Episode 89: We Need Regulations that Actually Allow for Innovation

Michael Schaus

Free to Offend Episode 89 | Guest: Cameron Belt

Innovators and entrepreneurs often find themselves stuck in a Catch-22 when it comes to bringing new ideas to the market: Regulators are skeptical to change laws and standards until there’s evidence it’s safe to do so, but innovators can’t generate that evidence until those laws and standards are actually changed.

Economist Cameron Belt joined the program to discuss his paper on “regulatory sandboxes” for Nevada Policy — a policy concept that allows innovators and regulators to overcome that Catch-22 and build a more dynamic, and flexible, regulatory framework.

Read the Transcript

Cameron Belt: I heard that it was launching, and I said, you know what? I want to do this just because it’s cool. And I was actually the first illegal Uber rider in Reno.

Michael Schaus: This is Free to Offend on your host, Michael Schaus. Yes, we understand that regulations are often a major burden upon those who are trying to innovate or trying to do something new in the marketplace.

But how exactly do you fix that? Because even as libertarian as I am, you can’t just rush out there and say, Hey, let’s suspend all regulations. That’s just impractical. And the chaos that would ensue certainly would be overwhelming, even if you think that the vast majority of regulations probably should go away. So how do you tackle this? What are some ways that you can make sure innovation is still able to exist in the marketplace?

Well, an idea out there is something called regulatory sandboxes. To talk about that, I’m very happy to welcome Cameron Belt. You probably recognize the name. He’s an economist. He’s been lingering around forever here in Nevada. I know that he’s done some work for Nevada Policy in the past.

He’s got his master’s at the University of Nevada in Reno, so he’s been doing work in Nevada for a very long time. And he’s a great guy, great friend of the program, great friend of the institute. Cameron, thanks so much for joining us.

Cameron Belt: Thank you for having me. I’m excited to be here.

Michael Schaus: I know recently, by the way, you were also working with Uber and Lyft, which is just kind of goes to my heart because that shows what kind of guy you are when you start talking about regulations and everything. And one of the things that we want to talk about is this idea of a regulatory sandbox. And I love this idea. I actually think it kind of fits in with what you were previously doing with groups like Uber and Lyft and what have you.

It’s this idea of let’s create an environment where when people want to innovate, we actually give them the regulatory freedom to do that. Explain kind of in a nutshell, what is the regulatory sandbox and how it has, or could be applied.

Cameron Belt: Absolutely. So, I’ll start off with just explaining in general what a regulatory sandbox is.

So, it’s a big word. It’s a big name for something that’s actually a really easy concept to understand, right? What it comes down to is a regulatory sandbox is a policy option where a state elects to allow for entrepreneurs to just try their businesses, right?

And why is that a big thing? Well, sometimes regulations can get in the way of new business ideas, right? Sometimes regulations have been written in code and codified for the last 20, 30, 40 years maybe. And now with changes in technology, advancements and you know, whatever it is sometimes what’s possible can actually butt up against what’s permittable, right? What the government allows to happen.

A regulatory sandbox says It allows an entrepreneur to come in and say, “Hey, I’ve got this really cool idea, but it conflicts with these two different regulations that are on the books right now. Rather than you going through and changing the laws and doing this whole thing, would you mind suspending these laws for the next year, two years maybe, and allow me to test this product and market to potentially a limited amount of people, right? That way I can gather data, find out if this crazy idea that I’ve got actually works. If it’s making people’s lives better. And then you, the regulators can learn, oh, the market has now changed. We might need to catch up as well.”

Michael Schaus: So, it gives not only businesses an opportunity to go and say, Hey, give us the freedom to do this innovative idea, but it also sounds like it’s designed to give regulators the opportunity to say, okay, we’re going to give this one company or this small group, a little bit of freedom, and then we’re going to watch and see how maybe we can regulate this moving forward.

If we want to open that up to the broader market, right.

Cameron Belt: Exactly. So, it allows for data gathering on both sides is what it really comes down to, right? It allows for us to sit back and rather than just being stuck in, oh, how could this possibly work out? It allows us to see how it works in the real world and gather that information in reality in the market, right?

Businesses have to constantly innovate themselves over time. And it stands to reason that regulatory bodies should kind of have that same mandate, too, right? They should keep up with the times as much as possible. And I’m sure that they all have the intention to do so. But what’s hard is they lack the data.

And so, what happens is these innovators end up being caught in a catch-22 where basically they want to innovate, but they’re not allowed to until the regulators can see that there’s a safety behind it, that there’s some data, that this is a fine idea. But they can’t generate that data unless they know what’s going on. And just this circle that happens, right?

And so, you have this constant tug and pull, innovation is pushing and then regulations are behind the times. They’re well intentioned potentially, I’m not too sure. I don’t know what anybody’s intentions are, but I’ll go ahead and just like say they’re probably well intentioned, right? They have public safety in mind. They have these different ideas in mind potentially.

But unfortunately, the results of these policies can be that innovation is stifled. Sometimes current large enterprises have an advantage over new entrances to the market because there’s barriers that they can more easily deal with because maybe they have larger pockets and pocketbooks, right? They’ve got bigger teams to deal with legal barriers, right? Rather than a startup, who’s got one guy who’s currently going through law school. Who really knows, right?

What it comes down to is we need to be allowed for innovators to try their ideas and we need to have consumers have the opportunity to try things that are new to them as well.

Michael Schaus: Can you imagine trying to explain to somebody for the very first time if they were just, you went back in time and try to explain Uber to them, for example? “Oh, you get random strangers to come pick you up and drive you places. That sounds horrible.

Cameron Belt: It sounds crazy. You know, what’s funny is, and I call this out in the paper, I was actually the first illegal Uber rider in Reno back in 20 14, when we tried to do it first. I was in grad school at the time. It could be 2014 or 2015, all the years start to meld together at this point. I think it was 2014.

I heard that it was launching, and I said, you know what, I want to do this just because it’s cool. I I’ve been following Uber since 2012 when I wrote up my first work with Nevada Policy, the Path to Sustainable Prosperity with Geoff Lawrence. We detailed Uber’s struggles in 2012 to launch the market, right?

Uber wanted to be in Vegas much earlier than it was. They didn’t get to be able to launch until 2015. They targeted in 2012. Vegas was the 15th city in Uber’s target list, right? That’s how much they knew that it was important to be here because they knew it was a good market.

But regulatory barriers stopped them from being able to be here. I wrote that story up and I detailed that in 2012. And here came my opportunity to kind of just try this brand new thing in Nevada. And so, I did and years later I was able to confirm that yes, indeed I was the first rider Reno for Uber.

I went in the data systems in the backend when I was working for them and said, ha, there’s my name right there. That’s pretty fun. But that’s what it came down to. I wrote an article at one point, I didn’t publish it anywhere, but it was called 21st Century Hitchhiking, and it was all about how I decided to get in a car with a stranger and I wasn’t mugged or killed or dropped off on the side of the road at all.

Michael Schaus: So where are some examples where this idea has been put into place? I mean, I know that regulatory sandboxes are not a brand new idea. I understand that in certain industries, this has actually been something that they’ve been trying and has actually been spreading throughout just not the United States, but also elsewhere, I mean, even Europe. I believe the

United Kingdom was one of the areas where this kind of first sparked. So, give me some examples of where this has been tried and how it has worked.

Cameron Belt: The UK actually was the first jurisdiction to try this out. It was in 2014, so it’s been around for almost a decade now.

So, this idea is not really that new. I mean, on some level, it’s new, but reality, it’s been around for almost a decade now. So, we’ve got some data to understand if this even a good idea. Right?

The UK launched it, and it was targeted primarily towards fintech, blockchain, you know, things along those lines.

They realized that innovation was going to keep going faster and faster and regulations needed to have some method of being able to keep up with the pace, right? They were trying to make sure that they were as in sync as possible, right? It’s hard to be fully in sync, but you can be better or worse rather than completely out of sync. So, they’re trying to be better.

So, they came up with this idea where they can say, hey, let’s let these innovative companies kind of go through this process of applying to get a grant from these specific regulations. Let’s let them take a break for a bit and see how it works.

And it’s performed really, really well. I don’t have the numbers in front of me right now, but there’s been hundreds of applicants that have gone through in the UK that have been successful businesses. What’s really awesome for the businesses themselves is they end up getting the data. They’re able to get better funded on the back end from entrepreneurs who are investors looking to throw money behind these ventures that are kind of moonshots.

So, if you’re an investor, and you’re looking to put money behind somewhere, you want to be able to have a little bit of a better idea that it’s going to work out pretty well. And the only way for you to do that is if it actually exists. I think I cited it in the paper, I think the businesses that went through the sandbox program ended up getting either 50 percent more funding or funded 50 percent more of the time as a result of giving this real-world data, right?

So started in the UK. It’s spread globally as well. But here domestically, we’ve seen it go across many different states, including Nevada actually in 2019. So, this isn’t even a new idea for Nevada necessarily.

But what we’re trying to do here is say, there’s more opportunity for us to expand and improve upon the current program that exists here in Nevada.

Michael Schaus: So, one of the concerns that would jump out at me just if this was the first time that I was hearing about it and I didn’t already kind of investigate some of this and obviously read the paper that that Nevada Policy is putting out on this.

One of the first things that would jump out at me as a very libertarian guy is, all right, I love the concept. I’m a little worried if you’re talking about businesses going to government asking for exemptions from regulations. How does that not turn into a crony system where Switch goes and ask the question and “Oh, sure, we’ll waive everything for you.” But the little guy, as you were saying that just starting a business in his basement, can’t have that access.

How do you address that concerns or how can you address those concerns in a regulatory framework?

Cameron Belt: Yeah, absolutely. You know, political favoritism is something that we all have to be very, very wary of. And we need to be able to design these systems as best as we can to hopefully tease that out and create accountability on not only the business side of making sure that they’re not damaging the world that they’re in, but also on the political side that they’re not creating perverse incentives or playing favorites, right?

Like you said, Switch gets this, but these three guys who are going out of their basement don’t get anything. There’s inherent risk when it comes to this. And I do understand the risk of the libertarian saying, “Wait, you want to create another government agency to do this?”

And in reality, what it comes down to is we’ve got constraints in front of us right now, right? And we want to be able to deal with the systems that we have in front of us. We’ve actually seen that this works pretty, pretty well. Utah and Arizona have both adopted the framework that we’re kind of suggesting here, where they create essentially an office of regulatory relief under some regulatory body. We’re kind of suggesting that would be under GOED or the Office of Business and Innovation where the sandbox program currently exists.

What would happen is let’s say you’re an entrepreneur and you want to start a new business. You’d file an application to say, “Hey, I’ve got this idea here. Here’s what it is in detail. Here’s the regulations that I believe most hinder us.” And you kind of throw that into the Office of Regulatory Relief.

They take it over and they say, okay, we’re going to look at this over and then we’re going to contact the regulators on your behalf and say, hey, somebody’s trying to do this. We’re going to try and push this through. You guys have 30, 60, 90 days, whatever it comes down to respond. Hopefully it’s a lot sooner though, right?

Now, if you don’t respond at first, you can have an exemption for a little bit longer, but after that point, you’ve got to tell us whether or not you’d want to support this, or you want to deny this and then give us the reasons for it. And then that goes to an independent body who kind of overseeing this all, right?

So, we take the regulators’ voices into consideration, but they don’t have to be adhered to necessarily, right? And all this will be under congressional record as well, so it’d be completely transparent. That way at every step of the way we can see who’s saying what and if there’s a pattern of consistent favoritism, we can at least point to it and say, hey, this is happening in public record rather than potentially behind closed doors.

Again, it’s not perfect. But it’s definitely better and it’s a step towards better. And it’s a step towards opening this door to allow innovators to consistently do better. Again, regulatory sandboxes written this way are really a responsible policy option for us.

Michael Schaus: And compare that to the current status quo where if you are a business and there is a regulation that’s standing in your way, what do you do? You go in and you lobby. And so of course Switch is going to get whatever regulations they want taken out because they’re going to have the most powerful lobbyists and they’re going to have plenty of money and you, the guy running out of your basement, don’t have a lobbyist.

So, this is a huge move towards saying let’s at least try to give everybody that equal opportunity to go forward and at least for your particular business, say, let’s get an exemption for some of these regulations that might otherwise stand in our way.

Cameron Belt: Right. That goes back to the classic idea in economics called the Theory of Government Regulation that I think Stigler talked about.

What happens there is, on average, regulations are usually positioned and kind of focused on taking care of the consumers. But what happens eventually is they actually take care of the producers. If you think about it, who has more incentive to consistently lobby further and further? You and I, as individual consumers, just doing our own thing or Switch or any other large-scale company. I don’t know why we’re beating up on Switch, but we can choose anybody.

Michael Schaus: Well, we’ll switch over to Amazon. Amazon was lobbying for a national sales tax on internet sales. Why would they do that? And it’s because they could afford to track it and pay 64, 000 different county taxes.

Cameron Belt: Exactly.

And so, when it comes down to that, it really changes the power dynamic, right? And so historically, if you look at the bodies that tend to support the most regulation historically have been the biggest businesses. And there’s nothing wrong with big business. Big business is a good thing when you’re able to be a market entrepreneur.

But if you flip the script, and you become a political entrepreneur where you’re gaining market share as a result of getting dished out different favors, that’s when we have a really, really bad situation on our hands, right? And all of a sudden, the interests of the public are superseded by the interests of, well, special interests.

Michael Schaus: Yeah. If you’re worried about cronyism, for example, the current system that we have sets it up for cronyism a whole lot easier. And that’s exactly why. The way that regulatory capture structure that you have in government, especially when it comes to how many regulations we have in this state, which we have quite a few.

So, the regulatory sandbox it’s been implemented in Utah, as you mentioned. In 2019, it was discussed here in Nevada. What do we have currently and how should we. Look at expanding that? I mean, what are some areas in Nevada where this would make a huge difference.

Are we talking gambling? Are we talking housing? Are we talking technology? You know, what do you see or where do you see the biggest benefit being in Nevada?

Cameron Belt: I’ll start off with the first question of where we at as of right now. We do currently have a sandbox program here in Nevada. It’s focused only on blockchain technologies. FinTech is what it comes down to, financial technology.

But since 2019, nobody has actually applied to take part in this program. We kind of asked the question of why and I had to do some digging. I found out actually there’s some explanation as to what it was. And one of the ideas is this is blockchain. They don’t want to be regulated anyway. So why would they actually try to show up?

And that makes sense. These guys were going against the grain. Why would they want to go with the grain whatsoever, even if it would be potentially in their best interest?

But the other side of it too, is it was kind of complicated and convoluted, our system is. And so, there’s not a lot of really good understanding of how the system works out. And there’s been some interest shown, but nobody’s actually taken the steps to take part in it.

And I’ll say this. Other states who tried to do blockchain based ones as well, saw this similar low levels of adoption, right? So, it’s not just a Nevada specific thing. I think Arizona was one of the other states where they saw a very low level of people trying to apply for the FinTech sandbox itself.

So, one idea that we can do here is rather than us continually just ad hoc past sandboxes for this industry or that industry, whatever happens to again be dictated by either our beliefs of what should exist or anything else, what we could do is just make a universal sandbox. And that’s what we’re kind of advocating for here. Two states so far, I think actually maybe three, have universal sandboxes in place. Utah and Arizona are two of them. I think Kentucky has been also talking about it as well.

Utah passed this not too long ago. And what they did was they said, look, let’s stop with this industry targeting, right? Let’s stop looking at one at a time and just moving this along. If this is great for one industry, it’s good for all industries. That’s what they came to the realization of, right?

Rather than us create different systems for each different one of these ones, let’s just put it all under one big umbrella. And let’s make this a concerted effort to just release barriers for all of business rather than some businesses or targeted ones.

Under this regime, what we would do is we’d say, okay, you have a business and you’re in AI, you’re in healthcare, you’re in transportation, you’re in gaming, right? Any one of these ones, you’re in insurance, you’re in legal services. All of these are ripe for innovation and there actively are innovators out there changing up how these industries work.

But they’re actively running into regulatory challenges with these new ideas that they’re putting into practice.

Michael Schaus: Yeah. And I feel like if you do that, I’m thinking specifically of going back to the corporate cronyism issue that so many people in our movement worry about, opening it up to everybody really does give you this benefit because if one industry starts to do it quite a bit, hooray.

But as people start to take advantage of it, as businesses started to take advantage of it, you’re going to see people in other industries notice and say, well, wait a minute. What could we do? And it kind of opens up that door for innovation and some of what you have in the state when it comes to the regulatory capture that we have with certain industries, and I’m not going to name names, but when you have regulatory capture, if all of a sudden a couple of pretty innovative folks can come along and get a waiver from some of those regulations, it teaches the regulators, Hey, you know what? We’re not protecting the public right now. We are protecting those big industry players or something.

And it gives you, as you pointed out at the very beginning, that data to say, this regulation may need to be changed or rethought in certain circumstances.

So, I love the idea of making it universal. How long has Utah had their universal one? And how have they been operating it? Do you know?

Cameron Belt: I think 2021 is when Utah passed the universal sandbox.

Michael Schaus: So relatively recently.

Cameron Belt: It is. Yeah, absolutely relatively recent. But what they’ve seen so far has been just a ton of adoption, right?

I don’t have the exact numbers of how many different businesses have applied in there as of right now in front of me. It’s all in the paper, but what it comes down to is hundreds of new businesses have been able to kind of apply here and are starting to get traction within the market.

And what’s really cool, what we can do is we can actually allow for Nevada to have a reciprocity law. If a business passes the sandbox in either, let’s say Arizona or Utah, you know, the states that are our neighbors that we’re potentially competing with when it comes to economic development, we might as well say you can be a business here as well, right? Let’s let you expand your sandbox to this area as well.

There can be nuanced differences between Utah and Arizona and Nevada, which I happen to know pretty, pretty well, because that was my job for six years, helping grow a business that was innovative, that was pushing the regulatory boundaries, that took into consideration all the nuances of why Vegas was different than Phoenix than is different than Nashville, things along those lines. Those

insights allowed my businesses at Uber and Lyft to grow more and to better serve the areas. And without that additional data, we’re just keeping an artificial barrier on the wellbeing of people living in the state, and that’s not a good idea, right?

Michael Schaus: Yeah. It makes sense that you would have some sort of reciprocity or even if it’s not flatline reciprocity, even an expedited system. “Oh, okay. Utah has given you this ability. All right, we will fast track that” because that shows that obviously that risk is already being monitored and already being watched by the folks over in Utah.

So that’s a great idea.

Cameron Belt: Exactly. And if we’re looking at an economic development perspective, we want to have established good businesses potentially or brand new businesses coming to the state. So, we need to open the doors as much as possible to this bottom up approach of economic development as well.

It’s another tool in the toolkit that’s not really being talked about because it’s a lot harder to do, right? It’s a lot harder to go through and get rid of every regulation individually. Let’s not take that exercise, okay? That’s a lot going on. Instead, let’s go down this road and say if there’s somebody that has an idea that there’s a clear regulation that’s getting in the way, and they have some potential to do good for the state, let’s open the door for them to do it.

And outside of just every other year window of legislative session, right? Businesses get created every day of the year, constantly, maybe every minute. I’m not really too sure what the numbers on that are, but innovation doesn’t stop. Ideas don’t stop. But we need to allow those ideas to come out of entrepreneurs minds and actually into our lives.

I think it’s important for us to talk about the lives part of this, too. We’re not just talking about business and revenue and money coming through here. We’re actually talking about, in some specific cases, people’s lives are at risk as a result of backwards looking regulations.

A really, really good example here is, I don’t know, Uber and Lyft. I detailed it earlier. Between 2012 and when they first expressed interest to launch in Las Vegas to 2015, over 300 people lost their lives to DUI accidents in Southern Nevada. It’s not outside the realm of possibility to think that one of those lives may have been saved as a result of this brand new technology that wasn’t allowed to exist.

This doesn’t, that doesn’t have to even be a thought exercise. I know it for a fact, because when I was at Lyft, we launched what we call the Las Vegas Coalition for Zero Fatalities. When we launched that, it was targeted at providing discounted rides around high drinking holidays.

We understood that when DUIs are at the highest risk. It’s when people are celebrating it’s like St. Patrick’s Day, New Year’s, you know, so on and so forth. Well, the first year that we launched the Coalition for Zero Fatalities, it was first year in five years that there were no DUI deaths. And it was the first time in four years they actually saw a decrease in the amount of DUI arrests.

So that’s a data point right there to point to the fact that we did have an effect. How much? It’s really hard to say, right? But any one of those is a saved life is a net good for society. And for those three years that we weren’t allowed to operate, it would’ve been illegal for us to try this. That’s what’s crazy. It would have been illegal for me to create a business to help people get from A to B when they were drinking at that point.

Michael Schaus: I remember thinking about this years and years ago when Uber and Lyft first came to Denver, Colorado. That’s where I was living at the time when they first showed up there.

Because I hadn’t really been following them that well, I didn’t fully understand the concept, but one of my friends that I was with, he certainly did. And immediately, I was like, how did I live this long without the service? You know, it’s, I mean, all of a sudden it was just like, well, wait a minute, where has this been my whole life?

We talk a lot about how great this is for businesses and regulators and what have you. The consumers are really what this all boils down to. Everything that we’re talking about for the businesses. Businesses don’t just go do this so that way they can make money. They know that the only way they can make money is by giving you something that you want.

So, this is all aimed at not only making Nevada a more prosperous place for businesses, but as consumers, you’re going to get a ton more value if you’ve got a whole lot more businesses that are free to innovate, to figure out better ways to serve you, just like we saw with Uber and Lyft, really taking over what used to be the taxi monopoly.

Cameron Belt: Exactly. I’ve been in Las Vegas my entire life. My family’s been here since the 1930s, right? So, I remember, before Uber and Lyft existed, when I was trying to get anywhere, I had to call somebody because I couldn’t get a taxi to come out to my house.

Even still today, I actually had a friend recently tried to take a taxi from a property on the strip out to Summerlin. And they said, “No, get out of my car.” What are they supposed to do at that point? The taxi shouldn’t be refusing, but there’s nothing you can do to stop that except for have another competitor that exists to take care of that need.

And the only way for that to happen is to open the door for competitors to exist, not just in the transportation industry. if we think about it, it’s been good in that industry. It’s going to be good across these industries that consumers have in order to make choices.

Michael Schaus: Absolutely. Well, obviously people can find the paper at Nevada Policy. They’re going to be putting it out and you’ll be seeing a whole lot more information on this. Again, if you just go to NevadaPolicy.org/sandbox.

Cameron, we really appreciate it. We appreciate all the hard work that you do. You do a lot of good stuff here in the state of Nevada.

Cameron Belt: Hey, thanks so much. I really appreciate that. And Nevada Policy has been an amazing organization to work with. They’ve been doing nothing but really great work lately for the state, and I can sing nothing but the praises for the institute.

Michael Schaus: Again, thank you so much, Cameron Belt.

Please visit nevadapolicy.org/podcast. You can sign up to get these podcasts right in your inbox, but also you can let us know if you think that there’s a topic or a guest that we ought to have on the program. Again, nevadapolicy.org/podcast.

Check out the new paper on regulatory sandboxes if you just go to nevadapolicy.org/sandbox. Thank you so much for listening today. This has been Free to Affair.

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 Free to Offend:
A podcast that radically defends free speech by regularly practicing it.

Produced by Nevada Policy Research Institute,
featuring Nevada Policy’s Michael Schaus.