Forget antitrust, regulate to let tech disrupt itself
For decades, policymakers have tried to curb big tech’s growing influence on our lives, from the government’s antitrust case against Microsoft for its anticompetitive behavior against Netscape in the browser market in the late 1990s, to the FTC’s challenging the acquisitions of Instagram and Whatsapp by Meta, Amazon’s practices with its sellers and customers, Apple’s recent $2 billion EU fine for its conduct against Spotify, and now the new DOJ case against Apple.
In all these cases, antitrust enforcement and fines have been ineffective. And well-intentioned rules, like the EU’s GDPR (General Data Protection Regulation), have backfired by raising compliance costs, aiding established firms and hindering new privacy-centric players.
Even when they don’t backfire, regulations in this area run into implementation challenges. While the key objective of the Digital Markets Act (DMA) is directionally correct — to prevent companies that have become gatekeepers in so many of our economic and social interactions to abuse their dominant position — its execution leaves plenty of room for incumbents to stall, whether it’s in the name of privacy, security, or technical complexity.
What defeated Microsoft Internet Explorer? It wasn’t large antitrust fines or giving consumers the option to choose a browser in Windows. Explorer lost when the world moved on to mobile and Microsoft missed that wave of innovation.
Fundamentally, it’s through these same innovative forces that competition can be restored. And it is the policymakers who will determine if that happens. Innovation that is truly disruptive requires an architectural rewiring of how problems are solved, and that sparks the need for new regulation.
Too early or too late
When faced with a novel technological paradigm, policymakers can make one of two major mistakes: regulate too early, or wait for long. When regulation is too rigid, too early, it is equivalent to picking winners at a time when the landscape is still uncertain. So it should come as no surprise that this approach never works.
A recent example is President Biden’s executive order on AI. This order appears to be driven more by fear than by technical considerations. For example, it sets thresholds based on the number of floating-point operations to determine the level of regulation for AI projects. Because the thresholds are arbitrary, they will either be irrelevant, or in the worst case, actually detrimental to AI development in the United States.
When regulation arrives too late, policymakers push the best innovators out by failing to provide them with clarity. That’s what is happening in the United States with crypto, and it comes at the risk of the country squandering its lead. It also, ironically, helps projects that are comfortable breaking the law, as we have seen with the FTX scandal. The excuse, at least from the SEC, is that rules written in 1933 and a framework for financial markets designed when we relied on open outcry trading, physical stock certificates, and prices rolled out on ticker tape do not need any updating.
Regulation that arrives too late or too early protects incumbents. And it’s hard to blame policymakers: Unlike venture capitalists, who enjoy massive upside on success and limited downside on failure, regulators and policymakers get little credit when things go well, and all the blame when they don’t.
The decision by the U.S. government to not over-regulate the internet drove decades of economic growth, but few likely remember the names of those involved. As a result, the typical regulatory “portfolio” is filled with safe but mediocre bets. The exceptions are moments in history where governments had the courage to propel their nations forward, from the Marshall Plan, to China’s economic reform, the space race, the EU single market, and more.
Reining in intermediaries
Today we’re at a similar juncture for all of our digital infrastructure, including AI, robotics, financial services, and digital marketplaces. If the United States wants to continue to lead, it must create the right conditions for competition to thrive. As in the early days of the internet, this starts with policymakers embracing and nurturing a novel architecture based on open protocols.
But how can open protocols limit the power of big tech intermediaries and accelerate a new wave of innovation? In Latin, intermediary means “in the middle.” While intermediation can be helpful — many transactions would never exist without them — when intermediaries accumulate too much power, they not only capture all of the value they create but also slow progress.
Accumulating power is a natural result of being an intermediary: When you’re in the middle, you have access to better information than either side, can decide on what terms others participate, and shape interactions to your advantage. Historically, we’ve alternated between the rise of new intermediaries and the subsequent push to remove them from their privileged position.
Interoperability
One effective approach to rein in powerful intermediaries is to find an alternative way to connect the two sides of the market. Sometimes the government may regulate away the intermediaries’ most outrageous behaviors or become a benevolent (but inefficient) intermediary. Sometimes technology surprises us all with something much better: interoperability. In Latin, interoperability means “to work between,” which makes it clear why interoperability is the best antidote to someone standing in the middle.
We’ve seen this all before. Because the internet was built on open and interoperable protocols, it was a strong decentralizing force, and decreased the power of intermediaries across a range of industries. But it also created the conditions for new and more powerful intermediaries to emerge — from marketplaces and payments, to messaging and social media, the creator economy, and so on. Propelled by the need to monetize the fast-growing networks they created, internet-based intermediaries proceeded to limit interoperability and constrained consumers and businesses within their walled gardens.
Today, those garden walls define how businesses surface products to their customers, how developers distribute their apps, how we interact with our social network, how creators connect to their audiences, and a lot more. By controlling not only access but also the underlying data and the algorithms that rank results and match buyers and sellers, each one of these platforms shapes how society allocates attention, effort, and money. Without a change in direction, AI will only make this worse, since it builds on the advantage these companies have established across data, compute, and distribution channels.
Interoperability fixes this. Imagine a world where you can send and receive messages irrespective of the messaging app you use. Same with sending and receiving money, reading updates from your social or news feed, finding the right product or service, or interacting with an AI agent. On a truly interoperable network, consumers and businesses have actual leverage against intermediaries because they can port their business elsewhere without having to rebuild their audience, social graph, or customer base. Developers also won’t worry about their platform becoming a competitor overnight.
By injecting interoperability into our digital interactions, open protocols unravel the advantage tech companies have established over the last decades and force them to compete again. This, in turn, drives the type of innovation that helped the United States lead in the early days of the internet.
***
The impact of these developments extends well beyond financial services. These open protocols, which are gradually rewiring our financial system, have the potential to reshape competition in AI, digital platforms, and infrastructure. Entrepreneurs and developers are already at work. But much like in the internet’s early days, their ventures will not succeed without the right regulatory framework.
So for any of this to materialize, regulators must first establish a framework that allows the new open protocols enabled by blockchains to thrive. From securities laws and financial market infrastructure to stablecoins, the time to act on crypto regulation is now. Otherwise, these protocols and the economic growth they promise will develop elsewhere.
***
A version of this piece first appeared in Forbes.
***
Christian Cataini is the co-founder of Lightspark and the MIT Cryptoeconomics Lab.
***
The views expressed here are those of the individual AH Capital Management, L.L.C. (“a16z”) personnel quoted and are not the views of a16z or its affiliates. Certain information contained in here has been obtained from third-party sources, including from portfolio companies of funds managed by a16z. While taken from sources believed to be reliable, a16z has not independently verified such information and makes no representations about the current or enduring accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; a16z has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by a16z. (An offering to invest in an a16z fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety.) Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by Andreessen Horowitz (excluding investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets) is available at https://a16z.com/investments/.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see https://a16z.com/disclosures for additional important information.