Digitalization, regulation, employment and earnings

July 27th, 2015 by · Leave a Comment

This article was authored by Jouko Ahvenainen, and was originally posted on

Should Airbnb’s apartment rental business be treated like a hotel business with licenses and taxes? Is Uber the employer or a technology service for drivers? Has Uber conducted illegal taxi business in France when its directors were arrested? Can people mutually make business by using digital currencies without authorities’ control? Who can raise money online? IoT and AI probably raise even more complex questions. Digitalization challenges old regulations, laws and business models with an accelerating pace.

The Internet and mobile enable people do more things and business directly with other people without requiring third parties. They also enable starting a global business with minimal costs. This can challenge existing businesses and business models, but it can also make old laws and regulations look old-fashioned over night.

Airbnb and Uber are well known examples of the ‘sharing economy’ globally. They have had a significant influence on the accommodation and transportation businesses. Both of them are Silicon Valley businesses with their valuations in billions. At the same time they have a number of legal battles around the world. Some people claim they are not real sharing businesses, they are more like global monopolies that dominate their respective domains.

Airbnb legal battles are based e.g. on regulatory requirements for licenses to offer accommodation, fulfill requirements of accommodation services, and pay VAT and other applicable taxes. Uber has fights especially with taxi services and drivers that claim it doesn’t have the required licenses, its drivers have not needed certificates and it doesn’t follow agreed or set price guidelines. The fight has been especially fierce in France where local taxi drivers have attacked Uber drivers and local police also investigate it, and tried to stop its operations and arrested its local executives. In the US Uber has also a battle, if drivers that use Uber services are its employees or only users of the service and contractors. Most recently Uber lost a particular employment case in the California Labor Commission.

Fintech and digital finance services are another example of significant ongoing disruptions. Digital currencies, especially Bitcoin, have become a significant way to make transactions, although it is not officially a currency regulated by any state or central bank.  Bitcoin’s technology, block chain, offers de-centralized financial transaction models that can even question the role of banks in many financial services (read Digital currencies and block chain).

Digital investing, e.g. crowdfunding, and lending services have been regulatory question marks for a few years in many countries. Some countries, like the UK, have been active to allow new models that they have become businesses in billions that also e.g. help small and medium size companies to get funding easier. But many countries have been more conservative and especially worried, if ordinary people can lose their money, when they start to use these services and don’t understand the risks.

Digitalization changes our lives in many ways. These battles especially crystalize important questions we are facing now: 1) should new digital services follow the same laws and regulations like old models to offer similar services, 2) when services are immediately global, how to handle different local laws, 3) how the digitalization changes employment, 4) how to make accounting and taxations for models where revenue streams are different from existing traditional models, and 5) should lawmakers be proactive to control new things before they emergence, or more reactive when they see how the market really develops.

When networks become faster, computers and phones get more processing power, and it is easier all the time to develop services, we will see more and more of these new digital services that challenge the old models. And they are also important for economies, when they increase efficiency and productivity. Nothing can stop this development in free countries. History shows that typically regulators, incumbent companies and labor unions lose the battle if they try to stay in old models, when technology enables something more effective and better. If lawmakers and regulators try to control new emerging markets too early, they can easily cause harm and distort the market. Typically it is better to let the market develop and based on learning and observations create new regulatory frameworks and set reasonable guidelines. It is probably the best way for digitalization too, if we want to get real value from it.

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Categories: Government Regulations · IoT, M2M

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