facebook, and the perils of platform monopolies...

When platforms can and do turn anti-competitive and anti-social and possible tools in the hands of a surveillance state

Long before Facebook was embroiled in its wilful data breach controversy, Mark Zuckerberg went to India to try his luck at world domination through “Regulatory Recapture”. A forcible Facebook conversion of poor indians who could not otherwise afford data and internet, through what he and his lobbyists eulogistically termed ‘net neutrality’. In effect, Mark was trying to oust competition by firmly entrenching Facebook in the lives of illiterate people from rural India who were yet to have their first taste of smart phones or data. If you give free data to people who could never otherwise afford it, what chance would competition stand in future once Facebook becomes the platform where everyone is on? Zuckerberg didn't need Steve Jobs' IQ to answer that question. Regulation can help even a platform gain dominance, where it would otherwise take a lot of strategy, talent, luck and execution to get it right! 

The bonhomie behind the Modi-Zuckerberg hug at Silicon Valley is now being traced to Facebook's infamous accomplice Cambridge Analytica that helped Modi’s party BJP by unethical means to influence elections. To add insult to injury, they allegedly got paid by Congress to sabotage Congress to a humiliating defeat! Those obnoxious quizzes that camouflaged as Data Analytics quietly stole data of party cadres, who were roped in as unsuspecting quiz-takers, as well as their friends and family. But, this is scandalous heresay, and I cannot vouch for the veracity of the sources who published this report.

However, a new class of invisible anti-social elements is emerging - Data terrorists. Data watchmen turning rogues, fuelled by monopolist testosterone. Same could be true of entities who have been dealing with data facetiously - like Equifax which lost the credit histories of whole populations. In case of data breaches, dereliction of duty should be as culpable as an external hack which may appear beyond the control of the breached party. No, we ought to extend no benefit of doubt to those breaches. It comes down to cyber security, and financial institutions are expected to guard it as their most important asset. If a financial institution is found to be untrustworthy, it must be held accountable with specific penalties, because the industry enjoys a high premium on account of assumed high costs to ensure security, compliance and so on. If ever there was a justification for regulation, this would be it. But, how often have we seen this in practice?

What triggers these acts of invisible aggression? 

Platform monopolies. Or Centralised decision-making. Or decision making divorced from consequences. Mismatched risk and reward.

Wherever upside for a morally questionable action is high, and the downside can be easily passed on to the unsuspecting common man - without any long lasting effects on the perpetrators of such invisible crimes, one can be sure of a conducive environment that encourages regulatory recapture. This is a direct result of lack of any enforceable penalty for such acts of invisible aggression. This is most often committed in connivance with the regulator or the policy maker, who also partakes in the spoils. Tragedy of Commons , as a term, acquires a new meaning. Tragedy of Commons is defined as a problem with communally maintained public goods, where one party (or few) consume(s) the collectively owned public good excessively to the detriment of all. An example would be factories which pollute excessively to the detriment of the environment, or trolls who exploit or abuse social media platform users , bringing down the quality of experience for all. 

Platforms like Facebook which amass huge data, with no qualms to insidiously extract private data like calls and texts, and exploit that data for mercenary and nefarious purposes, have incentives to impose social costs by acting against the collective interests of the community. This is especially true after platforms have gained the critical mass to be able to extract monopoly rents, when they no longer need to woo more users by aligning their interests perfectly with those of the users. Remember Zynga, FarmVille which played no small part in making fb addictive? Why were they later shown the door by fb? Why did fb pay a bomb to acquire Instagram, and later Whatsapp?

If regulators too help such platforms grow at the cost of other competitors, or turn a blind eye when such platforms indulge in anti-competitive behaviors, it has to be assumed that regulators are partaking in Tragedy of Commons, and being anti-social and corrupt themselves - though this is not always the case. The lesson from facebook's fiasco would of course be lost on many poor countries or citizens who made Facebook the invincible monopoly too big to fail. We are often guilty of timidity to question the growing power and might of victory runs - such as those of Forbes 30 under 30, the youngest billionaire, the invanquishable blade runner, and other such shenanigans. Who would have thought the poster boy of Silicon Valley, Zuck himself would be vulnerable? Edward Snowden is quick to point out Zuckerberg's interview to BBC many years ago voicing that "Of course, the data is owned by the users, it won't be shared outside of what users have expressly permitted, and of course FB would never sell it to third parties." Surely, corporate hubris cannot be brushed off as human frailty?

Imagine getting data worth trillions into the hands of a single monopoly. No matter how virtuous to begin with, absolute power absolutely corrupts. In India, for example, where data protection laws are non-existent, shouldn't one be very wary of the way PayTM and Jio have inveigled themselves into the collective psyche? Isn't this contravires to the laws on MRTP (Monopoly and Restrictive Trade Practices), which every developed country has? Unfortunately, regulators who supposedly mouth "protection of common man" are often protecting the well-heeled or worse the monopolies, at the expense of the common man! Take the case of PayTM, Jio. Successful platforms are natural monopolies. Monopolies are dangerous in hands of greed-ridden megalomaniacs with circumspect morals and neigh accountability.

Take the case of China, which banned ICOs, but after NEO established itself. It is not a matter of naive innocence that China let NEO grow under its nose to emerge the behemoth, amongst other fledgling ICOs that were nipped in the bud. Who regulates the regulator? Take a moment to ponder.

It has come to light that even the much deified Aadhaar in India may not be immune after all to such temptations of state misusing public schemes for surveillance, data pilferage or plain ineptitude at privacy and security (which is no excuse). Sensitive data linked to Aadhaar by UIDAI has apparently reached the data banks of Experian, without the awareness of users, let alone consent. I learnt this from twitter exposes by white hackers, and will say it here at the risk of becoming persona non grata because truth does not need to ingratiate itself and should be independently verified. In the wake of laws such as GDPR, these companies would just claim facetiously that data authentication was required for KYC purposes. Something like GDPR would be seen as draconian by firms with scant respect for the public good, and such laws would scarcely be unenforceable in countries like India, which struggle to enforce even contract law. It is a fact that banks and other data analytics companies armed with modern techniques like machine learning and data scraping of bots will have an accurate ability to predict critical events in our lives, and our spending patterns better than ourselves, our financial advisers and our family can due to a lot of our habits being captured as data and monitored dynamically. 

Is illegally mined data going to be the new revenue streams for banks, and a new loathsome form of aggression on democracy by political parties?

Is regulatory Recapture the new form of invisible corruption? PayTM and JIO - Two Indian Case Studies in offensive economics. 

Network effects are the make or break of a platform! Especially, if also combined with barriers to entry for other competitors. Though facebook did not succeed in its particular attempt to dominate the Indian mobile landscape with its net neutrality ploy, other players like Reliance Jio and PAYTM did - completely exploiting regulatory recapture. Jio made an offer the poor Indian consumer could not refuse. Government knowingly allowed it, and infact favoured Jio. Jio not only was one of the first few privileged awardees of a payments bank license when few (only 21 or so) payment bank licenses were up for grabs, but Jio also got away with its anti-competitive tactic, albeit an irresistible bait to many. Jio gave away a free smartphone and free unlimited data for a long enough period to set the habits of an audience just getting started with smart phone usage. Atleast in the United States, Microsoft and Apple have battled through many MRTP (Monopoly and Regulatory Trade Practices) law suits before they earned their standing as revered monopolists. 

PAYTM was another fintech contender from India. Today, PayTM has a formidable share in wallet apps ahead of Govt supported Apps like Bhim app, Jan Dhan Yojana, and way ahead of other competitors like Mobikwik. It did a good job of comprehensively signing up almost every payment partner, every merchant, and every bank to provide a seamless cashless experience to indian customers. On paper, this does look like a giant contribution towards Digital India, but on a closer look it does exactly the opposite. PAYTM would not have emerged as the monopoly that it is today, but for Indian Government’s overt and questionable help to PAYTM at one defining moment in the world history - India’s demonetisation, the ruthless act that claimed human lives in hundreds (one such death waiting for cash below). Regulatory recapture again! India is a tough place for things that require regulation, as Uber and Paypal learnt the hard way. Uber had to tinker its 1 click payment to a 2 factor authentication specifically for India, forcing it to introduce cash payments for Indian riders. Paypal is yet to gain a foothold in India. However, what made PayTM a monopoly is a story that reeks more ruthlessness than tales of Dale Carnegie who lived by a personal motto that ‘Competition is Sin’.

PayTM was thrust down the parched throats of many a starving Indian, when callous leaders unleashed demonetisation on an unsuspecting India. What followed was a watershed moment that shocked thoughtful individuals and governments all over the world. Evidence has now emerged that friends of the ruling party were in full knowledge of the impending move and fully made use of their business facades to launder money for their friends and the coterie were individually well prepared for this mass obliteration exercise. Nirav Modi, who recently fled india having scammed a Public Sector Bank to the tune of $2 billion, also used his jewellery storefronts to do fake invoices during demonetisation to help friends launder money. Whilst 100s of the unsuspecting poor, desperately dependent on cash, literally starved to death and could not even access medical attention. Banks had pulled the shutters in time of need, and ATMs were unable to dispense cash, and no regulator was around to ensure any order and save lives or to accept ownership. Especially when the decision was made to look like RBI's! The author had to stand in queues several days to settle bills during India's first ever Blockchain Summit Dec 2016 when demonetisation was in full swing, and miss taking our Chief Guest Vitalik around India much. But of course, my misery was nothing compared to the average Indian's !

PayTM became the sole alternative for people at a time when they had no option but to swallow the bitter pill of a cashless mobile app to survive, so what if they had never used a smart phone or any digital app before. No wonder PayTM founder became the youngest billionaire in india and one would not be surprised if links emerge proving Regulatory Recapture. 

Why does regulatory recapture happen? 

Because those who invent regulation and draft rules for others work for a salary for unknown masters and do not directly benefit from preserving intangibles such as liberty and freedom for the individual, protection from damages etc.

A regulator's goals are ambiguous and distant, and accountability is none. They have no incentive to act in the interests of those being regulated. Infact, they could have perverse incentives to collude with those excessively grazing the common good, thus becoming an active party to ' Tragedy of the Commons'.

Nirav Modi simply bamboozled Punjab National Bank to the tune of $2 billion in a systematic scam and fled the nation, also posing with Prime Minister’s entourage at Davos, days after the Enforcement Directorate declared him an offender. However, the regulator RBI washed its hands off saying it is not really possible to monitor every nook and cranny of every bank’s operations and balance sheet. Second case after demonetisation, where regulator washed its hands off.

If a regulator is not a protection for the downside, then what good is regulation in good times?

Are regulators and watchmen there only to protect a King of Good Times, Vijay Mallya from clutches of law?

Take the case of crypto currency regulation. While regulators have argued that retail investors need protection from so called risky products such as ICOs, they have been unable to stem all crypto currencies. Their avowed stand that regulators are in a position to adjudicate cryptocurrencies on their merit is ludicrous, and our presumption that regulators may have better foresight than us is perilous. It is hard for anyone to assess the merits or demerits of cryptocurrencies, including their founders, because this economy is founded on future possibilities. So regulators are at best as ignorant as the average investor they supposedly want to protect. At best, they are struggling to comprehend even the fundamentals of crypto economy, so how can they decide which are good and which are bad investments? Even if they were to issue these certificates of goodness, like Verizon which became a profitable company in the early days of the internet by issuing SSL certificates as a gatekeeper, I would argue this would be License Raj revisited, or money-making scheme akin to taxes rather than a diligent filtering of quality.

What good did regulation achieve, when Japanese crypto exchange Coincheck recently claimed to have lost half a billion dollars to a hack? Take the case of China which introduced a crypto ban in September 2017. Neo, which claimed to be the Chinese ethereum had already launched, and the ban said nothing about its continuance. So, by banning ICOs , the Chinese Govt was just extending mafia-like protection to NEO, while erecting entry barriers to those late to the party. To make matters worse, an ICO, which was just on the verge of launch during the Chinese ban, allegedly managed to persuade the regulator to let them continue with their launch, perhaps for a share in the spoils. Consider for instance SEC’s persistent hounding of Poloniex, which resulted in its acquisition by Circle , which was already regulated and therefore in control of SEC. It would be fair to argue, regulation serves more as a license or a protection and a profit making scheme for the state, rather than as a true guard against economic offenders who pilfer from the exchequer, society and ultimately tax-payer money. Who will protect us from the protector / gatekeeper or 'Chowkidar'? 

In a nutshell, regulatory recapture, like all other forms of corruption, presents an epitome of agency problems where agent and the client have conflicting interests, and that familiar old friend self-interest would once again be a more reliable indicator of individual behaviour than any ethically complex ruminations. 

In case of banks, despite plenty of evidence to the existence of regulatory recapture, the citizens are sadly in a state where we believe things cannot be improved. A fatalism has set in, just as regulators would have wanted it. Nothing is farther from the truth, especially thanks to the advent of blockchain and its steady climb to mainstream consciousness over the past decade. 

Bitcoin not only allows citizens to take back control over their finances and data confidentiality, but also gives us a profound mechanism by way of decentralised decision making that can render every sort of middleman redundant - from banks to stock exchanges to brokers, custodians, and in some cases even accountants, auditors and lawyers. However, in between the current centuries old systems and the opposite state of cryptocurrency-fuelled utopian laissez-faire, lies a complex maze. A lot of tools that are needed to bridge the two worlds. Some such tools would be A. Stable or Pegged Coins that are viable substitutes for fiat currencies B. Decentralised peer to peer exchanges that run without the intervention of any third parties , community run eco-systems that follow socially enforced governance mechanisms D. Well functioning distributed autonomous organisations. Thanks to the fast evolving crypto space, these are all on the horizon, which promise just such a future free of conflicts of interest, and free of regulatory recapture. We are in the process of building one such smart-contract run peer to peer IPO highway, which resists rent-seeking monopolistic middlemen.

Do we need cryptocurrencies to counter regulatory recapture, or regulators to curb cryptocurrencies?  

The author Arifa Khan is India Partner Ethereum and architect of Capital Coin Exchange - a tokenised IPO platform for real world companies to raise capital without investment banks and stock exchanges. She tweets as @misskhan. 

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