Atty. Gregorio B. Austral, CPA
The difficulty of regulating an innovation
Who would have thought that a company so indispensable in all our special occasions in the past would be toppled down and its most admired product could even be hardly appreciated by the young generation of today? Remember Kodak whose brand name became so famous in film photography. So famous that the public used its brand name to refer to the act of taking pictures. When we took pictures before, we do not say “magpapicture” but we say “magpaKodak”. Kodak enjoyed market leadership in a way that it was very hard for new entrants in the camera and film industry to penetrate. But this was only until the market started patronizing digital photography.
Kodak is a casualty of “disruptive innovation.” The death or near-death status of other market leaders like RCPI, Nokia, Underwood, Polaroid, Blackberry and many other companies can likewise be attributed to this phenomenon.
Disruption theory tells us that certain innovations can undermine existing products, firms, or even entire industries. The market entrant’s innovation ultimately displaces industry incumbents (Nathan Cortez, Regulating Disruptive Innovation, Berkeley Technology Law Journal, Vol. 29, Issue 1 Spring).
Disruptive innovation presents a difficult task to the regulators. In the Philippines, we are known to have many laws and regulations which are almost a hundred years old but remain to be the bible of many regulatory agencies. Take the case of our Negotiable Instruments Law which is primarily based on the assumption that merchants will do their transaction in writing. With the emergence of mobile and online banking, time will come that business will completely patronize paperless transactions. By that time, this law will become completely irrelevant.
The white or yellow taxi used to be the king of the road in big cities. Taxi companies invested heavily on their taxi fleet. Before, the company with the most number of units was the market leader. Today, we have the biggest taxi company which does not own even a single taxi unit. With Uber and Grab taking the big chunk of the market used to be dominated by the white or yellow cabs, the Land Transportation Franchising and Regulatory Board (LTFRB) is in a quandary as to how to regulate these emerging companies. Uber and Grab are just mere ride-sharing apps in our mobile phones. Philippine jurisprudence has not yet clearly settled whether the owners of the ride-sharing apps fall under the LTFRB’s regulatory powers. Although LTFRB recognized the vehicle owner as the TNVS (Transport Network Vehicle Service) and Uber and Grab as the TNC (Transport Network Company), it remains a topic of legal debate whether the TNC falls under the regulatory jurisdiction of LTFRB.
Another innovation that has started to disrupt business is the use of cryptocurrency.
Investopedia.com describes cryptocurrency as a digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of this security feature. A defining feature of a cryptocurrency, and arguably its most endearing allure, is its organic nature; it is not issued by any central authority, rendering it theoretically immune to government interference or manipulation. Cryptocurrencies make it easier to transfer funds between two parties in a transaction; these transfers are facilitated through the use of public and private keys for security purposes. These fund transfers are done with minimal processing fees, allowing users to avoid the steep fees charged by most banks and financial institutions for wire transfers. Central to the genius of one cryptocurrency, the Bitcoin, is the block chain it uses to store an online ledger of all the transactions that have ever been conducted using bitcoins, providing a data structure for this ledger that is exposed to a limited threat from hackers and can be copied across all computers running Bitcoin software. Many experts see this block chain as having important uses in technologies, such as online voting and crowdfunding, and major financial institutions such as JP Morgan Chase see potential in cryptocurrencies to lower transaction costs by making payment processing more efficient.
With the introduction of cryptocurrency, we will be seeing the days when the paper bills and coins containing archaic security features issued by the Bangko Sentral ng Pilipinas will become collector’s items and can be found only in the museum.
Aside from the issue of jurisdiction, regulatory agencies also face the dilemma of what laws and regulations to apply. Innovations run like a bullet train, but laws and regulations creep like a worm.
In this VUCA (Volatile, Uncertain, Complex and Ambiguous) world, the only thing that is permanent is change. Regulators have a dilemma in supervising disruptive innovations. Too much regulation can stifle innovation and prevents development. This is a case of law at odds with technology. But a very liberal regulatory policy may amount to a disservice to the sworn duty of these regulatory agencies, that is, to protect the public from the greed and abuse of unscrupulous business empires. These are difficult choices of regulatory policy framework.
Other than charter change, our lawmakers and regulators should also keep their hands busy on laws regulating technology. Otherwise, obsolescence may eventually serve their death warrants. Who knows if there will also be a disruptive innovation in government?