The End of a "Business as Usual" Reality for Tech
By J.B. Ferguson , Managing Director of Technology, Media & Communications
We think 2023 will mark a clear move into the “middle innings” of the tech regulation story. 2022 was a watershed year for tech and government in the US and EU, pushing the contest between economic behemoths historically unused to regulation and lawmakers fed up with them well into its middle innings. We do not yet know what the end game will look like, but we do know that companies across the tech spectrum must now grapple with the reality that a return to “business as usual” from the late 2010’s is impossible.
In the EU, the wheels of justice have slowly but surely ground down all hoped-for workarounds to the General Data Protection Regulation’s (GDPR) requirements for informed consent, and the Digital Markets Act (DMA) and Digital Services Act (DSA) promise to further restrict the use of consumer data and limit other alleged anticompetitive behavior. In the US, the continued implementation of export controls and the roll-out of an industrial policy for semiconductors (CHIPS Act) has upended the industry and reinvigorated investment in onshore production.
Capstone has covered these issues and other evolving areas like cryptocurrencies and biometric privacy in a series of in-depth 2023 preview notes laying out our expectations and key catalysts for the year. For a more in-depth read, take a look at our TMT?forecasts on our website.
China
Capstone believes 2023 will mark a pivotal year for the US push to implement its domestic manufacturing strategies to compete against China. We assign a 55% probability that the US will reach a multilateral agreement with key allies on semiconductor-related export controls by December 31, 2023, up from 35% in previous coverage. The Republican majority in the House will catalyze additional pressure for the Biden administration to address US vulnerabilities and national security concerns related to China’s “military-civil fusion” development involving semiconductors and Chinese social media applications such as TikTok.
One bright spot in 2023 is the emerging opportunities for cooperation, as demonstrated by the recent US Public Company Accounting Oversight Board (PCAOB) announcement that US regulators can inspect Chinese auditing firms used by Chinese companies with US stock listings. We believe the inspection process will likely inform how the US approaches similar concerns in other policy areas, such as the new Unverified List to review end-use checks for exports.
Read more here: How the US will Freeze Out China in 2023, China’s Heavy Hand a Boon to Innovation in the State
Social Media
United States
We expect the momentum for focused privacy laws in areas such as biometrics and children’s privacy, as well as regulatory action by the Federal Trade Commission (FTC), to continue in 2023. These two subcategories have attracted substantial consensus, and bipartisan support as lawmakers feel they can protect consumers without solving the core disagreements over broader privacy rights.
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In addition to more stringent biometric and child privacy laws, we anticipate that online platforms also will face growing headwinds to their content moderation activities as the legality of Section 230 of the Communications Act in 2023 is adjudicated by federal courts. The decisions in NetChoice v. Paxton and Gonzalez v. Google are likely to have sweeping implications on how the internet is regulated, regardless of how the US Supreme Court rules. Should the high court side with any of the parties challenging Section 230, we expect a wave of subsequent privacy litigation to attempt to establish liability for content on their online platforms.
Europe
We expect the Irish Data Protection Commission’s conflicts with the European Data Protection Board (EDP) over GDPR enforcement will continue. Both the DMA and DSA were designed to overcome GDPR’s structural enforcement weaknesses, and member-country regulators are likely to begin reframing GDPR issues to fit those statutes. For example, the DMA treats certain personal data practices as a competition concern, as it specifically prohibits the combination and cross-using of personal data for targeted advertising purposes without explicit and clear user consent.
More clarity on provisions, including what this additional consent will look like is expected throughout 2023, however, a formal position on what big tech will need to change is expected in 2024. The ongoing work and findings of the newly empowered national competition authorities will also feed into DMA enforcement.
Crypto
The SEC will maintain its aggressive posture toward the crypto industry as it heads into another year without a clear resolution on the securities status of cryptocurrencies. SEC Chair Gary Gensler is maintaining his insistence that most tokens are securities, commenting specifically that staked tokens may be securities after Ethereum transitioned to a proof-of-stake mechanism.
The SEC is coming off a victory against LBRY Inc., giving it additional legal precedent for pursuing further enforcement in the crypto space. The commission’s ongoing lawsuit against Ripple Labs will likely be decided by the end of 2023 and will clarify the SEC’s chances against major issuers such as Ethereum. Without legislation designating Ethereum as a commodity, the token is vulnerable to claims similar to those in the Ripple and LBRY cases.
As the FTX debacle caps off a tumultuous year for the crypto industry, the growing pressure it puts on lawmakers to provide crucial legislative clarity is a silver lining. Bills with greater bipartisan support likely to be introduced next year include provisions to mandate financial disclosures from crypto firms and to establish requirements for stablecoin issuers.