REGULATORY CAPTURE

This article is drawn from PSGR's larger paper:

PSGRNZ (2024) Stepping Back from the Brink: The Programmable Ledger. Four democratic risks that arise when Digital IDs are coupled to Central Bank Digital Currencies. Chapter 8. An Influence Web. Bruning, J.R., Physicians & Scientists for Global Responsibility New Zealand. ISBN 978-0-473-71618-9.

The Stepping Back from the Brink paper outlines the democratic risk presented by digital ID and CBDC currencies. The problem of regulatory capture concerns not just a Reserve Bank that defers to a conflicted management consultancy to develop policy, but more broadly reflects the risks of government agencies and regulators when they are faced with highly resourced industries that seek to achieve and maintain market access for their technologies and substances.

AN INFLUENCE WEB: REGULATORY CAPTURE

Quis custodiet ipsos custodes. "Who will guard the guards themselves?"

The absence of domestic academics researching the constitutional dilemma of regulatory capture in New Zealand might help explain why no academic or legal experts have yet considered the potential for undue corporate industry influence when it comes to policy and regulation of CBDCs, Digital IDs, and the relationships therein. The classic explanation of regulatory capture is[1]:

‘the process through which special interests affect state intervention in any of its forms, which can include areas as diverse as the setting of taxes, the choice of foreign or monetary policy, or the legislation affecting R&D. According to the narrow interpretation, regulatory capture is specifically the process through which regulated monopolies end up manipulating the state agencies that are supposed to control them.’

The classic model outlined by George Stigler presumes that regulatory capture involves incentives provided to a single regulator where:

‘regulation is acquired by the industry and is designed and operated primarily for its benefit.’[2]

This includes the revolving door problem, where people move between industry and government; and the problem of strategic influence where over time, generations of regulator-firm overlap and interdependencies can shift the regulator closer to the regulated industry, resulting in ‘too much’ of an incentive to co-operate.[3]

Consider the questionable ‘revolving-door’ practice where the regulated become the regulator. In 2019 Christian Hawkesby commenced as assistant governor for economics, financial markets and banking. Hawkesby had been part of a team which established Harbour Asset Management, which is owned by Jarden Wealth and Asset Management. [4] [5]

Public understanding of regulatory capture has changed in both scope and influence. Regulatory capture can occur via expertise and/or political lobbying through broader mechanisms which are not necessarily directed to a single regulator. Industry experts can lead, control and shape the design of policy to influence the policy decisions of governments regulatory authorities. In recent years scholars and researchers have drawn attention to the role of corporate industries in influencing nation state policy through the supply of expertise, through informational literature, communications and networking processes.[6]

Industry representative groups frequently take steps to develop a policy and informational narrative that reflects and supports their desired trajectory and business aims. Repeated interactions with the regulated industry have been described as cognitive or cultural capture, with the effect that regulators think like the industry. The threat posed by regulatory legislation can dissolve as regulations reflect private sector, rather than public sector interests and values, while industry can point to the legitimacy of the regulations that they ‘agree’ to.[7]

Industry influence and power has consolidated through globalisation, lobbying and networking, through the supply of private sector services and expertise, and the increasing adoption of private sector values inside governments and the influence of global management consultancy firms. Corporations exercise their political agency through political engagement, institutional participation, and provision and production of resources and services.[8] [9]

Industry funding is used to supply hard infrastructure, including conference and meeting premises to support elite networks and promote collegial relations and ensure access by industry leaders and firms to public officials.[10] However these industry organisations also provide the soft infrastructure – global and domestic thinktanks, communications and policy development researchers to shape political debate.

The consequence is a complex web of influence that extends far beyond the power of individual citizens. This is how stakeholder conversations concerning the adoption of technologies occur at pace behind doors, setting values and principles, language and framing. It’s simply business that industries use their resources to secure take-up by nation-states.

Industries will imagine, encourage and incentivise new roles for technology inside governments and then take action to ensure that government policy and resourcing decisions make a space for private industry-developed resources and services. This is good business practice.

John Finch and colleagues have suggested three processes used to stymy environmental regulation: industry groups formulating regulatory principles, operationalising these principles through technical documentation and calculation, and incremental innovation inside industry sectors to address the problems faced by industry regulators.[11]

Scholars argue that such strategies are not separate from the broader operations of industries, but integrated and centrally directed. ‘Corporations seek to dominate the information and decision-making environments to pursue their interests’, they achieve this by not merely influencing policy but through the co-creation and delivery of policy. The consequence for governments is that:

‘governance is a matter not simply of power or struggle but of communication, ideas and ideology.’ [12]

In 2022 Andrea Saltelli and colleagues summarised these processes as a range of tactics used by industry lobbyists to influence the way governments think about scientific and technical knowledge.

Three stages are suggested. Industry agents (lobbyists) influence the methods by which the policy-relevant evidence is produced. They then delegitimise or appropriate the role of the institutional settings which produce the evidence. Through these processes they change the:

‘the framework or the worldview, to the effect of removing those elements of regulation and evidence which are seen as undesirable by the private interests.’[13]

Fintech industries, and perhaps even the BIS, can be envisaged as democratic ‘erosion agents’ who purposefully drive institutional change and hence, the regime transformation. These are actors with agency – Marianne Kneuer considers that they are able to act on three conditions requiring:

the power to change the rules of the game;
the intention to change the rules of the game; and
the ability to organize relevant groups of followers to change the rules of the game.[14]

Kneuer notes:

‘erosion agents try to fly below the radar as long as possible – they avoid hard and open repression of citizens as well as the massive limitation of political rights, instead relying more on loopholes, selective and event-driven measures, and subtle control.’ [15]

Where stakeholder consultation has taken place it has been secretive and confined. With regards to Digital ID and CBDC policies the principles and frameworks might be claimed to arise from ‘stakeholder consultation’. The DIA and RBNZ have intensively engaged in stakeholder consultation with small groups of stakeholders that appear to disproportionately contain industry actors and marginalised communities while being unavailable to the general public.[16] [17] They’ve then created principles that reflect the stakeholder engagement, but which also mirror industry derived principles[18]. Industry groups often lead by establishing principles that are then adopted by nation states, as is discussed below.

However, as discussed, stakeholder consultations for the Digital Identity Services Trust Framework Bill (which sets up a governance framework for the corporations that use digital identity or provide technical services) broadly excluded the general public. The government framed Digital ID stakeholders as the public agencies who would have oversight over the greater digital infrastructure, the private sector industries who would supply the Digital ID technologies and services, and a minor group representing Māori interests.

The Digital ID framework policy-framing and legislation, and the April 2024 CBDC white papers mirror priorities, pre-prepared principles and discursive narratives already preprepared in white papers prepared by the Central banks, transnational consultancy firms and industry-funded non-government organisations.

I suggest that the cultural capture has resulted in a necessary achievement. Prima facie, it is not Parliament or The Treasury that appear to have responsibility for deciding whether the RBNZ should issue a digital currency – it is the RBNZ appear to have granted themselves this power, through their control of framing, risk assessment and discourse. The institutional setting has been appropriated.

These tactics, by directly targeting the societal functions of science, have effectively reshaped the social, ethical and cultural attitudes to policy making in favour of the Fintech industries and agencies who favour greater surveillance of citizens.[19]

Saltelli et al (2022) describe this as a two-pronged approach:

‘The first prong is a substitution of collusive activities, by removing the traditional separation between regulators and regulated. This process is built on ‘institutional carriers’ such as official statements and normative and ethical principles, stated by document agreed upon by different stakeholders. This allows for a formally neutral and legitimate conduit of industrial interests.’

Once these processes are in place, the regulator and regulated relationship is supplanted by a relationship of mutual support and through this process the governments’ values are captured and reframed -

‘The second prong is a process of reframing and rescaling values and the vision of the relationship among science, society and politics.’

Government discourse around ‘inclusion’, previously discussed, imitates the broader, global messaging, and fails to appreciate the perspective indigenous populations might have if they were asked to consider the harsh reality of increased control through Digital IDs and CBDC ledger technologies, of panopticon-like surveillance.

The global Fintech industry have embedded themselves in domestic surveillance and banking policy through their leadership in the development of Digital IDs and CBDC policy and infrastructure. It’s easy to be unaware of, and dismiss, the long-term collegiality; overlapping relationships; and ongoing crosstalk that has occurred for years between the World Economic Forum and the Bank of International Settlements[20], and the International Monetary Fund[21]. The World Economic Forum:

‘is mostly funded by its 1,000 member multi-national companies.[22]

Then there are the ‘top 100 strategic partners’ of the World Economic Forum (WEF), which include the dominant players in the Fintech system and all of the major consultancy firms that governments habitually bring in to government agencies to develop policy and oversee campaigns. The mission of the WEF states:

‘The World Economic Forum is the International Organization for Public-Private Cooperation. It provides a global, impartial and not-for-profit platform for meaningful connection between stakeholders to establish trust, and build initiatives for cooperation and progress.

In a world marked by complex challenges, the World Economic Forum engages political, business, academic, civil society and other leaders of society to shape global, regional and industry agendas.’

These WEF Strategic Partners are corporations, not governments, and they:

‘believe in the power of collaboration to drive positive change, and work closely with the World Economic Forum to help shape industry, regional and global agendas’. [23]

The Fintech sector and the individuals in the DIA and RBNZ who are dedicated to locking policies and law in place have another advantage. The technologies involved in Digital IDs and CBDCs are so new that they are not well-studied. Therefore, the political ramifications are not well known. The potential to undermine human, civil and constitutional rights have not been fleshed out by constitutional and administrative law experts.

The Fintech sector, the government actors who are committed to the policy, and the global management consultancies who network across government, Fintech and the World Economic Forum stand to benefit from the novelty of this process. It’s not surprising then, that as their power and influence is growing and as governance arrangements in favour of greater Fintech power are advancing at pace, trust in the tech sector is commensurately declining at pace.[24]

It is difficult not to see that the RBNZ, together with its policy co-developer Accenture, are conflicted, and unable to stand back and consider the broader digital ecosystem with any impartiality, and the policy documents suggest this.

Backing out of CBDC issuing powers may be extraordinarily difficult, as Central banks and the huge Fintech industry will use their financial and political influence to prevent what they would view as inappropriate regulation. Once policies and legislation are in place, if public opinion, or the social and scientific literature start to express concern about risk that might result in regulation, a large body of literature demonstrates that industry sectors double-down and invest in product defence.

RBNZ’s already close relationship with Accenture suggest that if negative or worrying information is revealed as CBDC infrastructure develops, that the RBNZ will be reluctant to step back. The RBNZ may be so immersed in BIS and Fintech culture, it may struggle to consider the problem from a constitutional or public interest perspective.

Dr David Michaels, Professor at George Washington University, has described industry’s legacy not as a product, but rather, the legacy is based on the success in maintaining public belief, and hence regulatory concern, on how safe or effective a product. Industries legacy is in product defence.

Dr David Michaels, former head of the U.S. workplace regulator, the Occupational Safety and Health Administration considers that product defence distorts the capacity for governments to act in the best interests of the public.

‘The basic principle of the regulatory system holds that decisions must be made on the basis of the best evidence available at the time. Product defense science doesn’t just game our free-market system; it prevents our government from accomplishing one of the reasons for its very existence. It is often unrecognised because it is so ingrained in our understanding that a primary government function is to facilitate some individuals (including the owners of corporations) to benefit by producing or performing something that does not impinge on the freedom and well-being of other individuals… We want stronger regulations not because we don’t care about freedom, but because we cannot be free without the states protection from harm.’[25]

Constitutional and administrative law and human rights experts, for example, who might consider the broader infrastructure of overlapping Digital ID-CBDC relations, and the implications for the public, were not included in stakeholder conversations, and certainly haven’t drafted any publications which suggest they have had access and insight into these frameworks, and the legislation that supports the regulations.

The effect has been to move governance models to more broadly reflect private sector values of innovation and efficiency, altering the political agency of Western governments. Academic institutions have reflected this priority change (the neoliberal turn) following government shifts in policy and research funding trajectories.[26] This has created information asymmetries, reducing the pool of public law, social science and ethics experts that might critically analyse the implications of close government relations, regulatory capture and the implications for representative democracies. The informational gap has increased the potential for governments to lean on industry expertise.

REFERENCES

[1] Dal Bó, E. (2006). Regulatory capture: A review. Oxford Review of Economic Policy, 22, 203–225. https://doi.org/10.1093/oxrep/grj013

[2] Stigler, G. J. (1971). The theory of economic regulation. The Bell Journal of Economics and Management Science, 2(1), 3. https://doi.org/10.2307/3003160

[3] Dal Bó, E. (2006). Regulatory capture: A review.

[4] Acknowledged in 2022 address: Prior, M. (2022) Our Transformation as a Prudential Regulator. A speech delivered to the Financial Services Council in Auckland on 22 September 2022 Address by Christian Hawkesby, Deputy Governor and General Mananger Financial Stability. https://www.bis.org/review/r220922a.pdf

[5] Business Desk, People Explorer. https://businessdesk.co.nz/people/christian-hawkesby Accessed April 19, 2024.

[6] Saltelli A. et al (2022). Science, the endless frontier of regulatory capture. Futures 135:102860 DOI 10.1016/j.futures.2021.102860

[7] Kwak, J. (2013). Cultural capture and the financial crisis. In Daniel Carpenter, & David A. Moss (Eds.), Preventing Regulatory Capture: Special Interest Influence and How to Limit it (Vol. 9781107036, pp. 71–98). Cambridge University Press.

[8] Farnsworth, K; Holden, C (2006) The Business-Social Policy Nexus: Corporate Power and Corporate Inputs into Social Policy. Journal of social policy, 35 (3). pp. 473-494. ISSN 0047-279

[9] Lewis N, Baker T, Prince R. (March 13 2023) The real problem is consultants' influence, not their cost. Newsroom. https://newsroom.co.nz/2023/03/13/the-real-problem-is-consultants-influence-not-their-cost/

[10] Scott, J. (1991), Who Rules Britain, Oxford: Polity Press.

[11] Finch J et al (2017). Captured by technology? How material agency sustains interaction between regulators and industry actors. Research Policy 46 (2017) 160–170, DOI 0.1016/j.respol.2016.08.002

[12] Miller D. and Harkins C. (2010). Corporate strategy, corporate capture: Food and alcohol industry lobbying and public health. Critical Social Policy, 0261-0183 101; Vol. 30(4): 564–589;376805. P.582 DOI: 10.1177/0261018310376805

[13] Saltelli A. et al (2022). Science, the endless frontier of regulatory capture. Page 9.

[14] Kneuer, M. (2021). "Unravelling democratic erosion: Who drives the slow death of democracy,

and how?" Democratization 28(8), 1442-1462 [Abstr. 72.1651].

[15] Kneuer, M. (2023). Trends on Democratic Erosion: The Role Of Agency And Sequencing. International Political Science Abstracts, 73(6), 837-847. Page 845. https://doi.org/10.1177/00208345231218076

[16] Department of Internal Affairs. Regulatory Impact Statement: Additional policy decisions for the Digital Identity Services Trust Framework Bill https://www.dia.govt.nz/diawebsite.nsf/Files/detailed-policy-for-the-digital-identity-trust-framework/$file/RIS-Additional-policy-decisions-for-the-Digital-Identity-Services-Trust-Framework.pdf

[17] RBNZ CDC Forum Members. https://www.rbnz.govt.nz/-/media/project/sites/rbnz/files/publications/oias/2024/oia2324-050-part4-information-about-the-cbdc-stakeholder-engagement-forum.pdf

[18] Bank of International Settlements (2020) Central bank digital currencies: foundational principles and core features. Report no 1 in a series of collaborations from a group of central banks. https://www.bis.org/publ/othp33.pdf

[19] Saltelli A. et al (2022). Science, the endless frontier of regulatory capture. Page 9.

[20] World Economic Forum. Search. https://www.weforum.org/search/?query=bank+of+international+settlements

[21] World Economic Forum. Search https://www.weforum.org/search/?query=international+monetary+fund

[22] Wikipedia. https://en.wikipedia.org/wiki/World_Economic_Forum

[23] WEF. Strategic Partners. https://www.weforum.org/communities/strategic-partnership-b5337725-fac7-4f8a-9a4f-c89072b96a0d/

[24] Edelmans Trust Barometer. Trust in Tech Sector 2012-2021. https://www.edelman.com/trust/2021-trust-barometer/trust-technology

[25] Michaels, D. (2020). The Triumph of Doubt. Oxford University Press. P.271

[26] Bruning J. (2021) Innovation and Ignorance: How Innovation Funding Cultures Disincentivise Endocrine Disruption Research. Thesis. Master of Arts (Sociology). University of Auckland. https://researchspace.auckland.ac.nz/handle/2292/57929

What is Regulatory Capture?

This article is drawn from PSGR's larger paper:

AN INFLUENCE WEB: REGULATORY CAPTURE

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