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Politicians And Regulations Are About To End The Startup World

Politicians And Regulations Are About To End The Startup World
By Alex Barrera • Issue #37 • View online
Hello everyone! Super weird timing for the newsletter, but I really wanted to get this week’s post out of the door. As promised, I’m doing a walkthrough of the top disruptive technologies are the problem with regulations. This is boring for many entrepreneurs, but it’s becoming the biggest challenge for most startups. Ignoring the current power war between politicians and startups will only harm innovation. It’s a Weekend edition, so it’s LONG. Find your quiet spot at home, get that tea going and enjoy!
17 minutes read.

Politicians And Regulations Are About To End The Startup World
Photo by Andrés Gerlotti on Unsplash
Photo by Andrés Gerlotti on Unsplash
Many trends are shaping our current technologic landscape. However, there is one that everyone keeps ignoring. That’s the collision between the technological and political establishments
For decades, the technology industry has been evolving at the fringes of the political space. Power circled Washington, and the enemy was the Wall Street club. The forces at work kept bankers on a tight leash. For decades, Wall Street has influenced the country and by extension, the world. That ended in 2016. 
The 2016 US Presidential Elections changed that perception. Suddenly, the political establishment started regarding big technology companies as the new power broker. And with good reason.  
Like a wild vine, tech corporation’s tendrils have extended everywhere. They not only control their core business but myriad other side industries. Such unchecked expansion is creating real shockwaves in the social fabric at a global scale.
The acceleration of automation, AI and other technologies are corroding the pillars of society. And the political sphere just woke up to it. 
We’re entering a time of titanic wars. Politicians are starting to pursue regulation to tame the tech beast aggressively. Meanwhile, the startup elites keep investing in staying under the radar.
“The company decided against informing the public because it would lead to “us coming into the spotlight alongside or even instead of Facebook despite having stayed under the radar throughout the Cambridge Analytica scandal,” according to an internal memo.”
The Regulation Wars
The era of “ask for forgiveness later” is finished. Startups aren’t targeting game apps anymore. Disruption is expanding and touching industries deeply tied to our society. Such a push is finding increasing resistance and stiffer regulations. 
This isn’t necessarily wrong. The cry for more regulations around technology, isn’t only political. An increasing number of technocrats are asking for better safeguards.
The problem though is the complexity of the matter. The political establishment is wary of several aspects. On one side you have the monopolistic aspects of certain technology corporations like Amazon or Google. The fear is that they have so much power that they can swing whole markets. 
On the other side, the capacity of individual companies like Facebook or Twitter, to subvert the information channels, terrorizes politicians. If Facebook’s News Feed algorithm is casually capable of swinging an election, what would happen if they did it on purpose? 
The immediate reaction to this fear is to assert control. The first line of attack will be to apply new definitions to the current antitrust laws. This is coming in conjunction with technology specific taxes like the Google Tax that’s about to pass in Spain
The problem though is that such interventions are only scratching the surface. The unregulated technology iceberg is massive, and it’s growing more extensive and complex every day.
Rethinking the regulation game
That technology is out of control is an understatement. As much as I love technology, we’ve gone from a niche market to an industry that controls every aspect of our lives. When the incentives of the tech elites diverge from the people they serve, there is a problem
Governments are struggling with the rapid rise of technology as a world-defining force. The speed of innovation and the increasing reach of startups is outpacing the already sluggish process. It’s not only the speed and reach. It’s the complexity of assessing the actual impact of technology on society
I’ve been quite vocal about the way politicians draft new regulations. It’s not feasible to have a political taskforce draft something that can impact millions. Not even when politicians seek help from the experts. The issue is that technology is increasingly entwined with much larger systems. It’s not an isolated application anymore. It’s an app that connects with our social graph, with the financial system, with the insurance world or the global transport infrastructure. 
Understanding the impact of a simple change in the regulations requires technology. We need predictive models and simulations that inform the short, mid and long-term effects of regulation. Even more importantly, such models need to make sure they don’t introduce biases or unethical recommendations. Drafting whatever we feel like isn’t a viable option anymore. 
To offset the lack of good judgment and vision of regulators, some companies are taking matters into their own hands. They try to build models that support their claims that their services are good for society. 
“Ubernomics keeps a low profile, despite the fact that Uber has collaborated on research papers with economic superstars like Levitt and former Obama adviser Alan Krueger. Its wide-ranging mandate includes studying the consumer experience, testing new features and incentives, supporting Uber’s public policy needs, and producing peer-reviewed academic research.”
  • The Bottom Line: The weakest aspect of our current regulatory framework is its passiveness. The exponential acceleration of disruption requires active regulation, not a passive and rigid process. It needs to understand when and where society requires new protections, not to wait until people die because of it. 
Regulatory Guerrillas
As I mentioned before, the clash between technology and politicians is reaching a breaking point. The problem is, there isn’t a single fault line. Several disruptive trends are on a collision course with fundamental social and civil rights. Some of them, though, are happening concurrently and approaching faster than most predictions.  
Next Generation Transportation
The one space that’s ripe for regulation is the transportation industry. There are no doubts because change is here and happening as we speak. There are two significant forces in play here. On one side we have the growing presence of ride-sharing companies like Uber, Lyft or BlaBlaCar. 
Their business model is challenging the public transport sector at large. Governments are deflecting any change of the current licensing model. They’re making small concessions and exceptions, but they seem reluctant to address the elephant in the room. The current model doesn’t work and needs to be rethought. 
On the other side, we have car-sharing companies like Car2Go, Lime or Mobike. These organizations are tapping and accelerating the change from ownership to renting of the transportation infrastructure. They are challenging many local rules, including stationing, accessibility or rights of drivers. Like the previous group, there is increasing friction between municipal forces and startups. Most cities wrestled with Uber’s aggressive push some years ago. Second and third generation sharing companies aren’t finding such fertile ground anymore. 
Source: Xinhua News Agency
Source: Xinhua News Agency
  • What’s Next: Many municipalities are ignoring the consequences of not rethinking the model. Consumers will use new ways of transportation, no matter what. There will be new services, unbeknown to all, built on top of these platforms. Cities need to start making processes that are scalable, informed and balanced for all actors. Dealing with new startups every weekend with an out-of-band approach won’t work.
Autonomous vehicles 
The previous two trends are reshaping public transport, especially in cities. They are the present. Following that trajectory closely we have autonomous vehicles. 
Driverless vehicles are going to have a massive impact on current regulations. From insurance claims to liability scope to the obliteration of whole industries like that of truck drivers. 
Two of the most challenging and fastest moving countries in this respect are US and China. The US is achieving an impressive track record, but China is catching up quickly
Source: National Conference of State Legislatures (NCSL)
Source: National Conference of State Legislatures (NCSL)
The one advantage of China is the lax enforcement of specific laws there. If Beijing has a vested interest in a technology, they won’t enforce the rules. And that’s what’s happening. 
Source: Synced Review
Source: Synced Review
Source: Synced Review
Source: Synced Review
Governments are deploying city and state exceptions and drafting new regulations for autonomous vehicles. Nonetheless, most countries are wholly unprepared for this, both regarding new laws and the chained effects this will have on their economy. 
Source: Autonomous Vehicle Readiness Index Report. KPMG January 2018.
Source: Autonomous Vehicle Readiness Index Report. KPMG January 2018.
  • Why it matters: The domino effect autonomous vehicles will trigger is immense. Insurance will have to change. High-speed data connectivity and smart roads will be deployed. These changes will require new regulations including new privacy or health-related regulations. Thousands of people will lose their job nearly simultaneously. The effect will strain the already battered social welfare systems. It’s not the next scenario that’ should worry us, but the second and third-degree changes. 
Automation of Labor
As startups keep automating century-old processes, the menace of a labor world without human workers looms bigger. This wave is unavoidable and has significant repercussions for any country, but mainly, for any political party. 
Politicians draw their power from their constituents (that’s the theory). Anything that threatens their livelihood is a political nuke. Automation of labor is the mother of all thermonuclear bombs. 
The impact will reshape the political landscape. It will obliterate the old partisan groups and will give rise to new forces within the spectrum. It’s surprising though that there isn’t a single country-level regulatory framework that covers this. The European Union spearheads the effort with some early-stage civil robotic laws, but it’s still far off and too abstract. 
The consequences of ignoring this are dramatic. Addressing three side effects is essential. The obvious one is, what to do with all the low-skilled workers that will lose their jobs to automation. Many experts argue that their integration into the new digital markets will be impossible. Besides, society needs to absorb these unemployed in a very short time span. For many, the only viable option to do this is through nation-wide Unconditional Basic Income (UBC). The problem though is that the current experiments with UBC are throwing mixed results.
“Whereas many auxiliary jobs are now performed by untrained workers, students or trainees on the basis of marginal employment, it is to be assumed that the demand for these jobs will decline massively in a technically modernized establishment. The integration of these workers into the new digital labor market is practically impossible.”
  • Why it matters: The state will need to support these vast amounts of long-term unemployed. This situation will add higher financial pressure to the social welfare system. The fact that such unemployment will happen within a short period will spark civil unrest and a deep political crisis. 
Another issue to tackle is labor protection against automation. Will governments allow full automation of any job? Will there be a “Human Quota” for certain industries? Everything points to the rise of a “made by humans” brand. Right now there are zero thoughts or legislation around this. Some will see it as a protectionist approach, but Human Quotas might be the only way to slow down the growth of the unemployed artificially.
Last but not least, the automation of work will take a toll on our tax system. With fewer workers comes fewer taxes. As mentioned before, some countries are already toying with technology taxes. But their scope is aimed at taking a cut of their digital businesses. There needs to be a serious analysis of what’s being automated and how much should we tax it with. Robot taxes will be first, mostly because they’re easy to comprehend and straightforward. AI systems taxes might be a much more difficult task to assess or tax. 
“Many people will not be able to retrain for another position for physical or cognitive reasons. These people will become long-term unemployed and will have to be supported by the state. The high financial pressure on social welfare systems will be a central problem.”
Gig Economy
Among the growing concerns around labor is the so-called Gig Economy. In all honesty, the Gig Economy isn’t new. It’s been in our societies for years now. Technology-enhanced platforms are only augmenting the impact of a preexisting situation
Several ramifications are essential to explore. The first one is around what exactly is a crowd worker. There isn’t a clear cut definition, much less one all countries can agree upon. The absence of this makes it hard to decide which legislation applies to them. Most of the friction between startups and regulators is around this point. 
Apart from an unclear description, there is uncertainty around what legal jurisdiction is appropriate. Most of the Gig Economy platforms have a global footprint. It’s hard to assess what takes priority; the country of origin of the crowd worker, of the recipient, or of the platform. 
The outcome of such legal void is the unprotected status of the crowd workers. Governments need to start regulating on a pan-regional scope. For example, the European Union should set a Directive that describes and protects EU crowd workers.
“Crowd workers are freelancers who offer their skills via their computers on online platforms. Crowd working is a symbol of a changing world of work for white-collar workers in the gig economy. This covers smaller tasks, such as writing product reviews, searching for phone numbers, and more comprehensive work, such as testing software, providing legal advice, ghostwriting or designing and programming a website. […] These newly created ‘mini-jobs’ are particularly popular in developing countries and with young people.”
Source: The Online Platform Economy in 2018 Report. JP Morgan Institute
Source: The Online Platform Economy in 2018 Report. JP Morgan Institute
These issues though, are superficial. The most worrisome effect of the new Gig Economy is the continuous erosion of high-wage structures in western countries. Many high-wage positions are being spliced into smaller tasks. Such “mini-jobs” are being outsourced to the Gig Economy, mostly to youngsters in developing countries. The consequence is an erosion of high-paid jobs in the west, and low access to highly skilled positions in developing countries. 
It’s critical to start drafting regulations to protect minimum income for all. It’s paramount that we protect the most vulnerable workers from turning to the Gig Economy to survive. In other words, Gig Economy status needs to be legislated and narrowed down. The enabling platforms shouldn’t be the ones handing down and defining the eligibility of their crowd workers. That should be a nation and region-wide effort by the states. 
“Due to the lack of alternatives, many young employees are working in less well paid ‘crowd working mini-jobs’ outside social security systems, which could lead to poverty risks.”
  • What to watch: The automation of work will render many workers unemployable. Their only means of survival will be to join the Gig Economy. The outcome will be a rapid destruction of the middle class, social unrest, and increased populist movements. 
Source: The Online Platform Economy in 2018 Report. JP Morgan Institute
Source: The Online Platform Economy in 2018 Report. JP Morgan Institute
Source: The Online Platform Economy in 2018 Report. JP Morgan Institute
Source: The Online Platform Economy in 2018 Report. JP Morgan Institute
Artificial Intelligence Bias
Derived from the extended use of automated systems is the fairness and morals of such. One thing is using these Artificial Intelligence systems for commercial purposes; another is employing such predictive models to make life or death decisions about people.
What recent studies have demonstrated is a pervasive recurrence of bias in such systems. The most significant risk here is the invisibility of the problem. Prejudice is hard to prove in humans; when we scale it with AI systems, it’s even harder. 
Source: Incidents of AI bias. When artificial intelligence goes wrong. LiveMint.
Source: Incidents of AI bias. When artificial intelligence goes wrong. LiveMint.
There is an increasing number of companies spurring AI-bias expert teams to keep their systems in check. There are also new organizations devoted exclusively to such a task. However, the proliferation of critical decision-based systems is faster than that of the checks and balances. 
The more extended these systems become, the more significant the risk of shattering society. The development of smart cities or autonomous vehicles is accelerating the adoption at a critical infrastructure level. 
Some regulators are taking notice. New York City became one of the first cities to pass an Algorithmic bill. The European Union is funding a project named Algoaware for Algorithmic Awareness-Building. The research is in its early stages, but it’s a significant step forward. 
“Particular attention must be paid by developers and regulators to the question of human-machine interfaces. Artificial and human intelligence are fundamentally different, and interfaces between the two must be designed carefully, and reviewed constantly, in order to avoid misunderstandings that in many applications could have serious consequences.”
Source: Student Predictions & Protections: Algorithm Bias in AI-Based Learning, June 2018
Source: Student Predictions & Protections: Algorithm Bias in AI-Based Learning, June 2018
  • What to watch: The pervasiveness of these AI-backed decisions at all levels of society is massive. The subtleness of the bias and the technological illiteracy of most people, especially politicians, makes detection impractical from such a high vantage point as a European watchdog. Detection, tracking, and counteraction requires nation-wide capillarity. Each country should start developing an agency to keep the right checks and balances. 
DNA Manipulation
But not all the trends are related to Artificial Intelligence. Synthetic Biology and more precisely, the use of CRISPR-Cas9 for DNA manipulation is becoming the future of many industries. With great advances comes grave risks too. 
For example, gene editing is becoming the de-facto for an increasing number of startups in the food industry. Food is tightly regulated, and the use of CRISPR-Cas9 in the industry has raised concerns. 
Nonetheless, depending on the country, gene-editing of crops is subjected to very different regulations. In July of 2018, Europe’s highest court ordered the expansion of genetically modified crop regulation to gene-editing too. Meanwhile, the US took the opposite approach and dropped any regulation around crop gene-editing. 
“This will have a chilling effect on research, in the same way, that GMO legislation has had a chilling effect for 15 years now,” says Stefan Jansson, a plant physiologist at Umeå University in Sweden. Gene-edited crops will not vanish from European research labs, but he worries that the funding to develop them could dry up. “If we cannot produce things that society finds helpful, then they will be less likely to fund us.”
Both regions illustrate how difficult it is to strike the right balance. Europe always tries to protect the consumer, while the US tends to favor research and free commerce.
However, the technology is showing incredible results in a wide variety of fields, including human experimentation. Adding strict regulations might hinder progress. Some countries like China are already taking advantage of this. 
“Most countries are struggling to assess whether gene editing may or may not be different from classical genetic engineering—from both a research, applications, and product standpoint. The most contentious areas of debate seem to revolve around gene-edited agriculture and food products and whether they should be regulated differently from genetically modified organisms. Contentious and unresolved debates also surround human germline editing.”
Crispr goes global: A snapshot of rules, policies, and attitudes. Bulletin of The Atomic Scientists. June 2018
Beyond human or crops editing, CRISPR-Cas9 is also used for insect gene editing. Some scientists use it to produce Malaria-deterrent mosquitos. These modified impotent mosquitos can wipe whole populations in one generation. The goal is to eradicate the major Malaria infection vector, mosquitos. The disease kills north of half a million people each year. Making black or white regulatory decisions isn’t as clear-cut in specific fields, much less when it has a direct impact on human survival
  • The bottom line: When regulating cutting-edge technologies it’s important to remember that most use-cases haven’t been deployed yet. Due to globalization, restricting based on fear might stifle innovation and make a country lose their competitive advantage. An increasing number of states are adopting a legal-sandbox approach to increasingly sophisticated technologies. 
Blockchain & Smart Contracts
Another fast-moving disruptive technology is Blockchain. Beyond the cryptocurrency frenzy, the technology itself is poised to change many industries
There are two elements to Blockchain; the underlying infrastructure, commonly known as the “ledger,” and the applications built on top via Smart Contracts
While everyone is debating about the infrastructure level, the most complicated aspect to Blockchain is the distributed contracts built on top of it. If a contract gets out of control, the potential repercussions are significant. An increasing number of organizations are adopting the underlying Blockchain infrastructure as an experimental, computational platform. It’s a matter of time before we start experiencing more and more incidents. 
The question though is who is responsible if something happens? The very decentralized nature of Blockchain makes it very hard to assess. And while the industry is in its infancy, contracts will get exponentially more complicated.
Imagine a field that brings black-box-decision-making algorithms and runs in a distributed and decentralized platform. The more systems we tie into this network (and we will), the higher the chance of triggering a Butterfly Effect. 
Several countries have already started regulating Blockchain. The problem is, they’re focused on its economic use cases. Those are the low-hanging fruit issues. As the infrastructure layer matures, the Blockchain fabric will become more complex. New use cases will find room in it to thrive. The most challenging aspect about it will be its global footprint. It will be close to impossible to enforce local regulations on such a distributed system. 
Europe, though, is taking an interesting approach. They already have an EU Blockchain Observatory that serves as a watchdog. Now they’re toying with the idea of applying a stamp of approval on specific applications built on top of Blockchain. The idea is enticing. It will turn regulators into trusted entities. This approach though still conflicts with the current privacy regulation, GDPR. Regulators need to iron out these tensions between a decentralized system and the right to privacy control. For new rules to be enforceable, they’ll need to take a global scope and become very flexible
“The most obvious and oft-cited point of tension comes from the fact that blockchains are, generally speaking, constantly growing, append-only databases, to which information can only be added, not removed. GDPR, on the other hand, explicitly gives individuals the right to have their data amended to ensure it remains accurate or (with certain exceptions) erased when no longer needed.”
  • Why it matters: The increasing class disparity is convulsing the world. This social fracture is eroding trust in politicians and world leaders. Consumers will increasingly turn to decentralized structures as a way to upset the status quo. Governments, despite the oxymoron, should start deploying blockchain labs and sandboxes to keep track of the new use cases. Regulators might need to evolve into certification agents with a global footprint. Passing rigid laws won’t be enforceable in Blockchain.
Weaponizing of Artificial Intelligence
These new trends are shaping our future. Some of them are already in full swing. Others will take a little longer, but they’re unstoppable. Innovation though usually has two faces. The useful, effective, potentially-life-saving one, and a much darker one
One of these dark sides is the trend toward civil-military integrations. The boundaries between commercial, civil uses and military ones are blurring. Many governments are approaching the leading Artificial Intelligent companies with partnership proposals. 
In the US, Google, Microsoft or Amazon have already had employees resigning due to their ongoing military contracts. The opposition to such integration runs all the way to the top. Companies like Microsoft are urging regulators to restrict the use of facial recognition technology. 
The truth is, there are no regulations that address the use of such technologies by the government. Even the GDPR, which is rather broad, doesn’t apply when it comes to national security activities or law enforcement. And this is a big issue. Many security agencies are deploying these AI systems to track and control their citizens. Sometimes even worse. In China, already, such civil-military collaborations are the norm.
“So far, there have not been any indicators of resistance to the idea that Chinese technology companies should be in service of the party-state. That’s hardly surprising; Xi’s regime has cracked down harshly on dissent, and open policy debates are far more limited than they were even just five years ago.”
  • Why it matters: The next wave of AI-based technologies is orders of magnitude more potent than what humanity has ever seen. Such power is eclipsing whatever force the political establishment had. We’re going to see a growing interest in such tools by the military and security agencies. The unchecked exploitation of such weapons by a “shadow” government could destroy society as we know it. We’re closer to a world out of 1984 than we know it. There needs to be a national AI ethics committee that balances such collaborations.  
“Developing strong working relationships, particularly in the defense sector, between public and private AI developers is critical, as much of the innovation is taking place in the commercial sector. Ensuring that intelligent systems charged with critical tasks can carry them out safely and ethically will require openness between different types of institutions.”
Final Words
This is a long article, but I wanted to give a 360 view of the significant regulation challenges we’re facing as a society. Politicians are finally waking to the menace of technology. During the next few years, we’re poised to see a string of ill-advised regulations trying to clench the rising power of startups. It will not work. The whole regulation process needs to be rethought. We won’t be able to protect our societies otherwise. 
The regulatory process needs to take a much more active role. New systems need to designed so that new predictive models can be used as part of the regulatory process. Boundaries will matter less and less, so some global legal framework needs to happen too. There’s been talks about a split of the Internet into two or even three networks. Rest assure, the partitioning will be done around regulations.
And on top of all that, we must elevate the average technological literacy of our government. 
  • The bottom line: Regulations, as we know them today, are outdated. The legal system needs to be upgraded to cope with the scale, speed and global reach of our disruptive technologies. Moving forward, few startups will be free to operate without regulations. This will add strain to the innovation engine. Startups need to plan for major legal risks and invest in Public Affairs efforts. 
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Alex Barrera

The Aleph Report

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