2015 Year in Review: Regulating the New Economy

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This post is one in a series of reports on significant issues for startups in 2015. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2015, such as immigration and patent reform, remain unfulfilled. Check back for more year-end updates and continue to watch this space in 2016 as we follow policy issues affecting the startup community.

by Anna Duning and Evan Engstrom

The ever-increasing pace of technological development and expanding reach of innovative enterprises into well-regulated industries has put considerable strain on the nation’s policymaking apparatus. As new technologies (such as recreational drones) become more popular and new platforms integrate everyday activities (such as transit) with technology, policymakers are faced with difficulties in crafting forward-thinking policies or adapting existing regimes to new technologies. In 2015, we saw this phenomena play out in a variety of ways all across the country at the municipal, state, and federal levels.

New Devices, New Rules

In 2015, the drone market grew exponentially, with more than 400,000 drones sold. The increasing presence of unmanned aircrafts—and the corresponding rise in reports of rogue drones posing safety hazards to commercial aircrafts and stoking privacy concerns—prompted the Feds to introduce new regulations for recreational drones this year. The Federal Aviation Administration, along with the Transportation Security Administration, ultimately came up with a drone registry for hobbyists, requiring recreational pilots enter their devices into a new national database. Commercial drones from the likes of Google, Amazon, and even Wal-Mart are also expected to take to the skies in the new year. These companies have all been part of a lobbying effort to keep new regulations limited and reasonable.

As the age of widely-available autonomous vehicles nears (Tesla says within two years), state lawmakers are grappling with how to establish the appropriate safety and regulatory standards for what will surely be one of the most disruptive technologies deployed in recent memory. Cybersecurity, accident liability, and basic road rules are all pressing concerns. Several states have already approved the testing of autonomous vehicles with varying degrees of regulations. Most recently, California introduced proposed rules that would require a licensed driver to be present in the vehicle. This requirement could limit some of the more promising uses of these new vehicles (such as transportation for the young or disabled) and even threaten the vehicle’s safety, but the state will take comments before instituting the final standards. We’ll be monitoring closely as state governments continue craft new regulations. These new rules won’t just impact the big manufacturers, as autonomous vehicles could spawn an entirely new sector of startups creating software for these cars.

Blockchain Rising

Though Bitcoin and the blockchain technology that powers it are relatively old developments by tech standards (2009!), cryptographically-secure distributed ledger technologies came to the attention of the mainstream in a big way this year, drawing interest from large financial institutions and regulators alike. While this increased scrutiny may rankle some of Bitcoin’s techno-libertarian old guard, the relatively cautious approach policymakers have taken to regulating the Bitcoin sector is a promising sign for the future growth of cryptocurrencies and blockchain technologies.

As Federal regulators have been content to monitor the development of cryptocurrencies, state policymakers have taken more proactive steps to regulate the sector. New York enacted its BitLicense rules this summer, which obligate financial intermediaries that hold or control virtual currencies on behalf of New York residents to obtain a license and follow certain customer monitoring and reporting requirements. The rules were meant to apply to just those companies that handle funds on behalf of customers and not impact software developers and entrepreneurs that don’t actually control customer money, but since the Bitcoin system looks so radically different from traditional financial systems, the rules necessarily have created some confusion as to how they will apply in practice. Fortunately, New York regulators appear to be cognizant of the need to avoid overregulating this nascent industry and will hopefully work to rectify any overbroad regulatory issues that may arise. As other states begin to consider regulations like New York’s regime (California for one debated a similar Bitcoin license bill this year before it died in the legislature), the need for a more uniform Federal standard will quickly become a priority for the sector. With more and more money pouring into blockchain startups ($500 million in 2015 alone), digital currency regulation will likely become a more pressing issue in 2016 and beyond.

The New Sharing/Gig/On-Demand Economy

No one seems to have agreed upon the best term to describe the collection of technology startups building platforms that connect customers to workers, homeowners, and drivers. Call it the sharing economy, the gig economy, or the on-demand economy; regardless, this new technology is shaking up well-established industries and the regulatory frameworks in which they’ve long operated.

Startups including Uber, Lyft, TaskRabbit, Handy, and Instacart (to name just a few) are restructuring how a wide variety of services are provided, and with that, challenging the existing labor standards that by and large rely on two narrow designations—employee or independent contractor. Many of these companies now face a slew of lawsuits about that classification, including a class action against Uber in California. Just weeks ago, Seattle became the first city in the nation to allow on-demand drivers to unionize. This legislation, too, will likely be contested in courts. The outcomes of these cases could dramatically reshape the 1099 economy and will surely impact the startups who’ve built their companies around existing worker classification rules. We’ll be paying close attention as they’re debated into 2016 and beyond.

Beyond the labor market, many of these startups are providing new (and in many ways, better, faster, and more efficient) services within highly regulated industries. This year, ridesharing companies, came up against major challenges in cities throughout the world. The New York City Council proposed rules this summer that could have put a freeze on all for-hire vehicles. Another requirement—that ride-sharing apps pass government approval before making changes—was also floated, though ultimately struck down. Meanwhile, San Francisco voted on a ballot proposition to limit Airbnb rentals in the company’s home city, a measure that ultimately failed, but cost the company $8 million to fight.

Ultimately, the trend of startups beginning to compete in heavily-regulated sectors of the economy accelerated in 2015 faster than many had predicted, resulting in an all too common struggle to fit the square peg of new innovations into the round hole of existing regulations. Not surprisingly, given the slow pace at which our nation’s regulatory bodies operate, the many policy debates that came to the fore in 2015 are nowhere near resolution. Next year will almost certainly see these policy debates escalate, and it is imperative that the startup community engage in this policymaking to ensure that the incredible potential of new technologies isn’t stifled by ill-fitting regulations.