If there is one thing I have learned in almost 23 years of covering communications and media regulation it is this: No matter how well-intentioned, regulation often has unintended consequences that hurt the very consumers the rules are meant to protect. Case in point: “universal service” mandates that require a company to serve an entire area as a condition of offering service at all. The intention is noble: Get service out to everyone in the community, preferably at a very cheap rate. Alas, the result of mandating that result is clear: You get less competition, less investment, less innovation, and less consumer choice. And often you don’t even get everyone served.

Consider this Wall Street Journal article today, “Google Fiber Is Fast, but Is It Fair? The Company Provides Neighborhoods With Faster and Cheaper Service, but Are Some Being Left Behind?” In the story, Alistair Barr notes that:

U.S. policy long favored extending service to all. AT&T touted its “universal service” in advertisements more than a century ago. The concept was codified in a 1934 law requiring nationwide “wire and radio services” to reach everyone at “reasonable charges.” In exchange for wiring a community, telecommunications providers often gained a monopoly. Cities made similar deals with cable-TV providers beginning in the 1960s.

The problem, of course, is that while this model allowed for the slow spread of service to most communities, it came at a very steep cost: Monopoly and plain vanilla service. I documented this in a 1994 essay entitled, “Unnatural Monopoly: Critical Moments in the Development of the Bell System Monopoly.” As well-intentioned regulatory mandates started piling up, competition slowly disappeared. And a devil’s deal was eventually cut between regulators and AT&T to adopt the company’s advertising motto — “One Policy, One System, Universal Service” — as the de facto law of the land. Continue reading →

Today my colleague Eli Dourado and I have filed a public interest comment with the New York Department of Financial Services on their proposed “BitLicense” regulatory framework for digital currencies. You can read it here. As we say in the comment, NYDFS is on the right track, but ultimately misses the mark:

State financial regulators around the country have been working to apply their existing money transmission licensing statutes and regulations to new virtual currency businesses. In many cases, existing rules do not take into account the unique properties of recent innovations like cryptocurrencies. With this in mind, the department sought to develop rules that were “tailored specifically to the unique characteristics of virtual currencies.”

As Superintendent Benjamin Lawsky has stated, the aim of this project is “to strike an appropriate balance that helps protect consumers and root out illegal activity—without stifling beneficial innovation.” This is the right goal and one we applaud. It is a very difficult balance to strike, however, and we believe that the BitLicense regulatory framework as presently proposed misses the mark, for two main reasons.

First, while doing much to take into account the unique properties of virtual currencies and virtual currency businesses, the proposal nevertheless fails to accommodate some of the most important attributes of software-based innovation. To the extent that one of its chief goals is to preserve and encourage innovation, the BitLicense proposal should be modified with these considerations in mind—and this can be done without sacrificing the protections that the rules will afford consumers. Taking into account the “unique characteristics” of virtual cur-rencies is the key consideration that will foster innovation, and it is the reason why the department is creating a new BitLicense. The department should, therefore, make sure that it is indeed taking these features into account.

Second, the purpose of a BitLicense should be to take the place of a money transmission license for virtual currency businesses. That is to say, but for the creation of a new BitLicense, virtual currency businesses would be subject to money transmission licensing. Therefore, to the extent that the goal behind the new BitLicense is to protect consumers while fostering innovation, the obligations faced by BitLicensees should not be any more burdensome than those faced by traditional money transmitters. Otherwise, the new regulatory framework will have the opposite effect of the one intended. If it is more costly and difficult to acquire a BitLicense than a money transmission license, we should expect less innovation. Additional regulatory burdens would put BitLicensees at a relative disadvantage, and in several instances the proposed regulatory framework is more onerous than traditional money transmitter licensing.

As Superintendent Lawsky has rightly stated, New York should avoid virtual currency rules that are “so burdensome or unwieldy that the technology can’t develop.” The proposed BitLicense framework, while close, does not strike the right balance between consumer protection and innovation. For example, its approach to consumer protection through disclosures rather than prescriptive precautionary regulation is the right approach for giving entrepreneurs flexibility to innovate while ensuring that consumers have the information they need to make informed choices. Yet there is much that can be improved in the framework to reach the goal of balancing innovation and protection. Below we outline where the framework is missing the mark and recommend some modifications that will take into account the unique properties of virtual currencies and virtual currency businesses.

We hope this comment will be helpful to the department as it further develops its proposed framework, and we hope that it will publish a revised draft of the framework and solicit a second round of comments so that we can make sure we all get it right. And it’s important that we get it right.

Other jurisdictions, such as London, are looking to become the “global centre of financial innovation,” as Chancellor George Osborne put it in a recent speech about Bitcoin. If New York drops the ball, London may just pick it up. As Garrick Hileman, economic historian at the London School of Economics, told CNet last week:

The chancellor is no doubt aware that very little of the $250 million of venture capital which has been invested in Bitcoin startups to date has gone to British-based companies. Many people believe Bitcoin will be as big as the Internet. Today’s announcement from the chancellor has the potential to be a big win for the UK economy. The bottom line on today’s announcement is that Osborne thinks he’s spotted an opportunity for the City and Silicon Roundabout to siphon investment and jobs away from the US and other markets which are taking a more aggressive Bitcoin regulatory posture.

Let’s get it right.

There’s a small but influential number of tech reporters and scholars who seem to delight in making the US sound like a broadband and technology backwater. A new Mercatus working paper by Roslyn Layton, a PhD fellow at a research center at Aalborg University, and Michael Horney a researcher at the Free State Foundation, counter that narrative and highlight data from several studies that show the US is at or near the top in important broadband categories.

For example, per Pew and ITU data, the vast majority of Americans use the Internet and the US is second in the world in data consumption per capita, trailing only South Korea. Pew reveals that for those who are not online the leading reasons are lack of usability and the Internet’s perceived lack of benefits. High cost, notably, is not the primary reason for infrequent use.

I’ve noted before some of the methodological problems in studies claiming the US has unusually high broadband prices. In what I consider their biggest contribution to the literature, Layton and Horney highlight another broadband cost frequently omitted in international comparisons: the mandatory media license fees many nations impose on broadband and television subscribers.

These fees can add as much as $44 to the monthly cost of broadband. When these fees are included in comparisons, American prices are frequently an even better value. In two-thirds of European countries and half of Asian countries, households pay a media license fee on top of the subscription fees to use devices such as connected computers and TVs.

…When calculating the real cost of international broadband prices, one needs to take into account media license fees, taxation, and subsidies. …[T]hese inputs can materially affect the cost of broadband, especially in countries where broadband is subject to value-added taxes as high as 27 percent, not to mention media license fees of hundreds of dollars per year.

US broadband providers, the authors point out, have priced broadband relatively efficiently for heterogenous uses–there are low-cost, low-bandwidth connections available as well as more expensive, higher-quality connections for intensive users.

Further, the US is well-positioned for future broadband use. Unlike many wealthy countries, Americans typically have access, at least, to broadband from telephone companies (like AT&T DSL or UVerse) as well as from a local cable provider. Competition between ISPs has meant steady investment in network upgrades, despite the 2008 global recession. The story is very different in much of Europe, where broadband investment, as a percentage of the global total, has fallen noticeably in recent years. US wireless broadband is also a bright spot: 97% of Americans can subscribe to 4G LTE while only 26% in the EU have access (which partially explains, by the way, why Europeans often pay less for mobile subscriptions–they’re using an inferior product).

There’s a lot to praise in the study and it’s necessary reading for anyone looking to understand how US broadband policy compares to other nations’. The fashionable arguments that the US is at risk of falling behind technologically were never convincing–the US is THE place to be if you’re a tech company or startup, for one–but Layton and Horney show the vulnerability of that narrative with data and rigor.

Even though few things are getting passed this Congress, the pressure is on to reauthorize the Satellite Television Extension and Localism Act (STELA) before it expires at the end of this year. Unsurprisingly, many have hoped this “must pass bill” will be the vehicle for broader reform of video. Getting video law right is important for our content rich world, but the discussion needs to expand much further than STELA. Continue reading →

In 2012, the US Chamber of Commerce put out a report claiming that intellectual property is responsible for 55 million US jobs—46 percent of private sector employment. This is a ridiculous statistic if you merely stop and think about it for a minute. But the fact that the statistic is ridiculous doesn’t mean that it won’t continue to circulate around Washington. For example, last year Rep. Marsha Blackburn cited it uncritically in an oped in The Hill.

In a new paper from Mercatus (here’s the PDF), Ian Robinson and I expose this statistic, and others like them, as pseudoscience. They are based on incredibly shoddy and misleading reasoning. Here’s the abstract of the paper:

In the past two years, a spate of misleading reports on intellectual property has sought to convince policymakers and the public that implausibly high proportions of US output and employment depend on expansive intellectual property (IP) rights. These reports provide no theoretical or empirical evidence to support such a claim, but instead simply assume that the existence of intellectual property in an industry creates the jobs in that industry. We dispute the assumption that jobs in IP-intensive industries are necessarily IP-created jobs. We first explore issues regarding job creation and the economic efficiency of IP that cut across all kinds of intellectual property. We then take a closer look at these issues across three major forms of intellectual property: trademarks, patents, and copyrights.

As they say, read the whole thing, and please share with your favorite IP maximalist.

Today the New York Department of Financial Services released a proposed framework for licensing and regulating virtual currency businesses. Their “BitLicense” proposal [PDF] is the culmination of a yearlong process that included widely publicizes hearings.

My initial reaction to the rules is that they are a step in the right direction. Whether one likes it or not, states will want to license and regulate Bitcoin-related businesses, so it’s good to see that New York engaged in a thoughtful process, and that the rules they have proposed are not out of the ordinary.

That said, I’m glad DFS will be accepting comments on the proposed framework because there are a few things that can probably be improved or clarified. For example:

  1. Licensees would be required to maintain “the identity and physical addresses of the parties involved” in “all transactions involving the payment, receipt, exchange or conversion, purchase, sale, transfer, or transmission of Virtual Currency.” That seems a bit onerous and unworkable.

    Today, if you have a wallet account with Coinbase, the company collects and keeps your identity information. Under New York’s proposal, however, they would also be required to collect the identity information of anyone you send bitcoins to, and anyone that sends bitcoins to you (which might be technically impossible). That means identifying every food truck you visit, and every alpaca sock merchant you buy from online.

    The same would apply to merchant service companies like BitPay. Today they identify their merchant account holders–say a coffee shop–but under the proposed framework they would also have to identify all of their merchants’ customers–i.e. everyone who buys a cup of coffee. Not only is this potentially unworkable, but it also would undermine some of Bitcoin’s most important benefits. For example, the ability to trade across borders, especially with those in developing countries who don’t have access to electronic payment systems, is one of Bitcoin’s greatest advantages and it could be seriously hampered by such a requirement.

    The rationale for creating a new “BitLicense” specific to virtual currencies was to design something that took the special characteristics of virtual currencies into account (something existing money transmission rules didn’t do). I hope the rule can be modified so that it can come closer to that ideal.

  2. The definition of who is engaged in “virtual currency business activity,” and thus subject to the licensing requirement, is quite broad. It has the potential to swallow up online wallet services, like Blockchain, who are merely providing software to their customers rather than administering custodial accounts. It might potentially also include non-financial services like Proof of Existence, which provides a notary service on top of the Bitcoin block chain. Ditto for other services, perhaps like NameCoin, that use cryptocurrency tokens to track assets like domain names.

  3. The rules would also require a license of anyone “controlling, administering, or issuing a Virtual Currency.” While I take this to apply to centralized virtual currencies, some might interpret it to also mean that you must acquire a license before you can deploy a new decentralized altcoin. That should be clarified.

In order to grow and reach its full potential, the Bitcoin ecosystem needs regulatory certainty from dozens of states. New York is taking a leading role in developing that a regulatory structure and the path it chooses will likely influence other states. This is why we have to make sure that New York gets it right. They are on the right track and I look forward to engaging in the comment process to help them get all the way there.

Yesterday, June 25, 2014, the U.S. Supreme Court issued two important opinions that advance free markets and free people in Riley v. California and ABC v. AereoI’ll soon have more to say about the latter case, Aereo, in which my organization filed a amicus brief along with the International Center for Law and Economics. But for now, I’d like to praise the Court for reaching the right result in a duo of cases involving police warrantlessly searching cell phones incident to lawful arrests.

Back in 2011, when I wrote in a feature story in Ars Technica—which I discussed on these pages—police in many jurisdictions were free to search the cell phones of individuals incident to their arrest. If you were arrested for a minor traffic violation, for instance, the unencrypted contents of your cell phone were often fair game for searches by police officers.

Now, however, thanks to the Supreme Court, police may not search an arrestee’s cell phone incident to her or his arrest—without specific evidence giving rise to an exigency that justifies such a search. Given the broad scope of offenses for which police may arrest someone, this holding has important implications for individual liberty, especially in jurisdictions where police often exercise their search powers broadly.

 

How is it that we humans have again and again figured out how to assimilate new technologies into our lives despite how much those technologies “unsettled” so many well-established personal, social, cultural, and legal norms?

In recent years, I’ve spent a fair amount of time thinking through that question in a variety of blog posts (“Are You An Internet Optimist or Pessimist? The Great Debate over Technology’s Impact on Society”), law review articles (“Technopanics, Threat Inflation, and the Danger of an Information Technology Precautionary Principle”), opeds (“Why Do We Always Sell the Next Generation Short?”), and books (See chapter 4 of my new book, “Permissionless Innovation: The Continuing Case for Comprehensive Technological Freedom”).

It’s fair to say that this issue — how individuals, institutions, and cultures adjust to technological change — has become a personal obsession of mine and it is increasingly the unifying theme of much of my ongoing research agenda. The economic ramifications of technological change are part of this inquiry, of course, but those economic concerns have already been the subject of countless books and essays both today and throughout history. I find that the social issues associated with technological change — including safety, security, and privacy considerations — typically get somewhat less attention, but are equally interesting. That’s why my recent work and my new book narrow the focus to those issues. Continue reading →

My latest law review article is entitled, “Privacy Law’s Precautionary Principle Problem,” and it appears in Vol. 66, No. 2 of the Maine Law Review. You can download the article on my Mercatus Center page, on the Maine Law Review website, or via SSRN. Here’s the abstract for the article:

Privacy law today faces two interrelated problems. The first is an information control problem. Like so many other fields of modern cyberlaw—intellectual property, online safety, cybersecurity, etc.—privacy law is being challenged by intractable Information Age realities. Specifically, it is easier than ever before for information to circulate freely and harder than ever to bottle it up once it is released.

This has not slowed efforts to fashion new rules aimed at bottling up those information flows. If anything, the pace of privacy-related regulatory proposals has been steadily increasing in recent years even as these information control challenges multiply.

This has led to privacy law’s second major problem: the precautionary principle problem. The precautionary principle generally holds that new innovations should be curbed or even forbidden until they are proven safe. Fashioning privacy rules based on precautionary principle reasoning necessitates prophylactic regulation that makes new forms of digital innovation guilty until proven innocent.

This puts privacy law on a collision course with the general freedom to innovate that has thus far powered the Internet revolution, and privacy law threatens to limit innovations consumers have come to expect or even raise prices for services consumers currently receive free of charge. As a result, even if new regulations are pursued or imposed, there will likely be formidable push-back not just from affected industries but also from their consumers.

In light of both these information control and precautionary principle problems, new approaches to privacy protection are necessary. Continue reading →

I recently did a presentation for Capitol Hill staffers about emerging technology policy issues (driverless cars, the “Internet of Things,” wearable tech, private drones, “biohacking,” etc) and the various policy issues they would give rise to (privacy, safety, security, economic disruptions, etc.). The talk is derived from my new little book on “Permissionless Innovation,” but in coming months I will be releasing big papers on each of the topics discussed here.

Additional Reading: