Home Cryptocurrency Technology neutrality 技术中立 English-Chinese Definition

Technology neutrality 技术中立 English-Chinese Definition

by admin

THE PAST DECADE has seen extraordinary growth in technological innovation. In relation to financial services, innovation has been driven by financial technology or fintech and has been spurred in particular by blockchain technology and by distributed ledger technology more broadly. The innovations include the following: new ways of raising finance, such as initial coin offerings; new means of exchange for payment purposes, such as cryptocurrencies; new asset classes, such as crypto assets (which include cryptocurrencies and tokens more broadly); and new forms of business, such as decentralised autonomous organisations.

Technological innovation has presented challenges for both regulators and regulatory design, with this column previously discussing technological innovation and regulatory challenges (see China Business Law Journal, volume 7, issue 8: Fintech and smart contracts; China Business Law Journal, volume 8, issue 9: Cryptocurrencies; China Business Law Journal, volume 12, issue 9: Decentralised autonomous organisations; China Business Law Journal, volume 13, issue 4: Regulating crypto assets).

This column first discusses the principle of technology neutrality. For many years, this has been a guiding principle for regulation, particularly in the financial services sector. The column then identifies how regulation should respond to technological innovation. Finally, the column discusses whether the principle of technology neutrality should still apply.

What is technology neutrality?

According to the principle of technology neutrality, laws and regulations should not favour, or discriminate against, any technology. Three main reasons have been given to justify the adoption of this principle.

First, it is important to make regulation future-proof so that it does not become out-of-date and unable to respond to technological innovation. Secondly, regulation should be impartial and should not discriminate against businesses on the basis of the technology that they have chosen to use. Thirdly, irrespective of the technology that is used, businesses that involve the same activities and risks should be subject to the same rules. This is often referred to as “functional equivalence”; namely, activity should be regulated by reference to its function instead of by reference to the way in which the activity is conducted or the label that is given to the activity.

Some years ago, the Chief Executive of the Hong Kong Monetary Authority (HKMA) referred to technology neutrality and risk-based regulation as follows:

The HKMA adopts a risk-based and technology-neutral approach in its supervision. This means that when developing and implementing regulatory framework and requirements, we will only base [supervision] on the intrinsic characteristics of the financial activities or transactions, and the risks arising from them. We will not introduce undue exemptions or requirements simply because some novel technological applications have been used. This will help ensure the creation of an environment that is conducive to innovation and fair competition for market participants, while end users will not have to bear unnecessary or undue risk.

A logical corollary to the principle is that law and regulation should not be technology-specific, except where it is necessary. In 2014, the Murray Inquiry, which examined the Financial System in Australia, qualified the concept of technology neutrality as follows:

Generally, regulation should be principles-based and functional in design, focusing on outcomes rather than prescribing the method by which it should be achieved. However, … technology specific regulation may continue to be required and be beneficial in cases where adopting a common technology standard would improve overall system efficiency. In these cases, future review mechanisms should be established to ensure technology-specific regulation does not impede innovation.

Focusing on outcomes instead of on process has at least two benefits. First, businesses have greater flexibility. So long as they achieve the right outcomes, they can determine the most efficient way in which to comply with regulation. Secondly, business can adopt innovative approach in determining how to comply with regulation and, ultimately, reduce the cost to consumers.

Importantly, the Murray Inquiry recognised that technology-specific regulation may be appropriate in certain circumstances, but care should be taken to ensure that such regulation does not impede innovation.

How should regulation respond to technological innovation?

There are three choices for regulation. The first choice is to adapt existing regulation, often involving broadening legislation to accommodate technological innovation. Examples include amendments to legislation governing companies to enable them to communicate with shareholders in electronic form in addition to, or in place of, paper-based communications.

Another example arises in the context of payment systems, where the definition of a “payment system” has been broadened to include different forms of payment, including cryptocurrencies, and not just money (or fiat currency). In Australia, for example, the term “payment system” in the relevant legislation is currently defined as “a funds transfer system that facilitates the circulation of money, and includes any instruments and procedures that relate to the system”. The government is proposing to amend the definition so that it refers to “enabling or facilitating payment or transfer of value” and is not limited to the circulation of money. In explaining the proposal, the government explained that the approach is:

technology neutral and does not explicitly outline the operators and service providers captured, to increase the likelihood that the law covers future innovations, including if new services emerge with a role in a payments chain, or future issues with entities that are otherwise outside of the regulatory framework. It also mitigates the risk of regulatory arbitrage.

Similar amendments to the legislation governing payment systems have already been made in other jurisdictions, including the UK, Canada and Singapore.

The second choice for regulation is to define technology and, where appropriate, create technology-specific regulation for areas of innovation (such as crypto assets and services in respect of crypto assets).

This choice has been seen in anti-money laundering legislation. In Australia, for example, a definition of digital currency appears in the legislation. In other jurisdictions, technology-specific definitions have been adopted for licensing purposes. In June 2023, for example, Hong Kong enacted legislation requiring virtual asset trading platforms to be licensed and regulated by the Securities and Futures Commission. The legislation defines a “virtual asset” as “a cryptographically secured digital representation of value”. Another example is the state of New York, where a BitLicense is required for “virtual currency business activities”, as defined.

The third choice for regulation is to let technology regulate itself, subject to general laws such as those governing consumer protection. This choice corresponds to the argument that “code is law” and that it should therefore replace law in the regulation of technology and technology-enabled products and services. To date, this has been the approach in many jurisdictions in the area of decentralised autonomous organisations (DAOs), where DAOs have not been subject to specific regulation.

Should the principle of technology neutrality still apply?

Although there is nothing new about technological innovation, there is no doubt that we are seeing technological innovation today that is qualitatively different from previous technological innovation. Twenty years ago, we had a similar debate in relation to how to regulate the internet and e-commerce, where technology started to be used as a means of facilitating transactions. However, the focus back then was on conventional transactions and conventional services. E-commerce traditionally had been all about the use of digital technologies to transact conventional goods and services, in the same way as e-money has traditionally operated as a digital representation of fiat currency (in other words, conventional sovereign currency).

Today, by comparison, the function of technology as it is used in crypto assets is not to facilitate transactions in conventional assets or services, but instead to create digital or virtual assets and services. In other words, the function of technology is not facilitative in nature but constitutive in nature – technology is an integral part of the creation of the virtual assets and services; it is technology that has brought these virtual assets and services into being. The most common example, perhaps, are digital currencies or cryptocurrencies. As technology has become constitutive of financial products and services, the logic of maintaining technology neutrality is increasingly being tested.

Some people argue that the principle of technology neutrality has impeded the development of regulation for the reason that it has made lawmakers and regulators reluctant to define technology for regulatory purposes and to create technology-specific regulation. In turn, this has compromised protection for consumers and investors and has given courts too much discretion to determine the scope of regulated activity. In addition, the preference to adapt the existing regulatory framework has stifled innovation and has actually favoured existing technologies – an outcome that is the opposite to the outcome that technology neutrality is designed to achieve.

The solution, as is the case in other contexts, is likely to be found in achieving an appropriate balance between technology-neutral regulation and technology-specific regulation.

Andrew Godwin 2015
Andrew Godwin

Andrew Godwin is currently a member of a World Bank team that is advising a central bank in Asia on potential reforms to its mandate. He previously practised as a foreign lawyer in Shanghai (1996-2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law (2006-2021). Andrew is currently Principal Fellow (Honorary) at the Asian Law Centre, Melbourne Law School, and a consultant to various organisations, including Linklaters, the Australian Law Reform Commission and the World Bank.

You may also like

Leave a Comment