The Regulatory Arbitrage that is Today’s Tech Businesses

Lady Justice
IMG Credit jsmoorman, Flickr

The internet is arguably one of the best, if not the best creation of humanity. The opportunities that have been created and those yet to be realized are limitless. However, problems and issues arise especially in relation to laws and regulation. Rules regarding consumer protection, service operations and many more are frequently classified as lagging behind or outdated when it comes to internet and technology.

One writer famously described the Internet as the modern Hydra. Hydra was a creature/monster in Greek mythology which had several heads. It caused terror to the people of the time and killing it was not particularly easy. Mainly because it had an ability to regenerate a number of heads after one was cut off. Back to our times, and comparing it to Hydra, the comparison is spot on.  The Internet and tech always keep evolving to the benefit of owners and sometimes the users but obviously a massive headache to the governments and regulators at large.

Regulatory arbitrage is a term commonly used in financial circles. It refers to the behavior whereby firms/businesses look out for unfavorable laws and regulation, and subsequently act in ways to avoid such regulations, in the hope of maximizing profits. It is very frequent in the financial industry (banking and insurance) and also in tax planning.

IMG Credit jsmoorman, Flickr

In the modern day, tech companies are maneuvering in new and incredibly innovative ways to escape regulations. A popular model is one that Uber has managed to execute with phenomenal results. Other companies using a similar model is Lyft and Airbnb and several others in different industries. Let’s consider Uber as it is in Kenya and quite familiar too. To the average person’s eyes, Uber is a transport and logistics company. However, on reading the terms and conditions, you get an entirely different picture.

Firstly, what comes out tacitly clear is that Uber is a ride-sharing company/app/platform – strictly and not a transport/taxi/logistics company. This term is one of the first clauses on the terms and conditions, and it is in capital letters. This means that 3rd parties (drivers-partners) are the ones who supply the service acquired on Uber. The relationship between the driver-partners and Uber is a complicated relationship. Mainly because on paper it is an independent contractor relationship but in reality, it appears as an employer-employee relationship, a situation which Uber does not like very much.

Many drivers in several countries have filed cases so that they can compel Uber to treat them as employees. It is not clear what the outcome of the cases will be as it may be as varied as the number of countries in which Uber operates. As for now, regarding labor relations, there is still considerable confusion on how these ride-sharing or sharing companies should treat the 3rd parties offering the service.

However, I doubt this is a long-term risk for Uber/Lyft as they are experimenting with driverless cars which are expected to take over from the driver-partners in future.

The second issue is one I had discussed in a previous article here. The fact that Uber operates in a taxi/cab industry where the regular players are under an enormous number of obligations to adhere to several laws and regulations which for Uber does not apply. Something of interest that came out from their terms and conditions is this –


Here they recognize that some of their partners may or may not comply with laws or regulations in regards to transportation and logistics – something which to any concerned person does not appear right. By and large, the effect of the above and several other clauses in their terms and conditions mean that they are ‘immune’ from regulation (in Kenya) by National Transports and Safety Authority (NTSA) and county governments in relation to public service vehicles or commercial vehicles.

Some governments have been quick to respond to the ‘regulatory arbitrage’, and they have sought to remedy the situation by enacting laws which attempt to regulate the transport/logistics sharing industry. Examples include the state of Tennessee and Colorado in the US. The rules relate to insurance covers to be taken out by the drivers-partners and other issues. The problem, however, is the fact that it is known that Uber and Lyft allocate significant amounts of their budgets to lobbying which means that some of these laws might lack partiality.

Another form of arbitrage emerges from the services offered by OTT operators (WhatsApp, Skype) in the Telecommunications industry. Most of these services are provided in a regulatory vacuum. Compare this to the regular network operator who has to take out a myriad of licenses for hefty amounts to provide communication services. Again for the network operators, they have to be monitored by the regulator for issues such as quality of services, price changes, and lastly and most importantly they pay taxes.

Prices charged for services offered by the network players are in relation to the costs incurred in development and maintenance of the network. For OTT players, these costs do not exist.

Another critical issue with OTT is privacy concerns. In 2013, allegations emerged that Microsoft allowed the US government access to Skype, which raises fundamental questions on whether user data and privacy of communications is respected. OTT players operate from foreign jurisdictions therefore, there is always a risk that foreign governments can compel these companies to release sensitive data on non-citizens.

OTT service providers offer their prices at a nominal fee or sometimes even free to the delight of most customers. That fact raises some issues. One, network operators are deprived of some of their largest revenue streams that include SMS (text messaging) and long distance calls and by extension, the government loses taxes. Two insufficient investment by telecommunication companies in expanding broadband coverage is increased. As it is, most network operators have little incentives to invest in universal broadband and programs like the Universal service fund initiated by Communication Authority (CA) can help remedy the situation. However, in a situation where the revenues of network players keep declining, the reality of universal broadband is further diminished.

Some countries are in the process of formulating regulations on OTT services. This is not very easy as an attempt to regulate OTT services might also lead you to the very murky topic of net neutrality. The issue facing most regulators is whether they (OTT service providers) should be subject to the same regulations as network providers and, therefore, offer essential services like emergency calls and legal intercept. France and Spain have restricted the use of OTT services as long as they do not touch the public switched telephone network (PSTN). People who argue against the regulation of OTT services always ask, ‘who came to the defense of the postal office when email came along?’

There are so many other areas in which tech businesses are operating in a regulatory vacuum for example fintech. The interesting thing is that this is not a developed world problem but rather a global issue. Anyway, it is hoped that probably by having collaborations, governments will be able to enact laws and regulations that will protect their citizens from the extremely unscrupulous tendencies of some of these tech companies.