The problem of ubiquitous computing for regulatory costs

Working paper on SSRN

The benefits of regulation should exceed the cost of regulating. This paper investigates the impact of widespread general-purpose computing on the cost of enforcing of regulations on generative artificial intelligence (AI) and decentralized finance (DeFi). We present a simple model illustrating regulators’ preferences for minimising enforcement costs and discuss the implications of regulatory preferences for the number and size of regulated firms. Regulators would rather regulate a small number of large firms rather than a large number of small firms. General-purpose computing radically expands the number of potentially regulated entities. For Defi, the decentralized nature of blockchain technology, global scale of transactions, and decentralised hosting increase the number of potentially regulated entities by an order of magnitude. Likewise, locally deployed open-source generative AI models make regulating AI safety extremely difficult. This creates a regulatory dilemma that forces regulators to reassess the social harm of targeted economic activity. The paper draws a historical comparison with the attempts to reduce copyright infringement through file sharing in the early 2000s in order to present strategic options for regulators in addressing the challenges of AI safety and DeFi compliance.