PayPal wrote the rules. Now crypto is playing the game.

The hot startup was set to go public. But regulators were threatening to shut down part of its business. A panicked CEO called for armies of lawyers to mollify bureaucrats.

It was 2002, and the company was PayPal. But that scene has replayed time and again. No need to panic: The fire drill has become a proven tactic. It’s known as the regulatory moat, and it’s one of the smarter — and sneakier — ways to cement your dominance in a constantly shifting tech environment.

A regulatory moat can fend off competitors. Look at PayPal’s history.

• In the run-up to its 2002 IPO, PayPal ran into trouble with the state of Louisiana, where regulators wanted to shut it down until they could figure out how to categorize the nascent payments company. The state was a tiny part of PayPal’s business, but the precedent was dangerous. New York and California were making noises, too.
• Spurred on by then-CEO Peter Thiel, PayPal raced to get licenses, Eric Jackson recounted in “The PayPal Wars.”
• A most unfortunate thing befell PayPal’s archrival, eBay’s Billpoint. Regulators who had looked into PayPal’s licensing started asking questions about its compliance. That became moot after eBay bought PayPal.
• In the years that followed, few challengers emerged. After initially kicking up a fuss about intrusive regulators, PayPal had effectively co-opted them. It would be years before Square, Stripe and others emerged to nibble away at PayPal’s business.

Cozying up to regulators isn’t just for banks and utilities anymore. Tech companies are spending a small fortune on lobbying.

• Uber is another example. First it fought regulations. Soon, it was writing them. Lyft drafted behind it. Between network effects and the costs of complying with local ride-hailing regulations, the two soon had an effective duopoly.
• Airbnb adopted a friendlier strategy, mobilizing local hosts to help it lobby for short-term rental rules it could live with. Rivals Homeaway and VRBO fell under those same rules, whether or not they were friendly to their business models, which was the point.
• BlockFi recently settled with the SEC over charges that its crypto lending product violated the law. It had to pay a $100 million penalty, which is an expensive moat. But now its rivals will likely have to comply with rules it’s thrashing out with regulators now.
• Coinbase is another crypto company that’s held up as an example of a regulatory moat-builder. Its latest push has been building up relationships with state regulators, which recalls the early PayPal playbook.

Regulators should be wary of tech companies bearing draft rules. “Whatever you do, please don’t throw me across that regulatory moat!”

• Meta has been talking a lot about how it wants to update internet regulations. Its proposed rewrites should be scrutinized: What if they end up imposing heavy costs on smaller upstarts, like, say, TikTok, while blessing the social network’s current moderation efforts?
• Crypto companies — even venture firms — have been hiring policy and government relations experts. Is the point to protect an industry in its formative state or to cement the early lead of certain firms and entrench them?

A regulatory moat is a smart strategy, but it can have a big downside. Inside the well-regulated castle, it’s easy to get complacent. AT&T enjoyed decades of profitable protection under the Kingsbury Commitment, a settlement that let it dominate American telephony. By the 1990s, AT&T was running ads about the future rather than building it. (Send a fax from the beach!) PayPal protected its well-regulated money-sending business, but let Square exploit a mobile niche that turned into a $70 billion business called Block today. Change, like death, bores through a castle wall.

People are talking

Binance's Changpeng Zhao said France is "very welcoming" toward crypto:

• “They are far more advanced in their understanding."

Simulate’s Ben Pasternak said making sure workers are productive shouldn’t be the reasonto bring people back to the office:

• “If you don’t trust someone to work from home, you shouldn’t have hired them, or they shouldn’t be on the team in the first place.”

Coinbase’s David London said states are taking crypto rules into their own hands:

• “We're literally tracking legislation all across the country, and seeing that states are putting policy proposals forward, in lieu of federal action.”

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The speed at which security has been built up over the last 12 months has been a derivative benefit of what we’ve seen during the pandemic. Privacy, compliance and security are three legs of the same stool. What we’re seeing increasingly is that intersection continuing to happen. RingCentral has invested in all those elements.

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Coming this week

A wave of tech earnings are coming this week from IBM, Tesla, Snap, AT&T and others.

Lincoln will show its EV concept on Wednesday. It’ll be Lincoln’s first fully electric vehicle.

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Twitter’s board invoked a so-called poison pillin an effort to stop Elon Musk's takeover. The plan lets shareholders buy additional shares at a cheaper price.

Researchers think Intel’s “emotion AI” tech is flawed. The classroom tool detects students’ emotions using facial expressions, but critics said it’s not possible to use facial expressions and other external factors alone to figure out how someone is feeling.

TED host Chris Anderson's interview with Elon Musk is up. They talk about space exploration, EV batteries, smart robots and Musk's various other interests.

AMC takes crypto now. Its theaters will let people buy tickets and concessions with Dogecoin and Shiba Inu, and it added support for crypto through Bitpay.

Elon Musk falsely tweeted about taking Tesla private in 2018 and knew it, a new court filing states. Tesla’s been in a legal battle with shareholders after they lost money from Musk’s tweet.

James Phillips is Stripe’s new president of financial services. Phillips most recently led Microsoft’s Digital Transformation Platform Group.

Andy Mitchell left Facebook for CLEAR, where he’ll work in partnerships. Mitchell last worked as Meta’s head of global media accounts.

Wei Zhou is the new CEO of Coins.ph. Zhou is Binance's former CFO.

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A MESSAGE FROM RINGCENTRAL

At RingCentral, we’re focused on making hybrid work simpler for organizations so they can best set up, run and manage their business. We’re asking ourselves what's the benefit that we can derive, or that we can enable, that is better than the best-in-class in the industry?

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