How RegTech tools can help alleviate the cost of regulatory uncertainty

This article is brought to you thanks to the collaboration of The European Sting with the World Economic Forum.

Author: Paul Klimos, Senior Associate, Orrick, Herrington & Sutcliffe LLP

• Regulatory technology, or RegTech, has the potential to alleviate uncertainty when it comes to regulating emerging technologies.
• Through the use of technologies, such as data analytics, artificial intelligence, machine learning and distributed ledgers or blockchain, RegTech can contribute to the simplification of regulation and the streamlining of compliance.
• With constant and rapid cross-border technological advancement, RegTech could become a universal tool in the service of global, agile and harmonious regulatory frameworks.

Uncertainty can be more challenging than over-regulation and less effective than under-regulation. Due mainly to the absence, ambiguity or unpredictable enforcement of rules, the consequences of uncertainty are amplified when it comes to regulating cutting-edge emerging technologies.

Despite the fact that regulatory uncertainty can hinder innovation, policymakers may still decide to avoid enacting clear or strict regulatory frameworks during transition or ‘phase-in’ periods or to serve geopolitical or national security interests. Barring such exceptions, and to better foster innovation, it is crucial to strike a balance between the what, when, how and who of regulation. Today, regulatory technology, or RegTech, tools may be best positioned to help alleviate such uncertainty.

Understanding uncertainty

The absence of regulation does not only mean the inexistence of rules. It can also denote a lack of rules designed to apply to — and known to be enforced upon — a particular group of people or entities, geography, product, service or transaction. Otherwise, without sufficient clarity on applicable rules, it would be necessary for stakeholders to rely on self-regulation or seek regulatory arbitrage in service of, primarily, their own objectives.

With self-regulation, for instance, one could assume the application of a comparable set of existing rules, principles or values to an emerging technology while awaiting the initial stance of legislators and regulators. But, should self-regulatory frameworks be indicative of agility and adaptability, they are not guaranteed to match the eventual standpoint of rule-makers; those standpoints are often driven by overarching regulatory mandates and fluid policy considerations. Moreover, regulatory arbitrage, even if it’s within the boundaries of legality, can cross ethical lines or jeopardise geopolitical or national security interests.

And, rules that are ambiguous, contradictory or inconsistent can cause additional confusion as to their meaning and applicability. Difficult to interpret and implement, such rules could require investing substantial resources into the development and maintenance of short-lived and inefficient compliance frameworks. On top of that, confusing rules can be accompanied by arbitrary, sporadic and unpredictable enforcement, potentially instigating fear in innovators’ minds.

Therefore, to alleviate uncertainty and reduce undue variability, regulation should become anticipatory, dynamic and designed to facilitate interpretation and compliance by all stakeholders. That being said, which tools can help regulators advance regulation that is easy to interpret and implement and agile enough to efficiently face uncharted technological frontiers?

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Utilising RegTech

Paired with agile governance techniques, RegTech can contribute to the simplification of regulation and the streamlining of compliance through the use of technologies, such as data analytics, artificial intelligence, machine learning and distributed ledgers or blockchain.

An important aspect of RegTech solutions is the increased ability to collect, analyse and take action on a broader, deeper — and presumably timelier and more accurate — set of data. The US Securities and Exchange Commission, for example, recently turned its attention to the ramifications of ambiguity and the need to continuously adapt regulatory techniques in the face of evolving risks. It simultaneously emphasised the importance of improving information sharing through timely, full, fair and truthful disclosures which, in practice, would take the form of periodic, consistent, comparable and reliable decision-useful information. RegTech can also build on the aggregation and comparative analysis of regulatory data to simplify reporting obligations and increase the usefulness of reported information.

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What is the World Economic Forum doing about digital trade?

What is the World Economic Forum doing about digital trade?

The Fourth Industrial Revolution – driven by rapid technological change and digitalization – has already had a profound impact on global trade, economic growth and social progress. Cross-border e-commerce has generated trillions of dollars in economic activity continues to accelerate and the ability of data to move across borders underpins new business models, boosting global GDP by 10% in the last decade alone.

The application of emerging technologies in trade looks to increase efficiency and inclusivity in global trade by enabling more small and medium enterprises (SMEs) to repeat its benefits and by closing the economic gap between developed and developing countries.

However, digital trade barriers including outdated regulations and fragmented governance of emerging technologies could potentially hamper these gains. We are leading the charge to apply 4IR technologies to make international trade more inclusive and efficient, ranging from enabling e-commerce and digital payments to designing norms and trade policies around emerging technologies (‘TradeTech’).

First, sharing and aggregating regulatory data among regulators — to the extent to which it is technically possible and legally permissible — could help identify emerging trends and predict issues that would not be apparent through traditional regulatory methods or standalone data sets. With more underlying regulatory data, RegTech can help enhance the comparative identification and ongoing assessment of short, mid or long-term risks across sectors, industries and technologies.

Second, the collective knowledge that results from tech-enabled data sharing can be a resource to various regulatory agencies within or across jurisdictions. It can promote a more informed and harmonious legislative and regulatory process across jurisdictions (intra-state, states with their federal government or internationally) and among regulators (cross-collaboration among regulatory agencies or between regulators and international organizations), paving the way for international standards and best practices.

In conclusion, RegTech appears to be critical to the responsible scaling of technology with regulation that is predictive, preemptive and dynamic. In today’s politically fragmented world with constant and rapid cross-border technological advancement, RegTech could become a universal tool in the service of global, agile and harmonious regulatory frameworks.