Regulators should aim to influence public behavior rather than rule with an iron fist when it comes to emerging industries such as blockchain.

Two Israel-based academics, Hada Jabotinsky and Nassim Cohen argued this point in a new paper and accompanying brief, published to the University of Oxford Law Department blog on Feb. 21.

The paper proposes an approach that would result neither in an under-regulated free-for-all that leaves consumers vulnerable, nor in heavy-handed prohibitions that stifle technological progress.

Complex new technologies such as blockchain, cryptocurrencies, Internet of Things, and automated cars require ever higher levels of technological literacy. The paper states that, as the pace of innovation gathers speed, regulators struggle to grasp the implications of the products and inventions brought before them.

What does a “nudge” involve?

The authors argue, “A nudge is ‘any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives.’”

Regulators can nudge the public by drawing attention to particular risks involved in new products, the paper notes. As an example of this, the paper points to the U.S. Securities and Exchange Commission’s 2018 campaign, “HoweyCoins,” aimed at educating investors.

For the initiative, the agency created a website for a fake initial coin offering (ICO), which lured investors with a “too good to be true investment opportunity,” using the same “red flags” the agency found to be common among fraudulent ICOs. The site then redirected those who attempted to purchase the ersatz tokens to an educationally-oriented page on the SEC’s own site.

Further “nudge”-based approaches include the introduction of rigorous disclosure requirements and default or simplified rules, which ostensibly make deviations more unlikely.

While still often relying on a degree of “gut instinct” on the part of regulators, nudges could prove less damaging to new industries than binding regulations, the paper concludes, leaving some scope for informed and independent choices by the public.

A confused question

The question of regulation continues to divide crypto and blockchain industry leaders: while some perceive its impact to be positive — providing legitimacy in the eyes of consumers and institutions — others contend that intervention too often stymies new thinking, investment and grassroots development.

Specifically with crypto, moreover, regulation often rattles those committed to the technology’s libertarian roots: last year, the Winklevoss twins’ ad campaign, “crypto needs rules” for their Gemini exchange was taken to be anathema to crypto’s founding principles by some in the industry.