Political Risk and the Sharing Economy

Political Risk and the Sharing Economy 

February 4, 2016

Patrick Colquhoun – Primary Article Contributor

Piercon Knezic, Karli Kurzuk – Team Leaders Following Sharing Economy

Keywords: Political Risk, AirBnB, Uber, Fon, Sharing Economy, Regulation, Government, Mitigation

The unprecedented growth of the sharing economy has increased the size of the potential market for goods and services. The structural change, which has occurred within the sharing economy has led to a need for governmental regulation. In order to protect their market share, established companies (such as taxi companies) are calling for more barriers to entry, and legal regulation of their new competitors. These companies also cite concerns about customer/employee safety, and corporate taxation as reasons for economic limitation. One example, of an established business successfully limiting the sharing economy comes in Germany, where several platforms, such as ‘UberPop,’ have been banned. In contrast, the Netherlands has openly collaborated with sharing economy companies. The city of Amsterdam has formed an agreement with AirBnB, which allows the company to rent properties using their online platform. In return for the ease of access, AirBnB collects the applicable tourist tax. Recently, London, England implemented a similar solution.

In a 2015 study performed by Deloitte, 1,400 American and Swiss citizens were polled on their opinions regarding shared-economy regulation. Their results indicated that only 21% (Switzerland) and 25% (U.S.) of people felt that more regulation was needed for the sharing economy. According to this poll, many feel as though there is no need for increased legislation regarding taxes, or security within the sharing economy. As a counter, politicians, corporations and some members of the public above argue for regulation, citing safety and sanitation as areas for which legislation is required.

One aspect that is often overlooked when considering the sharing economy is self-regulation. Because of the technological advancements that have occurred in the last decade, each transaction that takes place can be observed and rated by users. Two-way ratings (between the customer and the service provider) allow for increased transparency and electronic trails of each transaction. Deloitte has noted that, “someone who does not behave appropriately is unlikely to survive for long in the sharing economy” Customer safety is often cited by the taxi industry as a problem with Uber; however, the electronic trail left by each transaction allows the company to zero-in on any unsafe drivers, or users. The e-trail, which is unavoidable in the technology that drive the sharing economy, will allow authorities to locate and punish any potential criminals. The anonymity that occurs in traditional transactions (in this case, taking a taxi) does not allow for this kind of transparency and, therefore, it could be argued that the sharing economy is in fact improving customer safety.

The companies currently calling for regulation do have legitimate concerns about the practices of sharing economy companies. Using the example of AirBnB, the hotel industry is held to a much higher standards regarding taxation, hygiene and safety. However, it is not fair to equate traditional corporations with the mixed providers of the shared goods. Contrasting the size and strength of established business operators with the individuals sharing their goods/services, there is an argument to be made that it is unjust to hold them to the same standards of operation. If regulations were put in place, they could eliminate the advantages presented by the sharing economy. In their 2015 study, Deloitte provides two regulatory suggestions for governments in order to take advantage of the rapidly expanding economic field:

  • Firstly, existing regulations for traditional suppliers should be scrutinized, to eliminate unnecessary requirements/barriers to entry
  • Secondly, regulators should engage with the suppliers of sharing platforms and develop solutions to issues (ex. AirBnB paying housing taxes in Amsterdam and London)

In reference to the first suggestion, the Ontario government has accumulated approximately 40 pages of legislation for taxi drivers and has crafted no less than four laws regarding the mandatory placement of signs in hotel rooms. This shows that provincial legislators are eager to introduce further requirements, but are rarely willing to eliminate laws that are now obsolete. One example of this is the Innkeepers Act (1990), which dedicates a quarter of its text to rules regarding how, and when the owner of a hotel can place a lien (the right to keep possession of property until a standing debt is paid) on a customer’s horse. Eliminating legislation that is no longer relevant and enacting laws that will have future significance for Ontario should be the government’s main priority in this area.

Many provincial laws in Ontario simply do not acknowledge recently invented technologies. Furthermore, general societal views have evolved drastically in recent decades. Ontario’s technological and social norms, which were once conventional, have become outdated. Given the rapid pace of scientific advancement, this lag in legislation is not uncommon for governments. The clutter currently found within Ontario’s legislation has created unreasonable barriers for entry into the shared-economy field. Larger actors, such as existing internet providers, have already passed legislative restrictions and have a strong foothold on Ontario’s markets. Despite their services being less convenient for users, they have a legal advantage in economic competition against entrepreneurs and shared economy corporations. If the provincial government is to work cooperatively with these companies (such as Uber, Airbnb and Fon), the legal barriers found in Ontario’s dated laws will need to be rectified.  

Regarding Deloitte’s second proposal, the current Government of Ontario is contemplating how to approach the sharing economy. Kathleen Wynne’s Liberals, have yet to pass major legislation in regards to the sharing economy, though they have acknowledged the importance of regulation (including a framework for taxation). However, Tim Hudak’s, of the Conservative oppositions, proposal to legalize shared economy companies is picking up steam. Passing the parliaments second reading. Whether the Liberal government will approve the legislation or not, through their majority, is yet to be seen. The provincial government’s annual budget has thus far, permitted partnership with expanding shared economy companies. This cooperation is mutually beneficial, as it will assist Wynne’s administration in ensuring that all firms are complying with regulations. Going forward, the provincial government should research the benefits of sharing economic resources, as appropriate regulation could benefit both parties. In order to make informed legislative decisions, policy makers must acquire proper expertise regarding the sharing economy; a simple calculation of the pros and cons, usually called a ‘cost-benefit analysis,’ will help government officials create appropriate industrial regulations. A 2015 study by the University of Toronto argues that the provincial government should take a, “balanced, long-term approach that takes into account the interest of all parties, with a particular emphasis on the broader public interest.” If the Government of Ontario acts early and passes legislative trends that benefits Ontarians, they will see their economy become more productive, dynamic and competitive. The practice of sharing resources through technologically-fueled businesses is original; however, the economic competition the industry has sparked is familiar.

In the case of Fon, where customers are able to access a stranger’s personal WiFi internet, there have been concerns raised regarding privacy. The company’s users have cited banking information and personal login details as information they wish to keep secretive. In an effort to fulfill the wish of their customers, Fon introduced a Secure Socket Layer (SSL) of 2048-bit RSA encryption technology. The program was developed to send confidential data over the internet in a secure fashion; it guarantees that the data cannot be seen, or manipulated, by internet guests. Currently, this system is the most secure cyber-defense available, and it is employed on all of Fon’s 17 million networks. To protect personal data even further, Fon has erected firewalls to protect their users from online hackers. Their cyber-security system uses an HTTPS protocol, which ensures a secure path for transmitting all personal data. Though the idea of sharing WiFi introduces many risks, the fortification of Fon’s networks mean customer safety is less of a concern.

The regulation and security of Fon’s global networks would be of great concern to the Government of Canada, specifically Ontario, had the company not already established strong safeguards. Because Fon has defended its networks to the utmost level, the requirements of any future legislation regarding online privacy should be met with ease. As wireless internet becomes even more pervasive in the future, the governing party of Ontario would benefit greatly from cooperating with this shared-economy company.