessons from the American and European Experience (Oct. 20, 2003), in Heritage Lectures, Jan. 15, 2004, at 1-4. > 21 Allenby, _supra_ note 5, at 10 (“But it is not just that each NBRIC technology system is powerful; it is that they are combining in unexpected ways that are both beyond any single technological domain, and very potent.”); Steven W. Popper, _Technological Change and the Challenges for 21_<sup>_st_</sup> _Century Governance_ , in AAAS SCIENCE AND TECHNOLOGY POLICY YEARBOOK 83, 86 (2003) (“We see a growing divergence between time cycles of government and those of technology development. Quite simply, this presents government operations with a Hobson’s choice: Either live within a shorter response time and run the concomitant risk of ill-considered actions (or inactions) or see government input become less relevant and assume reduced stature. . . . The risk of insufficient access to information is large. This goes beyond the problem of gaining awareness of and collating relevant data series. A related and in many ways more problematic issue is that of managing and accounting for data and other knowledge resources. There is then, of course, the central task of analyzing and providing an interpretation of the data. These issues are already of concern and will increase in time.”) In this respect, it is again instructive to consider the origins of the modern automobile industry. Karl Benz was awarded a patent for the internal combustion engine in 1879, and started producing automobiles in the mid-1880s.<sup>22</sup> But Benz’s engine did not disrupt the horse and carriage industry or bring the automobile into the mainstream of everyday life. This only occurred much later, in 1908, when Henry Ford started to mass produce the Model T.<sup>23</sup> The slower pace of technological disruption explains why, until relatively recently, the public were happy to delegate regulatory decisions about new technology to policy makers relying on the scientific advice of experts.<sup>24</sup> There was a relatively high degree of trust in both the political process and the scientific/expert method.<sup>25</sup> > 22JOHN COAD, FINDING AND USING OIL (2008) (“ He received his first patent in 1879, and founded Benz & Company to produce industrial engines in Germany. He began designing a ‘motor carriage.’ Benz designed his three-wheel carriage engine with an electric ignition, differential gears and water cooling. It was first driven in Mannheim in 1885. On January 29, 1886, he was granted a patent for his gasoline-fuelled automobile.”). > 23 ALAN ALELROD & CHARLES PHILLIPS, WHAT EVERY AMERICAN SHOULD KNOW ABOUT AMERICAN HISTORY: 225 EVENTS THAT SHAPED THE NATION 210 (2008) (“The company was profitable from the start but become even more so in 1908, when Ford introduced the Model T. Up to this point, all manufacturers, including Ford himself, had seen the automobile as a custom-made luxury item for the wealthy.”). > 24 Rebecca M. Bratspies, _Regulatory Trust_ , 51 ARIZONA L. REV. 575, 576-575 (2009) (“Beck explains that unceasing technological innovation significantly contributes to risk and uncertainty in modern industrial society by forcing a constant reassessment of the relationships between scientific knowledge, technology, and public policy. In particular, new technologies underscore a growing divergence between market incentives and social welfare. As a society, we often turn to regulation to bridge that gap. But, in contexts as diverse as the licensing of agricultural biotechnology, the approval of new drugs8 or oversight of new financial instruments, the same refrain plays over and over—regulators must make high-stakes regulatory choices that implicate poorly understood risks.”). 25 There has been consistent empirical evidence that both trust in government and experts has declined in recent years. See Cary Funk & Lee Rainie, _Public and Scientists’ Views on Science and Society_ , PEWRESEARCHCENTER (Jan. 29, 2015), http://www.pewinternet.org/2015/01/29/public-and-scientistsviews-on-science-and-society/ (“Despite broadly similar views about the overall place of science in America, citizens and scientists often see science-related issues through different sets of eyes. There are large differences in their views across a host of issues.”); _Beyond Distrust: How Americans View Their Government_ , PEWRESEARCHCENTER (Nov. 23, 2015), http://www.people-press.org/2015/11/23/1-trust-ingovernment-1958-2015/ (“The erosion of public trust in government began in the 1960s. The share saying they could trust the federal government to do the right thing nearly always or most of the time reached an all-time high of 77% in 1964. Within a decade – a period that included the Vietnam War, civil unrest and the Watergate scandal – trust had fallen by more than half, to 36%. By the end of the 1970s, only about a quarter of Americans felt that they could trust the government at least most of the time. . . . Amid the war in Iraq and economic uncertainty at home, trust in government continued to decline. By July 2007, trust had fallen to 24%. Since then, the share saying they can trust the federal government has generally fluctuated in a narrow range, between 20% and 25%.”); see also Bratspies, _supra_ note 24, at 577 (“Trustworthy regulators have the potential to enhance society’s overall resilience, but uncertainty erodes the public’s trust and alienates citizens from the regulatory institutions intended to serve them. Declining levels of trust in government institutions both document and reflect this grim reality. Loss of trust undermines regulatory effectiveness and diminishes society’s overall capacity to persevere and even thrive in the face of multiple, unpredictable risks.”). In today’s world, however, the incessant speed of technological change means that this kind of approach faces insurmountable challenges. The pressure of time means that the facts surrounding a piece of new technology or other innovation may not be there, or the regulators may simply select the “wrong” – or at least contested or otherwise irrelevant - facts as the basis of regulation. The lack of time means that establishing facts or negotiating with entrenched interests becomes much more difficult. Moreover, there is a much greater degree of skepticism about the policy makers and scientists. Most people may not be familiar with terms such as “agency capture” or “minoritarian bias”,<sup>26</sup> but they are acutely aware of the way that political and scientific processes have been distorted by vested interests and lobbying on the part of wellorganized interest groups.<sup>27</sup> Take _AirBnB_ , for example. Regulators in some countries have become concerned that individuals looking to get rich from renting out properties via _AirBnB_ are buying housing in desirable urban residential areas, thus distorting property prices and – potentially – > 26 Neil K. Komesar, _A Job for the Judges: The Judiciary and the Constitution in A Massive and Complex Society_ , 86 MICH. L. REV. 657, 671 (1988) (“Minoritarian bias supposes an inordinate power of the few at the expense of the many. The power of these few stems from better access to the seats of power through personal influence, organization, information, or sophistication. In our society, influence can be gained by identifying important political figures and delivering what those political figures want. The terms of trade may be as crass as graft or as innocent as information.”); Neal D. Fortin, _The Hang-Up with Haccp: The Resistance to Translating Science into Food Safety Law_ , 58 FOOD & DRUG L.J. 565, 582 (2003) (“Agency capture has been described as the occasion when a regulated firm wins ‘the hearts and minds of the regulators’. Capture in this instance, however, is not an all-or-nothing phenomenon, but a matter of degrees. In the subtlest sense, capture exists any time an agency moves too far toward accommodating a single interest while moving away from its statutory mission.”). > 27 John C. Coffee, Jr., _The Political Economy of Dodd-Frank: Why Financial Reform Tends to Be Frustrated and Systemic Risk Perpetuated_ , 97 CORNELL L. REV. 1019, 1036 (2012) (“The alternative view, here presented, agrees that crisis is a precipitant, allowing legislative inertia to be o vercome. After a crisis, Congress tends to adopt proposals long-favored by the relevant administrative agency but frustrated by powerful lobbies. Only with a crisis can reformers--or “political entrepreneurs” in the political science vernacular--aggregate sufficient support to pass reform legislation. For example, in the years prior to the Enron and WorldCom crisis in 2001 and 2002, SEC Chairman Arthur Levitt sought to respond to a soaring number of financial statement restatements and campaigned to restrict auditor conflicts of interest. Levitt was rebuffed, however, by the industry. With the Enron and WorldCom insolvencies and the evidence of financial impropriety manifest to all, Levitt and others--most notably, Senator Paul Sarbanes--convinced Congress to replace auditor self-regulation with a new body: the Public Company Accounting Oversight Board (PCAOB).”); Roberta Romano, _Regulating in the Dark_ 4 (Yale Law Sch. John M. Olin Ctr. for Studies in Law, Econ., and Pub. Pol'y, Research Paper No. 442, 2011), http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=1974148 (“A typical pattern in a financial crisis is a media clamor for action, reflecting, if not spurring, a similar popular demand, and as a crisis intensifies, an accompanying suggestion that government inaction is prolonging the pain and suffering. A risk averse legislator, whose objective is reelection, will, no doubt, conclude that there is a need to respond without seeking to ascertain, if it were even possible, whether such demands are media-driven, or popularly shared, or, in fact, necessary to resolve the problem.”). creating housing shortages in such areas.<sup>28</sup> The solution? A rule that requires those renting accommodation via _AirBnB_ to be actually living in the property when it is being used.<sup>29</sup> Of course, the selection of the “relevant facts” in this case and the resulting rule benefits certain vested interests, most obviously the hotel industry who stand to lose out from the new competition from _AirBnB_ . But are the selected facts in this case relevant or even correct? A possible effect of a rule requiring residency of rented accommodation is that it may limit _Airbnb_ in certain markets, so it is clearly important to get this right. Are the people intending to offer _Airbnb_ accommodation really only in it for the money? In many cases, renting accommodation may be about connecting with people from other cultures or offering a welcoming experience for tourists visiting a new city. The “factual” premise or basis of the regulation - i.e., individuals looking to make easy money from residential properties - may simply be incorrect. The selected facts may not even be facts, or at least, the most relevant facts about a particular innovation. As a second example, consider _Uber_ or similar “taxi-like” car sharing services. There is no doubt that services like _Uber_ are disrupting the taxi industry.<sup>30</sup> The effect is that regulatory > 28 Tim Logan, Emily Alpert Reyes, & Ben Poston, _Airbnb and Other Short-term Rentals Worsen Housing Shortage, Critics Say_ , LATIMES (Mar. 11, 2015, 3:00 AM), http://www.latimes.com/business/realestate/lafi-airbnb-housing-market-20150311-story.html (“A study released Wednesday from Los Angeles Alliance for a New Economy, a labor-backed advocacy group, estimates that more than 7,000 houses and apartments have been taken off the rental market in metro Los Angeles for use as short-term rentals.”); Biz Carson, The Fight Between Airbnb and San Francisco Just Got Nastier, Business Insider (May 15, 2015 9:00PM), http://www.businessinsider.com/san-francisco-report-blames-airbnb-for-housing-shortage-airbnb-strikesback-2015-5 (“On Monday, the Board of Supervisors Land Use and Transportation Committee will vote on how to amend the regulation. One proposal from the Mayor's office puts the cap at 120 days a year for short term rentals. Another option set forward by Supervisor David Campos was to limit short term rentals to a max of 60 days a year and compels Airbnb to release its data to the city.”). > 29 Will Coldwell, _Airbnb’s Legal Troubles: What are the Issues?_ , THEGUARDIAN (July 8, 2014 8:38 EDT), https://www.theguardian.com/travel/2014/jul/08/airbnb-legal-troubles-what-are-the-issues (“For example, in New York owners or tenants cannot legally rent their apartments out for short periods (less than 30 days) unless they are also living in the property.”). > 30 Megan Garber, _After Uber, San Francisco Has Seen a 65% Decline in Cab Use_ , THEATLANTIC (Sept 17, 2014), http://www.theatlantic.com/technology/archive/2014/09/what-uber-is-doing-to-cabs-in-sanfrancisco-in-1-crazy-chart/380378/ (“The news was ... not good, for San Francisco's taxi industry, anyway. The precipitous rise of services like Uber (and its fellow shared-ride services, like Lyft and Sidecar) has meant—markets being what they are—a precipitous decline in taxi rides taken across the city. The SFMTA's interim director Kate Toran reported to her board that the average trips per taxicab in the city had declined from 1,424 a month in March 2012 to only 504 as of July 2014.”); Brishen Rogers, _The Social Costs of Uber_ , 82 U. CHI L. REV. DIALOGUE 85 (2015) (“Uber is sparking two major transformations of the debates around _Uber_ are currently dominated by an unfair competition argument: _“Trustworthy and reliable taxi companies are facing unfair competition from Uber and this kind of unlicensed activity poses enormous risks for consumers.”_<sup>_31_</sup> _“US startup companies, in particular, don’t respect the legal order that protects the European labor market.”_<sup>_32_</sup> These “facts” are then used to justify regulatory intervention that effectively attempts to kill _Uber_ in certain markets. But, as with the _AirBnB_ case, are these facts really facts? Or, at least, are they the most relevant facts? Do taxis really offer a better service than _Uber_ ? Is _Uber_ any less safe than a licensed taxi? And is a lack of respect for labor laws a pertinent factor motivating companies like _AirBnB_ ? The two-way rating system (drivers rate customers and customers rate drivers) and an algorithm-based system for matching up drivers and customers appear to offer an effective car-hire sector. First, it is eliminating various transaction costs that have plagued the sector, particularly search costs, thereby creating something akin to a free market for car-hire services. Second, it is encouraging vertical and horizontal integration of the sector, which is highly fragmented in many cities.”). 31 _See e.g_ ., Dean Baker, _Don’t buy the ‘sharing economy’ hype: Airbnb and Uber are facilitating rip-offs_ , THEGUARDIAN (May 27, 2014 7:30 EDT), https://www.theguardian.com/commentisfree/2014/may/27/airbnb-uber-taxes-regulation (“Insofar as Airbnb is allowing people to evade taxes and regulations, the company is not a net plus to the economy and society – it is simply facilitating a bunch of rip-offs. Others in the economy will lose by bearing an additional tax burden or being forced to live next to an apartment unit with a never-ending parade of noisy visitors, just to cite two examples. The same story may apply with Uber. Uber is currently in disputes with regulators over whether its cars meet the safety and insurance requirements imposed on standard taxis. Also, many cities impose some restrictions on the number of cabs in the hopes of ensuring a minimum level of earnings for drivers, but if Uber and related services (like Lyft) flood the market, they could harm all drivers' ability to earn even minimum wage.”). 32 Evan Rudowski, _Uber, Uber Alles? Not in Europe_ , TECHCRUNCH (Feb. 17, 2016), https://techcrunch.com/2016/02/17/uber-uber-alles-not-in-europe/ (“Germans love speed, but they don’t love recklessness: the reason one can drive fast on the autobahn is because one can be confident that other drivers will follow the rules of the road. American companies, by contrast, are accustomed to a culture built on rejecting rules and deregulation has been gospel to the American political and economic mainstream since the 80s . . .In European markets, succeeding within the rules is a badge of honor. Breaking the rules, even in pursuit of a seemingly worthy goal such as improving market efficiency or consumer choice, can be seen as offensive and not something to necessarily be applauded.”); _Should Uber be Allowed to Compete in Europe and if so how_ ?, COMPETITION POLICY INTERNATIONAL (Jun. 18, 2015), https://www.competitionpolicyinternational.com/should-uber-be-allowed-to-compete-in-europe-and-if-sohow/ (“Uber’s arrival in Europe has generated massive demonstrations by taxi drivers and a number of court judgments banning or restricting Uber’s services on the ground that the company engaged in “unfair competition”. Uber and other online-enabled car transportation services to connect passengers with drivers offer an attractive alternative to regular taxi services. The difficulty is that these services are protected by regulatory measures that create significant barriers to entry.”). means of policing _Uber_ drivers and ensuring a safe ride for customers.<sup>33</sup> And is most people’s experience of licensed taxis really so great, at least when compared with _Uber_ ? Most consumers just want a quick, clean and respectful service, but – all too often – incumbent taxi companies offer a disrespectful or unreliable driver and a dirty cab. There is a disconnect between the facts that regulators identify as important and the experience and wishes of most consumers. None of this is to necessarily blame the regulators. Agency capture, in which entrenched interests distort regulatory decisions, has always posed some risk,<sup>34</sup> but the acceleration in innovation cycles means that even in the best conditions and with the best of intentions, selecting relevant facts is a difficult task. And the option of simply waiting seems likely to result in further complications and criticism. In an age of constant, complex and disruptive technological innovation, knowing _what_ , _when,_ and _how_ to structure regulatory interventions has become much more difficult.<sup>35</sup> > 33 _How Uber Ratings Work | 5-Star Tips_ , UBERMOVEMENT.COM (last visited Sept. 8, 2016), http://ubermovement.com/ratings-are-a-two-way-street/ (“Providing two-way ratings and feedback allow us to celebrate the riders and drivers who make Uber great. This system also lets us know if the quality of service provided is consistently below Uber's standards.”). > 34 Thomas O. McGarity, _Mtbe: A Precautionary Tale_ , 28 HARV. ENVTL. L. REV. 281, 325 (2004) (“One of the most powerful and persuasive early critiques of the federal regulatory regime of the 1960s was that the agencies charged with protecting the public had become captured by the very industries that posed the threats that the agencies were created to address. Early regulatory reformers, ranging from Ralph Nader to George Stigler, observed that if an agency only hears from the regulatees, it will become sympathetic to the regulatee's point of view and vulnerable to manipulation. Even an agency that is thoroughly dedicated to its statutory mission knows that, with the limited resources available, it “cannot go to the mat every time” it disagrees with the regulated industry. As a result, decision-making outcomes will tend to reflect the economic needs of the regulated industry rather than the broader and more diffuse public interest that the agency was created to protect.”). > 35 Kaal, _supra_ note 2, at *4 (“This combination causes the so-called “pacing problem” between innovation and regulation, e.g. innovation develops faster than applicable regulation (Allenby 2011, Askland 2011). Similarly, the literature on dynamic regulation of innovation describes regulatory challenges presented by disruptive innovation associated with the timing of regulation, facts-based, ex-post, trial-and-errorrulemaking with stable and presumptively optimal rules in the existing regulatory framework (Popper 1957, Kirchner 2011), and ever increasing unknown future contingencies in rulemaking.”); Gary E. Marchant, _The Growing Gap Between Emerging Technologies and the Law_ in THE GROWING GAP BETWEEN EMERGING TECHNOLOGIES AND LEGAL-ETHICAL OVERSIGHT: THE PACING PROBLEM 23 (Gary E. Marchant et al. eds. 2011) (“The pacing problem facing the legal system has at least two dimensions. First, many existing legal frameworks are based on a static rather than dynamic view of society and technology. . . .Second, legal institutions are slowing down with respect to their capacity to adjust to changing technologies.”); Lyria Bennett Moses, _supra_ note 13, at 764 (2011) (“The particular technologies said to outpace law are constantly varying. Currently, the focus is on nanotechnology, biotechnology, robotics, information and communications technologies, and applied cognitive science,' some of which have spawned new legal specialties.”); Lyria Bennett Moses, _How to Think about Law, Regulation and Technology: Problems with ‘Technology’ as a Regulatory Target_ , 5 L. INNOVATION & TECH. 1, 7 (2013) (“Like the ‘challenge of regulatory connection’, the ‘pacing problem’ is an attempt to understand the struggle to ‘keep up’ with technology. There is more than one way to describe the ‘pacing problem’. One can look at the types of legal and regulatory problems that arise as a result of technological change Regulators can find themselves in a situation where they believe they must opt for either reckless action (regulation without sufficient facts) or paralysis (doing nothing). Inevitably in such a case, caution tends to trump risk. The precautionary principle becomes the default position.<sup>36</sup> But such caution merely functions to reinforce the status quo and the result is that new technologies struggle to reach the market in a timely or efficient manner. # _2. A “Post-Fact Society”?_ Should we conclude from the above analysis of the contemporary regulatory dilemma that we live in a “post-fact society”? A “post-fact society” means that facts no longer matter or that they can be reduced to the mere expression of political interests.<sup>37</sup> Much of the current discussion on this issue seems to go in this kind of direction.<sup>38</sup> The including the need to manage new negative impacts and risks, the need to manage uncertainty in the application of existing laws, the need to adapt regulatory regimes that may be over-inclusive or underinclusive when applied in the new context and the need to manage obsolescence. Alternatively, Brownsword distinguishes between descriptive and normative disconnection, and between productive and unproductive disconnection. These line up to some extent, although there are differences in emphasis. On a simplistic level, numerous scholars point to hare and tortoise metaphors to explain the difficulties faced by ‘law’ when interacting with ‘technology.’ On a deeper level, new technologies can force us to question our commitment to and interpretation of important concepts and values, such as democracy.”). > 36 Cass R. Sunstein, _Throwing Precaution to the Wind: Why the ‘Safe’ Choice Can Be Dangerous_ , BOSTON GLOBE, July 13, 2008 (“The precautionary principle, for all its rhetorical appeal, is deeply incoherent. It is of course true that we should take precautions against some speculative dangers. But there are always risks on both sides of a decision; inaction can bring danger, but so can action. Precautions, in other words, themselves create risks—and hence the principle bans what it simultaneously requires.”); Jonathan Adler, _The Problems with Precaution: A Principle without Principle_ , AEI (May 25, 2011), http://www.aei.org/publication/the-problems-with-precaution-a-principle-without-principle/ (“An obvious question: why is it safer or more ‘precautionary’ to focus on the potential harms of new activities or technologies without reference to the activities or technologies they might displace? There is no a priori reason to assume that newer technologies or less-known risks are more dangerous than older technologies or familiar threats. In many cases, the exact opposite will be true. A new, targeted pesticide may pose fewer health and environmental risks than a pesticide developed ten, twenty, or thirty years ago. Shifting the burden of proof, as the Wingspread Statement calls for, is not a “precautionary” policy so much as a reactionary one. This myopic focus on the threats posed by new activities or technologies can actually do more harm than good.”). > 37 _See e.g_ ., Michiko Kakutani, _Texts Without Context_ , N.Y. TIMES, Mar. 17, 2010, http://www.nytimes.com/2010/03/21/books/21mash.html?_r=0 (“As Mr. Manjoo observes in ‘True Enough: Learning to Live in a Post-Fact Society’ (2008), the way in which ‘information now moves through society — on currents of loosely linked online groups and niche media outlets, pushed along by experts and journalists of dubious character and bolstered by documents that are no longer considered proof of reality’ — has fostered deception and propaganda and also created what he calls a ‘Rashomon world’ where ‘the very idea of objective reality is under attack.’ Politicians and voters on the right and left not only hold different opinions from one another, but often can’t even agree over a shared set of facts, as clashes over climate change, health care and the Iraq war attest.”). > 38 William Davies, _The Age of Post-Truth Politics_ , N.Y. TIMES (Aug. 24, 2016), http://www.nytimes.com/2016/08/24/opinion/campaign-stops/the-age-of-post-truth-politics.html (“How stalemate resulting from competing claims to scientific authority has damaged - possibly even destroyed - trust in the capacity of science to provide definitive or indisputable knowledge that can form the basis of regulation.<sup>39</sup> And a similar skepticism surrounds politicians and their ability to exercise independent judgment, fueling the rise of a populist style of “anti-politics” in many countries.<sup>40</sup> According to this type of skeptical account, we are left with a plurality of competing narratives and no criteria with which to make reliable judgments about which facts are “true”. We inhabit a world of theatrics and instant messaging, where truth and facts are reduced to a game - albeit a very serious one - of image management and a rhetoric of persuasion.<sup>41</sup> can we still be speaking of “facts” when they no longer provide us with a reality that we all agree on? The problem is that the experts and agencies involved in producing facts have multiplied, and many are now for hire. If you really want to find an expert willing to endorse a fact, and have sufficient money or political clout behind you, you probably can. The combination of populist movements with social media is often held responsible for post-truth politics. Individuals have growing opportunities to shape their media consumption around their own opinions and prejudices, and populist leaders are ready to encourage them.”). 39 _Id_ . (“The problem is the oversupply of facts in the 21st century: There are too many sources, too many methods, with varying levels of credibility, depending on who funded a given study and how the eyecatching number was selected. . . .Like statistics or other traditional facts, this data is quantitative in nature. What’s new is both its unprecedented volume (the “big” in big data) and also the fact that it is being constantly collected by default, rather than by deliberate expert design. Numbers are being generated much faster than we have any specific use for. But they can nevertheless be mined to get a sense of how people are behaving and what they are thinking.”). 40 There has been a well-documented decline in trust of government and simultaneous rise of populist parties across the western world. See e.g., Gerald F. Seib, _Behind the Rise of Populism, Economic Angst_ , WALL ST. J., Jan. 20, 2016, http://www.wsj.com/articles/behind-the-rise-of-populism-economic-angst1453199402 (“Political trends in Europe and the U.S. often move in synchronization, and rarely has that been more true than right now. In both places, the political establishment is shaking, fringe actors are moving to center stage, parties are changing face and voters appear to be tearing themselves loose from their traditional moorings. . . . In Europe, ‘you’re seeing, as in the U.S., that the political center has collapsed,’ said Heather Conley, a former State Department official who now analyzes Europe for the Center for Strategic and International Studies. ‘Collapsed and discredited. That’s why you’re seeing the increase on the far right and the far left.’); _Trust in Government_ , GALLUP (last visited Sept 8, 2016), http://www.gallup.com/poll/5392/trust-government.aspx (A record 81% of Americans reported in 2015 to have only have some or no trust in the government in Washington to do what is right). This lack of social trust plays itself out in the regulatory system, which often displays large periods of stagnation followed by frenzied, often haphazard public outcries and regulation enactments as a result of crisis (or the regulatory sine curve). See Coffee, _supra_ note 27 at 1078-1079 (“The key and recurring debate over financial reform is between those who distrust both legislation and regulation (a position that the Tea Party Caucus exemplifies) and those who believe restraining systemic risk necessitates strong regulation. In this debate, the standard move of those who distrust regulation is to attribute economic stagnation and job loss to costly regulation, ignoring that the costs of market bubbles and crashes dwarf those of regulation. Their ability to do this is evidence of a collective social amnesia that overtakes Congress and others as soon as the crisis fades from the headlines. This recurrent amnesia is in turn evidence of what this Article has termed the Regulatory Sine Curve--a cycle driven by the differential in resources, organization, and lobbying capacity that favors those interests determined to resist further regulation.”). > 41 Davies, _supra_ note 38 (“As politics becomes more adversarial and dominated by television performances, the status of facts in public debate rises too high. We place expectations on statistics and expert testimony The problem with this view is that it reinforces the type of regulatory paralysis highlighted above. If we live in a post-truth world then we don't have any objective basis on which to act, leading to inertia or the reproduction of the status quo. And yet, rather than abandoning facts, we should be thinking about some alternative grounds for regulation that would allow the regulation of innovative products and services to be more effective and legitimate. After all, many consumers want instant drone delivery and many entrepreneurs are willing to provide such a service.<sup>42</sup> Moreover, those markets that are “first movers” stand to gain the financial and other benefits that offering such a service promises. In a global society in which regulatory competition is the “new normal”,<sup>43</sup> regulators can pay a heavy economic price for being overly cautious or abandoning the project of trying to establish a meaningful basis for regulation.<sup>44</sup> # **III. Three Principles for Regulation Tomorrow** Lawmaking and regulatory design needs to become more proactive, dynamic and responsive.<sup>45</sup> So how can regulators actually achieve these goals? What can they do to that strains them to breaking point. Rather than sit coolly outside the fray of political argument, facts are now one of the main rhetorical weapons within it.”). > 42 Teresa Hayes, _The Rising Demand for Drones in the Retail Sector_ , MARKETRESEARCH.COM (Jun 29, 2016 8:30 AM), http://blog.marketresearch.com/the-demand-for-drones-in-the-retail-sector (“Interest in drones from the retail sector is growing rapidly as competitive pressures push retailers and distributors to develop new ways to make their supply chains more efficient, to automate warehouses, and to reduce delivery costs. Walmart, the nation’s largest retailer, recently announced plans to use drones for inventory management in its warehouses. Amazon, the nation’s largest internet retailer, is researching the use of drones to deliver packages to consumers. Global e-commerce giant Alibaba is testing delivery drones in China while DHL is already using drones to deliver packages in Germany.”). > 43 Ehud Kamar, _Beyond Competition for Incorporations_ , 94 GEO. L.J. 1725, 1725 (2006) (“This article documents and analyzes a powerful form of regulatory competition — competition for investments — that has been transforming national corporate laws in the European Union in recent years. Unlike the competition for incorporations that shapes Delaware corporate law, and by some accounts the corporate laws of other American states as well, competition for investments stems from firms’ inability to incorporate outside the jurisdiction in which they operate, and is designed to attract capital and direct investments in local businesses, rather than incorporations by foreign businesses. The high political payoffs that await successful participants in the competition for investments enable them to overcome opposition that could stop them if they competed for incorporations.”). > 44 _Id_ . > 45 Kaal, _supra_ note 2, at 14-20; Kaal, _supra_ note 17, at 818-820 (financial rulemaking with dynamic elements); Wulf A. Kaal, _Evolution of Law: Dynamic Regulation in a New Institutional Economics Framework_ , in FESTSCHRIFT ZU EHREN VON CHRISTIAN KIRCHNER 1211 (Wulf A. Kaal & Schmidt M Schwartze eds 2014); Wulf A. Kaal & Erik P.M. Vermeulen, How to Regulate Disruptive InnovationFrom Facts to Data (U of St. Thomas (Minnesota) Legal Studies Research Paper No. 16-13), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2808044. promote innovation and offer better opportunities to people wanting to build a new business around a disruptive technology or simply enjoy the benefits of a disruptive new technology as a consumer? Here are three principles that we believe can form the basis of regulation tomorrow: # _1. Data Driven Regulatory Intervention_ A reliance on different sources of data surrounding new technologies can provide some signals or clues about _what, when_ and, to a certain extent, _how_ to regulate. Of particular importance in this context is data relating to investment in new technology and innovation.<sup>46</sup> Such data can be used as an index or proxy of the necessity of regulation.<sup>47</sup> Collecting and collating such data may appear to be a tedious task for policy makers, regulators, lawmakers and alike. However, since government funding is often considered to be the main driver behind disruptive innovations, a plethora of investment data is readily available to make accurate predictions regarding what the next “big thing” is likely to be. Moreover, the fact that it is start-up companies that are the ones that usually challenge existing rules, laws and regulations, means that private data sources are widely available.<sup>48</sup> The proliferation of the better hand-collected global databases on the market, such as _CB Insights_ , _PitchBook_ and _Mattermark_ ,<sup>49</sup> can make an important contribution to a “datadriven” regulatory approach. _Figure 1_ gives an indication of what such a data-set might look like. The Figure shows the global venture capital investment deals per industry tracked by data-provider _PitchBook_ from 2005 to the first half of 2016. We could go much more granular than this, but even a broad perspective clearly indicates that certain areas, such as Fintech and the Internet-of- > 46 Kaal & Vermeulen, _supra_ note 45, at 7 (“We apply a data-driven approach that enables dynamic regulation as established by Kaal26 to regulatory issues associated with disruptive innovation.”) > 47 _Id_ . > 48 Brian Park & Erik P.M. Vermeulen, _Debunking Myths in Corporate Venture Capital: What Works, What Does Not, and How to Make It Happen_ , 12 J. U.S.-CHINA PUB. ADMIN. 764, 773 (2015) (“The proliferation of global databases on the market such as Dow Jones VentureSource, CB Insights, PitchBook, and PWC MoneyTree contribute to improving the selection process for investors a great deal.”). > 49 _Id_ . Things, are attracting more and more attention from investors. In this way, investment data can help to develop a list of technologies and issues that need to be the focus of regulatory attention. From such data, we can get a better - and earlier - sense of which technologies are developing and which technologies need regulatory attention. This might then allow regulators to be more pro-active and avoid wasting resources on technologies that are unlikely to make it to market. It would also allow regulators to more accurately define the scope of a technology by focusing on the type of firm that is attracting attention. **Figure 1: Investment Data Used for Identifying Technology Trends** <!-- Start of picture text --> 25000.0 Wearables & Quan8fied Self<br>Virtual Reality<br>SaaS<br>Robo8cs and Drones<br>Oncology<br>20000.0 Nano-technology<br>Mobile<br>Marke8ng Tech<br>Manufacturing<br>LOHAS<br>15000.0 Life Sciences<br>Internet of Things<br>Infrastructure<br>HealthTech<br>Fin Tech<br>10000.0<br>Ephemeral Content<br>EdTech<br>E-Commerce<br>Cybersecurity<br>CleanTech<br>5000.0<br>Big Data<br>Autonomous cars<br>AudioTech<br>AdTech<br>.0 3D Prin8ng<br>2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br>Source: PitchBook Data, Inc.<br><!-- End of picture text --> As to the question of _when_ to make a regulatory intervention, investment data can be similarly helpful. When early stage investments peak and later stage investments are taking off, it arguably shows demand both on the commercial and consumer side. Data on the timing of investment appears to provide a reliable indicator of the commercial maturity of a technology, in the sense that high levels of investor activity indicate that a particular technology is about to be ready for commercial exploitation. _Figures 2 and 3_ give examples in the field of “artificial intelligence” and “robotics and drones.” As to the question of “ _how_ to regulate”, the starting point is that regulation needs to be “demand driven”, i.e., the substantial direction of the regulation needs to be based on the interests of consumers. If there is a genuine demand for certain products or technologies, then such technologies should, in principle, be permitted. The focus on the demands of the consumers does not mean that policy makers, lawmakers and regulators should ignore the negative side effects or other risks of new technologies. What it does mean, however, is that entrenched interests with a clear interest in obstructing a disruptive product or service should not be allowed to dominate the debate. **Figure 2: Artificial Intelligence – Venture Capital Investments** <!-- Start of picture text --> 450.0 What and When?<br>400.0<br>350.0<br>300.0<br>Grants<br>250.0 Later stage VC<br>Early stage VC<br>200.0 Seed<br>Angel<br>150.0 Pre/Accelerator/Incubator<br>100.0<br>50.0<br>.0<br>2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: PitchBook Data, Inc.<br><!-- End of picture text --> **Figure 3: Robotics and Drones – Venture Capital Investments** <!-- Start of picture text --> 160.0 What and When?<br>140.0<br>120.0<br>100.0<br>Grants<br>Later stage VC<br>80.0<br>Early stage VC<br>Seed<br>60.0 Angel<br>Pre/Accelerator/Incubator<br>40.0<br>20.0<br>.0<br>2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br>Source: PitchBook Data, Inc.<br><!-- End of picture text --> Big Data is an example of this (see Figure 4). Clearly, the principle of respecting privacy is important, but is not without exception and can, for example, be overridden if there are clear diagnostic benefits in allowing people's private health information to be used. In this context, regulatory experimentation strategies may offer a potential solution. **Figure 4: Big Data – Venture Capital Investments** <!-- Start of picture text --> 1200.0<br>1000.0<br>800.0 Recapitaliza6on<br>Acquisi6on Financing<br>Grants<br>600.0 Restart Later Stage VC<br>Later stage VC<br>Early stage VC<br>Seed<br>400.0<br>Angel<br>Pre/Accelerator/Incubator<br>200.0<br>.0<br>2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br>Source: PitchBook Data, Inc.<br><!-- End of picture text --> # _2. A Principle-Based Approach_ Regulators need to take the idea of regulatory competition seriously. Most obviously, this entails a greater willingness to engage in policy and regulatory experiments in which different regulatory regimes are adopted and results compared.<sup>50</sup> To some extent, regulatory competition will occur “naturally”, as different jurisdictions adopt different regulatory models.<sup>51</sup> But such experimentation is also important _within_ a particular jurisdiction as it provides regulators with data on the real-world effects of a particular regulatory scheme in a comparable setting. Embracing regulatory experimentation involves a re-thinking - or re-framing - of what decision-making involves in a regulatory context. French sociologist, Michel Callon, has emphasized how regulatory decisions should not be thought of as “final events” (to be made for all-time and from which we “all move on”).<sup>52</sup> Rather, we should think of them as “measured decision-making”. i.e., regulatory choices are open-ended and highly > 50 For example in corporate law: Christian Kirchner, Richard W. Painter & Wulf A. Kaal, _Regulatory Competition in EU Corporate Law After Inspire Art:Unbundling Delaware's Product for Europ e_ , 2 EUR. COMPANY & FIN. L. REV. 159 (2005). > 51 _Id_ . > 52 MICHAL CALLON, PIERRE LASOUMES & YANNICK BARTHE, ACTING IN AN UNCERTAIN WORLD: AN ESSAY ON TECHNICAL DEMOCRACY (2009). contingent choices that form one stage in a longer process and not the “final word” on a particular issue.<sup>53</sup> Regulators need to abandon a fixation on finality and legal certainty and embrace contingency, flexibility and an openness to the new.<sup>54</sup> This shift in perspective also affects _how_ we regulate disruptive technologies. A key element of a more open approach involves a shift from rules to principles. Certainly, a principle-based approach facilitates a greater degree of openness and flexibility on the part of regulators and prevents innovative technologies (and the companies that have developed them) from becoming bogged down in the regulatory thicket that often results from a rulesfocused approach.<sup>55</sup> Re-framing regulation in this way and adopting a principle-based approach facilitates action, whilst also allowing future revisions in the regulatory regime to be based on the incorporation of new knowledge or subsequent discoveries. In this way, the solution to the regulatory dichotomy of recklessness or paralysis is a willingness to move beyond the expectation of finality that currently surrounds regulatory decision-making. Principle-based “contingency” can facilitate a new flexibility, especially if it is combined with more open communication on the part of regulators around such contingent action. However, despite the clear benefits, companies often raise concerns about risks related to > 53 Nathan Young, _Book Review_ , 35 CANADIAN J. OF SOCIOLOGY/CAHIERS 327 (2010) (“Rather than approaching decisions as final events (to be made for all-time and from which we all “move on”), Acting in an Uncertain World advances the alternative notion of ‘measured action’ or measured decision-making, where ‘you do not decide [an outcome], you take measures’ that are based on inclusive processes that involve both experts and the public, but that ultimately remain open-ended so as to incorporate new knowledge, discoveries, and claims. The need for finality, the authors argue, is usually overstated, more the product of expediency and habit than actual necessity. The antidote to the false dichotomy of recklessness versus paralysis is a willingness to remove the artificial temporal horizon that currently defines decisionmaking, while at the same time creating new mechanisms for consistent citizen involvement in the ongoing process of determining measured actions.”). > 54 _See_ Wulf A. Kaal, _Evolution of Law: Dynamic Regulation in a New Institutional Economics Framework in_ FESTCHRIFT ZU EHREN VON CHRISTIAN KIRCHNER 1211, 1212 (Wulf A. Kaal, Matthias Schmidt & Andreas Schwartze eds., 2014) [hereinafter Kaal in FS Kirchner]. (“[T]he institutional infrastructure for rulemaking was geared towards the creation of rules for governing a relatively stable society with less upward mobility and relatively stable economic and market environments.”); KARL R. POPPER, THE POVERTY OF HISTORICISM 46 (3<sup>rd</sup> ed. 1961). > 55 Kaal, _supra_ note 2, at *18 (“The law and technology literature heralded principles-based regulation as another promising remedy for the pacing problem. As contrasted with more rigid rules-based regulation, principles-based regulation emphasizes general and abstract guiding principles for desired regulatory outcomes. . . . The downsides of principles-based regulation include a costly and time consuming change from rules-based regulations to principles-based regulation, uncertainty, and compliance problems because of uncertainty.”). doing business in a principle-based environment.<sup>56</sup> The argument is that it is usually impossible to operate in compliance with principles that could again change “after the fact”.<sup>57</sup> That is to say, a principle-based approach may facilitate policy makers, lawmakers and regulators in promulgating facts-based laws and rules through the backdoor.<sup>58</sup> How then can we deal with this potential shortcoming of a principle-based strategy? # _3. The Minimum Regulatory “Sandbox”_ The Financial Conduct Authority ( _FCA_ ), the financial regulatory body in the United Kingdom, may offer some clues as to an answer. In April 2016, the _FCA_ broke new ground by announcing the introduction for a “regulatory sandbox” which allows both startup and established companies to roll out and test new ideas, products and business models in the area of Fintech (i.e., new technologies aimed at making financial services, ranging from online lending to digital currencies, more efficient).<sup>59</sup> The investment data suggests that the UK regulator is moving in the right direction with this kind of decision (see Figure 5). The idea behind the sandbox is to provide a safe space for testing innovative products and services without being forced to comply with the applicable set of rules and regulations.<sup>60</sup> With the sandbox, the regulator aims to foster innovation by lowering regulatory barriers > 56 Julia Black, Martyn Hopper & Christa Band, _Making a Success of Principles-based Regulation_ , 1 LAW & FIN. MKTS. REV. 191, 196 (2007) (“One of the criticisms usually raised against Principles-based regimes is that they do not give the industry the comfort of knowing where it stands because the meaning of the Principles is not sufficiently certain.”). > 57 Kaal, _supra_ note 2 at *18 (“Dynamic regulatory mechanisms can avoid the downsides of principles-based regulation. Similarities between dynamic regulatory mechanisms and principles-based regulation include the ability to respond to changing industry practices and the ability to improve relationships between regulators and regulated companies. Dynamic regulation can respond to changing industry practices through feedback effects and enhanced information for regulation. Dynamic regulation improves the relationship between regulators and companies through for-cause regulation based on real-time high quality information for regulation and associated feedback effects.”). > 58 _Id_ . at *18. 59 Christopher Woolard, FCA Director of Strategy and Competition, Address at the Innovate Finance Global Summit (Apr. 11, 2016), https://www.fca.org.uk/news/speeches/innovate-finance-global-summit. 60FINANCIAL CONDUCT AUTHORITY, REGULATORY SANDBOX (2015), https://www.fca.org.uk/publication/research/regulatory-sandbox.pdf (“This paper is a report to Her Majesty’s Treasury on the feasibility and practicalities of developing a regulatory sandbox that is a ‘safe space’ in which businesses can test innovative products, services, business models and delivery mechanisms without immediately incurring all the normal regulatory consequences of engaging in the activity in question. We believe there is opportunity to expand Project Innovate and introduce a regulatory sandbox. In this report, we set out our plans for implementing the sandbox and proposals for how we can work with industry and the Government to further support businesses.”). and costs for testing disruptive innovative technologies, while ensuring that consumers will not be negatively affected.<sup>61</sup> **Figure 5: FinTech – Venture Capital Investments** <!-- Start of picture text --> 1400.0<br>1200.0<br>1000.0<br>Acquisi3on Financing<br>Grants<br>800.0 Equity for Service<br>Restart Later Stage VC<br>Later stage VC<br>600.0<br>Early stage VC<br>Seed<br>400.0 Angel<br>Pre/Accelerator/Incubator<br>200.0<br>.0<br>2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016<br>Source: PitchBook Data, Inc.<br><!-- End of picture text --> What is perhaps most interesting about the sandbox is that new ideas, product and services can be tested in a “live” environment.<sup>62</sup> In order to create this environment, the _FCA_ defined a set of default parameters that can be altered on a case-by-case basis.<sup>63</sup> These parameters include: **_Duration_** - as a default the FCA considers three to six months to be appropriate. > 61 The three key questions that were investigated by the FCA on the sandbox proposal were the following: regulatory barriers (how and to what extent can they be lowered?), safeguards (what safeguard should be in place to ensure safety), and legal framework (what regulatory arrangement are mandated by EU law). _See Id_ . at 3. > 62 Chris Tobey, _The Financial Conduct Authority (FCA) went live with Project Innovate in October 2014 with the aim to encourage competition in the finance industry through disruptive innovation in the interest of consumers_ , SWORDAPAK (June 16, 2016 15:54PM), http://sword-apak.com/blog/posts/2016/june/thefca-regulatory-sandbox-is-here-to-disrupt-the-finance-industry-in-a-big-way/ (“Unauthorized firms will be given restricted authorization to test their products/strategies in a live environment without the concerns of costs and standard regulatory requirements.”). > 63 FINANCIAL CONDUCT AUTHORITY, _supra_ note 60, at 3 (“The FCA sandbox unit will offer a range of options: Firms face different regulatory challenges depending on a range of factors, including regulatory status and type of activity. We have identified a range of available options for helping firms to address some of these challenges while testing in the sandbox (see section 3.5 and following).”). **_Customers_** - the number of customers should be big enough to generate statistically relevant data and information. This means that customers should be selected based on certain criteria that are appropriate for the product and service. Clearly, pre-agreed safeguards and protections should be in place. **_Disclosure_** - customers should be accurately informed about the test and available compensation (if needed). Moreover, indicators, parameters and milestones that are used during the testing phase should be clear set out from the outset. What makes the regulatory sandbox so attractive is that, insofar as technology has consequences that flow into everyday lives, such technology will be open to discussion and democratic supervision and control. In this way, public entitlement to participate in regulatory debates can help to create a renewed sense of legitimacy that justifies the regulation. It should come as no surprise that “regulatory sandboxes” are currently being discussed and considered by other regulators, such as the Australian Securities and Investment Commission ( _ASIC_ ), Singapore’s Monetary Authority ( _MAS_ ) and Abu Dhabi’s Financial Services Regulatory Authority ( _FSRA_ ).<sup>64</sup> > 64 Patrick Dwyer, _Regulatory Sandboxes: ‘Safe Spaces’ for Start-Ups_ , FINTECH BUSINESS (June 27, 2016), http://www.fintechbusiness.com/blogs/399-regulatory-sandboxes-safe-spaces-for-startups (“These sandboxes will allow start-ups to test their services in a live environment with a reduced level of regulation, much like a clinical trial for a new drug. In the words of the UK’s Financial Conduct Authority (FCA), the regulatory sandbox is a ‘safe space’ for fintech start-ups. A regulatory sandbox scheme was launched by the FCA last year. The Monetary Authority of Singapore (MAS), keen to promote Singapore as a fintech innovation centre, released a proposal paper on its regulatory sandbox on 6 June.”); see also _Innovation Hub_ , ASIC (last updated Aug. 6, 2016), http://asic.gov.au/for-business/your-business/innovation-hub/ (“Through the hub, eligible businesses can request to receive informal guidance from ASIC on the licensing process and key regulatory issues that should be considered as you set up your business. This information is designed to help you understand your options and, if relevant, prepare your applications for licences or waivers from the law.”). # **IV. Conclusion** Regulators seem to understand that we have moved away from a model in which regulatory decision-making is facts-based and delegated to politicians and experts. In a data-based regulatory environment there is a clear need for measures that are built on flexible and inclusive processes that involve startups and established companies, regulators, experts and the public. This regulatory approach is already adopted in the financial industry. It is only to be expected that this trend will expand to other areas of innovation and technology.