Regulating the Digital Economy in Three Parts: The Conclusion

Canada's next federal government should regulate social media companies in the context of a more general focus on the broader digital economy and digital society, as part and parcel of the wider economy and society

September 13, 2021
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Illustration by Abhilasha Dewan

In our first of three commentaries, we argued that any government regulation of social media platforms must address incentives baked into their advertising-dependent and data-fuelled business models. In part two, we contended that such efforts must also counter the ideology of a “free and open internet,” which tends to prioritize US-style free speech above other values like privacy.

This ideology perceives the values of interconnectivity and interoperability as central to a global internet, argues Dutch internet scholar Niels ten Oever, and generally portrays governments’ interventions as illegitimate and contributing to fracturing the global network.

In this concluding piece, we argue that the next federal government needs to regulate social media companies in the context of a more general focus on the broader digital economy and digital society, which themselves shouldn’t be thought of as separate from the wider economy and society.

When it comes to platform regulation, a disproportionate amount of scholarly and public debate focuses on a few social media companies. It’s reached the point that “platform” has almost become a synonym for “social media.” This is a problem to the extent that it risks emphasizing an important but limited policy issue — how to deal with the bad behaviour of an individual sector (social media) — at the expense of more systematic issues that affect the online and online-adjacent economy and society as a whole. Just as an effective anti-hate speech policy requires that online takedowns be matched with a commitment by police, prosecutors and politicians to enforcement of robust anti-hate laws, effective regulation of platforms and social media requires effective regulation of the economy in areas such as competition policy and consumer welfare.

Consider the problem of what Natasha Tusikov elsewhere has referred to as “chokepoints”: key sectors of the economy controlled by a small number of players whose position gives them the power to bring life or death to businesses, organizations and, yes, speech itself. Google Search is an example of a chokepoint: when the vast majority of the world’s population uses this search engine to find information, if Google doesn’t index you, you don’t exist.

Online payment providers — the companies that enable online spending — are another chokepoint that’s just as, or even more important than, search and social media chokepoints. Perhaps no example is more compelling to illustrate digital monopolies over networks and data than payment providers’ decade-long war on sex on the internet. In the recent OnlyFans saga, the London, England-based platform first announced it would ban all sexually explicit content, which came as a shock to the many adult entertainers and sex workers responsible for the platform’s success, and quickly reversed course.

The Structural Power of American Finance

While it’s tempting to frame this as a social media/platform story of speech restricted and won back, it’s actually a finance story. OnlyFans faces a problem common to adult websites: securing payment processing from among the very small number of payment providers, the main ones being Visa, MasterCard and PayPal, all based in the United States. Banks and payment processors, including PayPal, must follow rules set by the credit card networks, which means sex work is designated a high-risk transaction, adding to service costs.

Payment providers, especially those headquartered in the United States and with global operations, have a pattern of denying financial services to people and businesses involved in publishing legal sexual content. As Tusikov has argued elsewhere, this amounts to financial discrimination. Given the concentration of the online payment industry, payment providers wield significant power to determine what content and services they approve for payment, in what can be called “revenue chokepoints.” As instances like this continue, those selling sexually explicit content are increasingly turning to alternative and less-reputable payment systems, including cryptocurrencies, which have their own set of problems.

These worldwide rules are based on distinctly US (anti-sex) norms and laws. People in smaller countries such as Australia, Canada and Mexico, which use US platforms and businesses, find they must also accept US rules, even when they may conflict with national or local laws.

Payment providers exert a form of what international political economy scholar Susan Strange called “structural power”: the ability to set the rules under which others operate. In this case, payment providers effectively can determine who can or can’t conduct business online. And so, American obsessions and phobias become global rules.

The disproportionate power of foreign financial services companies isn’t just limited to social media or sex. A Toronto, Canada-based food truck found this out the hard way in 2019 when sales of its Cuban coffee were flagged by a US bank processing payments for the company’s Square mobile payment system for violating the US trade embargo on Cuba. The company’s payment processors in the United States couldn’t process the sales because of the embargo. According to Canadian law, the company had done nothing wrong. And yet, a Canadian business obeying Canadian laws unknowingly ran afoul of US laws because of its dependence upon US-run global financial infrastructure.

The Monopoly Problem

Government action to rein in online payment providers and, more generally, limit monopolistic online companies in other sectors, are vitally important because of the sheer scope and power of the handful of mostly American companies that dominate the provision of services online. Amazon, in particular, raises monopoly concerns in its dual role as marketplace operator and merchant. As an operator, Amazon is in an unrivalled position to privilege its products and control prices, while as a merchant, it can siphon data from its business rivals to create and push its Amazon-branded products.

One solution to this monopoly problem is a structural separation that would prohibit dominant actors from directly competing with the businesses reliant on their services, argues Lina M. Khan, American antitrust expert and new chair of the US Federal Trade Commission. Structural separation would not allow search engines, social media, app stores or marketplaces to operate those services and compete directly with third-party businesses reliant upon those services. The United States has a suite of antitrust bills intended to address these problems.

Similar problems of anti-competitive behaviour are evident in Apple and Google’s duopoly of mobile operating systems and app stores, which attracted critical regulatory scrutiny in the European Union and Australia. Both the United States and South Korea have legislation pending that, among other provisions, would require Apple and Google to allow alternative payment methods and not impose undue restrictions on app developers.

Rethinking the Division between Tech and Finance

Online payment providers are another vital sector in desperate need of reform. Canada, for example, could follow the lead of the Australian government, which has undertaken a parliamentary review of mobile payments and digital wallet services, and a Treasury-commissioned review (the so-called Farrell Report) of the payment system. The impetus for the reviews was the growing role of technology companies such as Apple and Google providing financial services (i.e., fintech), as well as the increasing popularity of cryptocurrencies.

One of the Farrell Report’s key recommendations, among those to strengthen licensing and competition requirements, tackles directly another key issue in digital economic governance: platform exceptionalism. Platform exceptionalism contends that services delivered online or via an app should be treated differently than the same services delivered offline (see Uber and taxis, or Airbnb and hotels). The Farrell Report calls on Australian regulators to set rules based on the nature of the service, not on the entity providing the service. Under this rule, platforms providing payment services would not be treated differently than traditional financial institutions offering the same services. Simply put, the claim of “platform” would no longer be a perceived or actual regulatory advantage.

Addressing Structural Economic Problems

The key point here is that much of the online, or digital, economy exhibits significant structural problems that need to be addressed. There is, in short, a lot of work to be done in this area. While the Liberal government has made some piecemeal moves to address some of these issues, the challenges Canada faces are beyond the ability of, say, a proposed data commissioner or revamped privacy legislation to fix.

What’s needed is a concerted, institutional response to address the problems of the digital/online economy as a whole. Rather than just appointing a commissioner or tinkering at the legislative margins, the next government should seriously consider deeper institutional reforms to regulate the digital economy in the Canadian public’s interest. For example, it should also consider why the Competition Bureau has been so sadly outgunned while other countries’ regulatory agencies swiftly move to respond to the challenges posed by Big Tech. As well, any plans must involve modernizing Canada’s woefully outdated privacy laws, as critics charged the government’s Bill C-11, focused on protecting privacy and personal information, lacked structural reforms to rein in surveillance-intensive businesses and data practices.

Here, we have two suggestions. First, create a successor to the Economic Council of Canada to provide in-house advice to the government of the day on novel economic and social issues. Elsewhere, we and others, chiefly Jim Balsillie, founder and chair of the Centre for International Governance Innovation, have called for such a governmental institute focused on applied policy issues, including the economic and social challenges of a digital/datafied society. Our ability to face these challenges is only as strong as our ability to understand them. The government needs highly qualified, expert in-house analysts, not just to help set policy but to evaluate outside advice (like these articles) with an eye to promoting policy in the national interest, rather than the necessarily partial views of tech companies, lobbyists and, yes, academics.

Second, and more importantly, the next government needs to reinvigorate its own bureaucracy to deal with the challenges of the twenty-first century. They could start by reforming or replacing the Competition Bureau, and its enabling laws, with an agency and legislative framework modelled on the Australian Competition and Consumer Commission (ACCC). The ACCC has been at the forefront of mid-sized countries’ attempts to regulate the digital economy, including social media companies. Canada also hasn’t had a dedicated consumer protection agency or industry for decades now — another point we can borrow from the ACCC.

Reining in monopolistic online companies and addressing the myriad other issues raised by the digital economy is a complex and difficult challenge. But if the past few years have taught us anything, it’s that these problems are too important to be left to self-regulation or piecemeal reforms. The only question that remains is whether Canada, and the incoming government, is willing to do what it takes to achieve the best results for Canadians.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

About the Authors

Blayne Haggart is a CIGI senior fellow and associate professor of political science at Brock University in St. Catharines, Canada.

Natasha Tusikov is an assistant professor of criminology in the Department of Social Science at York University and a visiting fellow with the school of Regulation and Global Governance (RegNet) at the Australian National University.