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Trust Trumps Regulation in the Share Economy

By Brendan Petri

Discussion surrounding the recent banking crisis largely centered around two key themes: trust and regulation.  Unfortunately, a combination of ill-conceived regulations and lackluster oversight led to the financial crisis, and the failure of our regulations in turn led to new, more stringent—and perhaps more foolish—regulations post-crisis.  These problems are not unique to the banking industry; regulating is a difficult task, especially in new spaces like the Share Economy.  How can we expect to anticipate all problems before they happen, then stop them with regulations that manage to avoid stifling the space?

This year at SXSW the Share Economy took center stage.  At a panel featuring Juliet Gorman of Etsy, Nate Blecharczyk of Airbnb, and Shelby Clark of RelayRides, discussion quickly turned to regulation and trust in the Share Economy.  With new regulations threatening current business models (like California’s money-transmission law) and the press calling for regulation in response to a sexual assault precipitated by an Uber ride, regulation is on everyone’s mind in the Share Economy.

But hold on—the Share Economy seems to be running pretty smoothly without much outside regulation at the moment.  How can that be?  The entire space is built on a sense of trust and community, and its self-regulation is top-notch.  Regulating this space with rules designed for legacy institutions is inappropriate.  Renting a spare bedroom a few weekends a year does not make someone a hotel owner.  Moreover, in many cases the Share Economy is flourishing because its picking up the slack for broken systems.  Many feel safer using Lyft than they do riding in taxis.  Regulating these services like taxis won’t improve the experience—it will just make them more like the experience they’re replacing.

Without trust, there can be no Share Economy.  With trust, there is little need for outside regulation. In short, trust trumps regulation.  Let’s see why:

1.    Self-Regulation.  These are businesses, after all.

Despite all the talk about sharing, Airbnb, RelayRides, et al are all businesses.  They have a vested interest in seeing that transactions go smoothly and that customers are satisfied.  This has already resulted in some pretty good self-regulation, like Airbnb’s $1 million insurance policy for users.  As co-founder Nate Blecharczyk said at SXSW, “we wanted to make a statement that we stand behind our users.” Regulations don’t demand insurance to this extent, but they do it anyway—for their customers.

The same is true for the car-sharing business.  They do “background, license, and criminal checks on all drivers, and have systems in place to get rid of those who are rated poorly by riders.

These businesses (and many others in the Share Economy) have earned the consumers trust, as evidenced by their great success.  Self-regulation seems to be working.

2.    Handshake Accountability.

Yes, transactions in the Share Economy are largely conducted virtually.  However, at the end of the day “the service provider is the owner of the business” (Nate B.), which results in a different level of service and responsibility.  If you’re renting your house or your car, at some point you have to hand the keys over.  Even if this doesn’t happen face-to-face, the owner is very intimately involved with the transaction.

The Share Economy succeeds due to the pride users take in being micro-entrepreneurs, and the accountability and oversight that occurs within the community.  No amount of outside regulation can replace that.

3.    Virtual Accountability.

Everything you do in the Share Economy has consequences.  Good behavior is rewarded with good feedback and positive reviews; bad behavior can get you shunned from the community.

Shelby Clark says “your reputation means more if it follows you,”, and portable trust metrics (see Trustcloud) will serve to enhance the power of virtual accountability.

4.    Even highly regulated industries rely on Share Economy-style tools.

Consider the hotel industry.  High level of government regulation and huge corporate players.  When I go to the book a hotel room, though, where’s the first place I look for guidance?  Tripadvisor!  Likewise, Yelp has replaced the restaurant critic.  That’s right—peer reviews similar to those in the Share Economy are still among the most powerful tools for decision making in a highly regulated industry.  Great examples of trust trumping regulation.

The share economy is at a critical point in its development.  Regulation could crush it, stifling growth or changing it into a form that we won’t even recognize.  Fortunately, as trust in the community continues to develop and as portable trust metrics become widely used, it will become obvious that not only does trust negate the need for regulation, it does a better job of regulating than any regulation ever could.

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