Should We Regulate the Internet the Real-World Way or the Real World the Internet Way?

By Nick Grossman • February 24, 2014

This post originally appeared on The Slow Hunch. The Taxi, For-hire and Limousine Regulations Committee of the Seattle City Council will vote on the proposed ordinance on Friday, February 28. Nick Grossman wrote the following ahead of the originally scheduled vote earlier this month. This reposting is part of the Regulatory Reform for the 21st Century City project.

Tomorrow, the taxi committee of Seattle’s City Council is voting on proposed new regulations for ridesharing services. You can read the full proposal here, and Todd Bishop from GeekWire has a good summary here (updated here).

The gist of the proposed regulations is to treat rideshare vehicles (such as those dispatched by Sidecar, Lyft in the US, and and BlaBlaCar in Europe) like taxis — imposing a traditional regime of licensing, inspection, limitations and disclosure. Here are some highlights:

  • Classify "Transportation Network Company" (TNC) vehicles as "for-hire" vehicles (i.e., taxis or liveries)
  • Limit total number of TNC cars to 300 citywide (across all platforms)
  • Limit driving hours per-car to 16hrs per week
  • Drivers must apply for a special permit and pass a special test (in person)
  • Drivers must take a defensive driving course and pass a test
  • Vehicle inspections at state-approved facilities
  • Criminal background checks for drivers
  • Drivers can only affiliate with a single TNC (e.g., I can only drive for Lyft or Sidecar, not both)
  • Require the TNC company (platform) to physically locate in Seattle
  • Insurance requirements

As for the stated goals of the regulations, there are several, but really the main ones are:

  • "The Council finds that as the use of application dispatch technology by unlicensed companies, vehicles, and drivers raises significant public safety and consumer protection concerns; and
  • The Council finds that the use of application dispatch technology by unlicensed companies and drivers are competing with existing licensed taxicab and for-hire drivers in the transportation market and causing negative impacts;"

In other words: ensure public safety, and protect the existing taxi industry.

Leaving aside the second one, and whether that should be a priority, I just want to focus on how we might go about ensuring safety and building trust. Long-time readers will recognize this graphic:

Example of a "1.0" trust regime

The proposed Seattle regulations are a perfect example of a "1.0" trust regime. Build a high bar for participation, where new actors (TNC companies, drivers) must prove a lot up front and ask permission to operate. This is how we’ve regulated the real world in the industrial era.

This is NOT how things are typically regulated in the internet era. In fact, it’s essentially the opposite. "2.0" regulatory schemes let anyone get started, and over time they are judged by their actions, driven by peer review and public data. Think Ebay, Airbnb, Uber, even Craigslist, and every other site that has user-generated content and peer-to-peer transactions.

I like to use the example of "what if Ebay had done up-front, centralized vetting of every seller on the platform?" That simply wouldn’t have been possible at web scale, in an environment where many many many smaller actors are entering the market at high speed. Instead, the answer was to create trust, safety and fairness (i.e., "regulate") in a way that is massively scalable and also allows even the smallest actors to participate with minimal initial overhead.

So it’s entirely unfair to criticize these new businesses as "unregulated" (as they are criticized in the Seattle draft regs). That completely misses the fact that there is actually VERY INTENSE accountability in most of these systems. Uber drivers get kicked off the platform (for better or worse) if their ratings drop below 4.3. They may not be “licensed” the same way as traditional cars, but they sure are held accountable for their actions, which absolutely does incentivize good service.

So, as more and more real-world regulatory regimes bump into internet-based businesses (ridesharing and homesharing have been the two big ones recently but it’s happening in every sector), the question keeps coming up: should we regulate this the real-word / industrial / 1.0 way, or the internet way?

And the most common answer, so far, is to apply 1.0, industrial-style, regulations to these new situations.

A common justification for this is the issue of fairness: all the other taxi drivers need to go through this up-front licensing process, so why not the new guys? We need to make sure there’s a level playing field. And that does make sense.

So here’s a provocative idea:

What if, rather than applying the 1.0 model to these 2.0 businesses, what if we went the other way? What if we were to say: there are two ways you can be compliant with the regulations: EITHER: go through the traditional permit- and inspection-based process OR you operate more freely IN EXCHANGE for massively greater transparency and data-driven accountability.

What if, instead of imposing 1.0 regulations on ridesharing services, we instead applied 2.0 regulations on the existing services?

In other words, what if we started to regulate activity in the real-world the way we regulate activity on the internet, not the other way around?

Imagine if the Seattle regs read, instead, something like this:

WHEREAS: Transportation Network Companies have demonstrated new, more efficient and effective, ways of regulating for-hire transportation through the application of technology and data;

NOW, THEREFORE, BE IT ORDAINED BY THE CITY OF SEATTLE AS FOLLOWS: Anyone offering for-hire vehicle services may opt-out of existing regulations as long as they implement mobile dispatch, e-hailing and e-payments, 360-degree peer-review of drivers and passengers, and provide an API for public auditing of system performance with regards to equity, access, performance, and safety.

That sounds pretty ridiculous, I suppose, but the point I’m trying to make is that these services aren’t “unregulated”, they are just differently regulated. And that form of regulation is actually an innovation, and is actually quite effective.

(Of course, there are still gaps. One of the biggest ones, in the case of ride sharing, is insurance. That’s addressed in the Seattle regs, and it’s also something that Sidecar and Lyft have both addressed recently, adding $1mm supplemental coverage as part of their platforms. And at USV, we’ve seen a number of proposed startups eyeing insurance in the peer-to-peer space.)

So, we will see what happens in Seattle tomorrow. Either way, my guess is that it will be an important precedent as more and more cities take up the ridesharing issue (DC and Chicago right now, among others). Maybe the next one will make a bold move and apply regulation 2.0 the the old as well as the new.

Disclosure: my employer, Union Square Ventures, is an investor in Sidecar.


About the Author

Nick Grossman

Nick Grossman is a technologist & entrepreneur focused on the intersection of the web and urban, social, and civic systems. For the past 10 years, he has developed software and media products, advocacy efforts and internet-based businesses that help cities and the internet work better together. He works at Union Square Ventures and is an advisor to the Data-Smart City Solutions project.