Neutrality or Nirvana?

Trade law should not allow countries to insist on a regulatory nirvana in cyberspace unmatched in real space.

Reading Anupam Chander’s The Electronic Silk Road has been a real treat, and thanks to the folks at Concurring Opinions for organizing this terrific online symposium and including me. The book offers a wide-ranging and insightful discussion about global electronic commerce and its regulation and management. Anupam proposes general principles—rules of the road, essentially—to guide policymakers in this process of regulating and managing global e-commerce. The very first principle introduced in the book–the quotation above captures its essence–is that of technological neutrality: To keep cybertrade free and open, the online provision of a service should not be subject to more onerous regulatory burdens than its offline counterpart.

I wish to focus on this first principle. It seems a balanced and uncontroversial prescription. Why should local regulators saddle online service providers with heavier regulatory burdens than the local bricks-and-mortar competitors? The specter of protectionism lurks!

For me, Anupam’s technological neutrality principle is insufficiently ambitious with respect to the possibilities for effective regulation of e-commerce. Anupam’s concerns are free trade concerns, with which I am sympathetic. At the same time, though, e-commerce may actually be able to do better than brick and mortar on a number of important regulatory fronts, but technological neutrality gives up on those possibilities. It relieves the pressure to pursue more efficient regulation in cyberspace.

Anupam relies on the WTO Appellate Body’s United States-Gambling decision as a principal example for discussion. Antigua challenged US laws that precluded it from offering online gambling services in the US. Antigua claimed, among other things, that the laws discriminate against online gambling in favor of bricks-and-mortar casinos located in the US. The Appellate Body relied on the public morals exception of GATS Art. XIV in accepting US concerns that online gambling might implicate organized crime, money laundering, fraud, underage gambling, and public health, among other things. For Anupam, this outcome is clearly inconsistent with technological neutrality:

After all, underage persons can sneak their way into casinos; gambling addiction predated the Internet; cash in casinos can be more anonymous than an offshore bank account, which requires extensive security measures; and organized crime is not entirely unknown in American gambling history . . . . The appropriate standard should be one where the online service should be required to achieve the regulatory goals at rates roughly equivalent to those achieved by offline versions of the service.

U.S.-Gambling represents “an especially grave threat” to e-commerce for Anupam. Perhaps this is right. And perhaps this finding of the Appellate Body was too solicitous of disguised protectionist interests. But Anupam is more comfortable than I in rejecting the claim of the US that the different regulatory risks make online gambling a distinct service from bricks-and-mortar gambling. (Also it’s probably harder to get cocktails in cyberspace. ;-)). Free trade over the internet would happen so much faster if we just declared the provision of a service online to be like its brick-and-mortar counterpart and then applied the technological neutrality principle. But it should not be surprising that for some services, online provision may implicate concerns that are appreciably different from those relating to offline provision.

Treating online gambling as distinct preserves opportunities for regulatory innovation in cyberspace that can take advantage of features not as readily available in real space. And that cyber-regulation may actually be better, cheaper, faster than regulation in real space—just like the online services themselves. For example, record keeping may be much easier with online service provision than its brick-and-mortar counterpart. Suitcases of cash may disappear in a casino, but online gambling keeps records of every dime that goes in and out, with the potential to make money laundering much more difficult. Similarly, auditing of online gambling operations could occur in real time much more easily than with brick-and-mortar casinos. In many cases, online service provision might be more amenable to effective regulatory oversight than brick-and-mortar versions. But the broad application of technological neutrality lets us off the hook, being satisfied with regulation no more effective online than offline.

[D]ue to the non-face-to-face nature of the medium, it is easy to challenge net-work as potentially promoting fraud. But to insist on the complete absence of fraud on Internet-mediated services would be to conjure a preexisting world of face-to-face transactions devoid of fraud. Fraud and other regulatory leakages are a persistent fact of commerce and are not unique to Internet commerce.

Anupam is clearly right that regulatory nirvana should not be the test. But improved e-regulation seems a worthy goal. Anupam implicitly anticipates this potential. He expresses frustration that Antigua failed to argue for “reasonably available alternatives” to address the expressed US concerns with online gambling. His suggested possibilities include fixes that take advantage of the online nature of the service provision.

Antigua could have shown that the steps it requires to add money to a gambling account (such as bank wire transfers) would prove nearly insurmountable for youth. And it could have required that gambling providers make available services for gambling addicts, including mechanisms for allowing people to limit losses or to lock themselves out.

Perhaps here lies the path to both free trade and a regulatory race to the top with e-commerce? Protectionism may spur foreign online providers to innovate to address the real and imagined social externalities that host country regulators fear. By contrast, sweeping all online and offline gambling into one service category for technological neutrality purposes takes the heat off. At the same time, as online gambling flourishes within the US and more local online providers emerge, it becomes exceedingly difficult to exclude or overregulate Antiguan providers without running afoul of WTO rules. Even in U.S.-Gambling, the U.S. was ultimately tripped up by the fact that US law allows online horse race betting services by local but not foreign providers. So Antigua enjoyed the last laugh.

As this short discussion should illustrate, Anupam has written an engaging, ambitious, and thought-provoking book. It belongs on the shelf (or e-reader!) of everyone interested in international trade.

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