Discussion Summary: Can Global Regulators Manage the Giants of the Digital Landscape?
In the rapidly evolving digital landscape, policymakers are grappling with the complexities of applying existing laws and regulations to decentralized online services, such as decentralized exchanges and blockchain-based platforms. This challenge arises because these regulations were primarily designed with traditional, centralized intermediaries in mind.
Neil Chilson, a senior research fellow for tech and innovation at Stand Together, and Konstantinos Komaitis, a prominent figure in the field, recently emphasized the need for a more flexible, outcomes-based regulatory approach. This approach would shift the focus from rigid rules based on organizational structure to addressing the results or effects of a service.
One of the key challenges faced by decentralized platforms is regulatory uncertainty. Laws vary widely across jurisdictions and are evolving, making compliance difficult. Decentralized platforms often struggle to meet traditional requirements like Anti-Money Laundering (AML), Know Your Customer (KYC), and securities laws, which may not neatly apply to decentralized architectures.
Another challenge is technological incompatibility. Existing legal frameworks often mandate centralized control points, like custodians or central securities depositories, which do not exist in decentralized systems. For example, legal barriers prevent Distributed Ledger Technology (DLT) providers from integrating trading, settlement, and clearing within one entity under current EU law.
Decentralized services also face issues around data privacy and reporting, complicating regulatory reconciliation and enforcement efforts. Enforcement limitations, due to the decentralized nature and absence of a single controlling entity, further risk gaps in consumer protection and market integrity.
To address these challenges, Chilson and Komaitis propose a regulatory framework that emphasizes risk management, proportionality, and technological neutrality. This approach could enable per-service authorizations, recognise and leverage technological features of decentralized systems, allow selective, privacy-respecting data sharing, and encourage innovation and market diversity.
Chilson also urged the audience to consider an experimental approach in how they govern technology and approach issues like privacy and content moderation. Both experts highlighted the need for flexible regulation to adapt to changing trends and suggested alternative approaches to content moderation, focusing on outputs and harms, could be more effective.
Komaitis emphasized that decentralization extends beyond technological decentralization to include the decentralization of decision-making power. He argued that the principles behind decentralization online are similar to those behind subsidiarity.
The Center for Data Innovation recently convened experts to discuss these challenges, with the debate centering on the differences between a prescriptive approach and an outcomes-based approach to regulation. Both Chilson and Komaitis agreed that current legislation is prescriptive and built with specific players and services in mind, particularly in debates over content moderation.
In recent years, some users have gravitated toward decentralized Internet services like Mastodon and Peertube. As these services continue to grow, the need for a regulatory framework that accommodates the operational realities of both centralized and decentralized services becomes increasingly important. Such a framework would help create a digital ecosystem capable of evolving alongside rapid technological innovation without stifling progress or jeopardizing regulatory goals.
- Neil Chilson and Konstantinos Komaitis advocate for a more flexible, outcomes-based regulatory approach to address the challenges faced by decentralized platforms.
- The key challenge for decentralized platforms is regulatory uncertainty, as laws vary across jurisdictions and may not apply to decentralized architectures.
- Decentralized services also struggle with technological incompatibility, as existing legal frameworks mandate centralized control points that don't exist in decentralized systems.
- Issues around data privacy and reporting complicate regulatory reconciliation and enforcement efforts for decentralized platforms.
- Chilson and Komaitis propose a regulatory framework emphasizing risk management, proportionality, and technological neutrality, which could accommodate both centralized and decentralized services.
- The Center for Data Innovation hosted a discussion on these challenges, focusing on the differences between a prescriptive and an outcomes-based approach to regulation, particularly in debates over content moderation.
