When disruption meets regulation

By Felix Salmon
January 30, 2014
Nick Dunbar has a fantastic post today headlined “Disruptive Business Models, Uber and Plane Crashes”, talking about how “the latest flurry of innovation” is being concentrated in regulated industries.

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Nick Dunbar has a fantastic post today headlined “Disruptive Business Models, Uber and Plane Crashes”, talking about how “the latest flurry of innovation” is being concentrated in regulated industries. Dunbar concentrates on non-financial companies: his examples are Uber, Airbnb, and a small company called Manx2, which was an airline in much the same way that Uber is a taxi service or Airbnb is a hotel company. Manx2 no longer exists, in the wake of a plane crash which killed two pilots and four passengers.

What Manx2 actually did was sell tickets. For each particular route, Manx2 then contracted with a plane operating company to fly the passengers…

The Spanish regulator that oversaw Flightline had no clue that the crew who had trained and been accredited in sunny Spanish climes were working remotely for Manx2, flying to fogbound Irish airports. And the passengers who bought tickets from Manx2, which the report says was ‘portraying itself as an airline’ had no clue about the risks they were taking by flying in such a plane run by a freelance operator. Reading the report, it’s hard not to get the impression that the virtual airline business model of Manx2 was partly to blame for what happened.

All regulated industries are inefficient: regulation cannot help but add a layer of bureaucracy to any organization, and no one ever hired a compliance officer as a way of boosting productivity. This creates a natural inclination, on the part of entrepreneurial types, to want to disrupt the industry in question. They look at it, they see all that inefficiency, and they know they can produce 90% of the output with 10% of the overhead.

The problem is that from a societal perspective, sometimes 90% — or even 99% — just isn’t good enough. Airlines are a good example: thanks to regulation, they’re incredibly safe. And when a company like Manx2 manages to slip through the regulatory cracks, the consequences can be disastrous.

The anti-Uber lobby is making similar claims about taxicabs: that they’re licensed for a reason, and that Uber’s attempt at doing an end-run around taxicab regulations is going to endanger passengers and other road users. When you get in a cab, you’re placing your life in someone else’s hands, and you really don’t want that person to be a violent criminal, or have a history of nasty traffic accidents. What’s more, the government is generally better at checking on such things than private companies are.

The main reason why local governments mistrust Uber, however, has nothing to do with public safety: it’s simply a fiscal matter. Both hotels and taxis are important revenue sources for municipalities, which is why city governments tend to be unenthusiastic about Airbnb and Uber.

From the point of view of Silicon Valley libertarians, the idea that they’re disrupting a long-established flow of public monies is a feature, not a bug. If you threaten their disruptive business models, you’re threatening their freedom! That’s the message being sent quite explicitly by the mild-mannered Fred Wilson; his west-coast counterparts, like Balaji Srinivasan and Peter Thiel, have a tendency to go even further.

In finance, regulation is very important indeed — if you want to prevent everything from terrorist finance to global financial meltdown, central authorities need to be able to keep tabs on all financial flows. Finance startups generally operate in a lightly-regulated grey area, just because compliance costs tend to be prohibitively high if you want to, say, start a bank. That explains why Simple isn’t a bank; why most microfinance shops don’t accept deposits; why Apple didn’t storm into the payments space years ago; why it’s so difficult for startups to compete with PayPal, which has spent many years and hundreds of millions of dollars on global compliance; and so on and so forth.

And so when states like New York and California try to gently embrace bitcoin, bringing it into the regulatory fold while not stifling it entirely, the result is always going to be a little bit messy. Bitcoin is built on libertarian mistrust of regulations; indeed, much of the enthusiasm surrounding it comes precisely because it is such a powerful and elegant means of circumventing government control.

I can see the argument for lighter regulation of microfinance institutions: if your depositors have just a few dollars in their accounts, you can’t be expected to spend $50 per customer per year on know-your-customer operations. But in the case of bitcoin, the scoundrels have the head start, and the regulators are never going to be able to catch them. As a result, the entire bitcoin edifice is probably going to end up being shut down by the Feds at some point. It might well get replaced by some other cryptocurrency, but in the case of bitcoin, the regulatory arbitrage is already far too advanced. Which means that if the bitcoin economy continues to grow, the world’s financial regulators will eventually have no choice but to kill it.


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I agree but I think there will be an easier way and that is for the Fed to establish its own crypt currency. People that actually wanted to use it as currency, legally, would shift away from bitcoin.

Posted by MyLord | Report as abusive

“if you want to prevent everything from terrorist finance to global financial meltdown, central authorities need to be able to keep tabs on all financial flows”

This is actually a very extreme viewpoint that I doubt has any basis in fact. Certainly the ability for central authorities to monitor flows dates back only a few decades — decades which have not been free from either terrorism or financial meltdown! It’s definitely true that central authorities want to monitor all flows, and that they justify this desire using the specter of terrorist finance and financial crisis, but it doesn’t follow that such monitoring is useful, or just.

Posted by same_anonymous | Report as abusive


I second @same_anon’s point. The USA is able to ‘keep tabs on all financial flows’ by way of its dragooning of the SWIFT transaction database at least since 2006. They didn’t pursue serial miscreants like Wachovia and your favourite banking zombie, HSBC for moving/laundering hundreds of millions in drug cartel money, did they?

On a related note, we were told that the SEC was unable to prosecute Steve Cohen at SAC owing to ‘lack of evidence’. Where are the NSA recordings and telephone metadata when you need them?

Posted by crocodilechuck | Report as abusive

You got it right. It’s a powerful means of circumventing control, just as many of the profound technologies have done throughout history.

The author is fearful, but I also understand the his fear. Technology kills industries, topples hierarchies, but it also creates value for civilization. Whether you are half glass full or empty, it doesn’t matter in the end – because the writing is on the wall and the exponential trajectory of technology can’t be stopped.

In 1995 we saw the internet rise — a network not owned by anyone. In 2008 we saw a currency — not owned by anyone. It was only a matter of time.

The printing press used to be concentrated in the hands of a few. It was a powerful tool of control. Technology gave the “press” to the people — now anyone can publish a digital book or write a blog that can reach millions — not guaranteed of course, but it gives you an equal shot.

Today the “digital ledgers” are concentrated in the hands of the few. Banks/exchanges are giant digital ledgers moving digital bytes that represent cash/stock around in our digital world. All Bitcoin is doing is giving that “digital ledger” to the people. And somewhere out there a geeky kid in the garage is building something new on top of this open network we haven’t seen before.

Bitcoin is a set of rules that allows for the decentralized exchange of digital ownserhip. It is beyond money. And there is a key word: decentralized. But all it is is a set of rules. A mathematical equation. You cannot kill the math. You can kill “Bitcoin” on paper — but the idea and technology that allows “public ledgers” will live on whether by some other name.

Posted by pilkolokio | Report as abusive

Regarding AirBnb & Uber ‘safety’ regulation, vs reputation systems. After some number of interactions, surely the risks of a bad apple even out.

Like, regulation can set a hurdle, and then a few murderous taxi drivers make it over. Lie low for a while then randomly kill a passenger

Reputation system is open to all, and a few murderous taxi drivers kill their first passenger and be removed from the system. But then those that lie low and randomly kill later, are just like that those that pass the test then randomly kill later. They’re just a hazard of life, like plane and car crashes.

Posted by neil21 | Report as abusive

More, on “if you want to prevent everything from terrorist finance to global financial meltdown, central authorities need to be able to keep tabs on all financial flows.”

http://rt.com/shows/sophieco/banks-globe -stream-economy-875/

‘Heck of a job’, Felix..


Posted by crocodilechuck | Report as abusive

I honestly don’t know if they can kill it. It’s re-assuring to think they have the power to, but there really isn’t much that they can do in order to stop it. They can ban it. They can make possession of it contraband, but if the objective is to stop crime, they’re literally shooting themselves in the foot. The minute you ban Bitcoin, it becomes the defacto currency of crime. If that happens, you’re going to have a billion dollar black market that makes silk road look like kids in a garage, and there’s nothing anybody could do to stop it. Transactions related to crime at that point become totally invisible, and totally untraceable. I like to think that the regulators are smarter than that. When most crime is done in US dollars, the feds and foreign regulators at least have some recourse. In a black market world powered by bitcoin, there isn’t a damned thing they can do, other than sit there and lament about the good old days when any bureaucrat with a button could shut down any account.

Posted by SexyZionist | Report as abusive

I’m not sure if my last comment posted, so I’ll try this again.

Do you have any idea what kind of damage banning or attempting to shut down bitcoin would cause? Assume for a minute they attempt to do this. What happens? Well, considering that bitcoin is a protocol, and you can’t shut down protocols, the only logical course of action is that Bitcoin would become the defacto currency for the black market, worldwide.

If you were upset that the Silk Road had 0.05% of the global drug and naughty things trade, imagine what would happen if there were 10,000,000 such marketplaces, that made the Silk Road look like amateurs in their garages with 100% of the global drug and naughty things trade. Sounds funny until you consider that the feds have some recourse now, when people get caught dealing drugs. In a world where Bitcoin is illegal, there would be none at all. The best they could do is just sit, and watch the money go bye.

The conclusion is ultimately the same though. The black market expands, eventually accounting for large amounts of legal commerce as well. Ultimately ending the power of the state to do, well, just about anything. In this scenario, it just takes about a decade longer to pull off. Maybe that’s all they need.

If your goal as a regulator is to drive crime down, and punish the guilty, then driving Bitcoin underground is the worst possible idea you could possibly have. I hope they’re smarter than that.

Posted by SexyZionist | Report as abusive

“if you want to prevent everything from terrorist finance to global financial meltdown, central authorities need to be able to keep tabs on all financial flows.”

More like, if you want the government to be able to keep tabs on all financial flows, use terrorism as an excuse. Maybe Brits are more inclined to queue up for scaremongering, but Americans aren’t quite. See also: phone records.

Posted by Moopheus | Report as abusive

But regulatory arbitrage worked so great in the financial crisis! What with all the shadow banking, bribing credit rating agencies to stamp AAA on CDOs everyone knew weren’t AAA (otherwise why did they yield high rates?) to sell to regulatory-capital-constrained German banks.

Posted by Curmudgeonly | Report as abusive

“The bird of reason flies so well in the air of experience that it imagines it could fly even better in a vacuum.” I. Kant 1st Critique (quoted from memory). Markets cannot exist without regulation, or more accurately, a market is a substitution instance of a specific regulatory schema. From this perspective, libertarianism is a species of nihilism its practitioners parasites.

And of course, cancer might be seen as just another form of innovation.

Posted by frit | Report as abusive


Posted by AminCad | Report as abusive


Posted by AminCad | Report as abusive

“The problem is that from a societal perspective, sometimes 90% — or even 99% — just isn’t good enough. Airlines are a good example: thanks to regulation, they’re incredibly safe. And when a company like Manx2 manages to slip through the regulatory cracks, the consequences can be disastrous.”

Society has no right to determine for an individual what level of risk they will subject their own lives to. If people want to use an airline with a poor safety record, assuming the airline is not a risk to the public at large (e.g. is not flying over population centers), they should be absolutely free to.

This is an incredibly obvious truism to me. I can’t believe we have people, including Felix Salmon, promoting draconian prohibitions in the name of risk avoidance.

Posted by AminCad | Report as abusive

I think there is also the fact that different industries require different regulatory thresholds due to the scale of their risks.

If only 99% of all AirBNB encounters go well, that’s fine.

If only 99% of all ground beef sold in the USA is salmonella free, you’ve got massive food poisoning outbreaks.

If only 99% of all airplane flights are successful, that’s a crash every 100 flights, with thousands of people dying per day.

Posted by mfw13 | Report as abusive

The manx2 example sounds like a far more basic failing if Dunbar actually knows what he is talking about – which he may not.

The notion of pilots being trained only to fly in certain geographies sounds dramatically off vs. FAA practice, which I thought was similar in other countries. If the pilot and equipment are only qualified for VFR – Visual Flight Rules – then they only fly in VFR conditions, which would mean without fog. Full stop. If pilot and equipment are IFR – Instrument Flight Rules – then they can land based on instruments, and fog shouldn’t matter. It would be very unusual – maybe impossible – for any sort of commercial passenger or large-scale charter to operate VFR in the U.S.

Posted by realist50 | Report as abusive

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