High-Wire Act: Zicklin Prof Studies Legal Challenges of Disruptive Tech
April 22, 2025How should policymakers and regulators deal with disruptive technologies such as artificial intelligence and blockchain, and their applications, including cryptocurrencies?
That’s the question Professor Nizan Packin (Department of Law) poses in an article she recently published in the American University Law Review, entitled “Blacklisting or Banning Technologies that Scare Us: AI, Cryptocurrencies, and More.”
Regulators struggle to keep pace with new technologies, Professor Packin notes, largely because of their own resource limitations and weaker technological expertise, as well as the sheer speed of private sector innovations. This phenomenon is so well known, in fact, that it’s called “reg lag,” short for “regulatory lag,” and it can exist even in situations where there’s broad agreement on the need for regulation, as we see with the lack of concrete rules on children’s use of addictive social media platforms such as TikTok.
As a result, rather than create new regulatory frameworks for these technologies, regulators often turn to shortcuts such as banning or blacklisting. The New York City Department of Education, for example, banned the use of ChatGPT when it was first released (it has since rescinded the ban), and the U.S. Treasury’s Office of Foreign Assets Control (OFAC) blacklisted Tornado Cash, a cryptocurrency “mixer” that enables anonymous crypto transactions, in a move that was then challenged in court.
Although the terms “ban” and “blacklist” are often used interchangeably, there’s an important difference, Packin points out: “Banning is a temporary prohibition that doesn’t necessarily carry any carefully defined or broad impact type of judgment. If New York bans the use of ChatGPT in their schools, that doesn’t mean California should. Blacklisting, however, carries reputational damage and is used when regulators suspect criminal activity.” That reputational damage extends to third parties, she adds; any person or company doing business with a blacklisted company will see its own reputation, credit score, and even financing options affected accordingly.
The private sector companies creating these disruptive technologies criticize the use of banning and blacklisting as amounting to “regulation by enforcement,” or creating precedent through piecemeal enforcement actions instead of comprehensive regulation. Packin and her coauthor recognize the validity of these criticisms but counterclaim that “sometimes there is no other way,” Packin says. But that doesn’t mean these prohibitions are the only tools at regulators’ disposal.
“Over time, we’ve seen that financial regulators are relying less on ‘sticks,’ or punitive measures, and more on ‘carrots,’ or rewards,” Packin offers. “While some argue that carrots are more effective than sticks because you can recruit more stakeholders by rewarding them than by causing them harm, we believe that you can’t successfully regulate with carrots alone. A successful regulator will have both in her arsenal.”
Packin and her coauthor recommend that policymakers not start with the most punitive options but move from lighter to heavier methods and carefully combine carrots and sticks, or risk losing the benefits of hosting certain companies or industries in their jurisdictions. “We see, for example, that Meta is threatening to unincorporate in Delaware and instead set up shop in a more business-friendly state like Texas or Nevada,” Packin says. “According to news reports, the governor of Delaware and state representatives have met with various stakeholders to discuss potential legislative proposals on this issue.”
Another tool regulators can deploy is known as a “sandbox,” which has become popular in jurisdictions such as Singapore. Just as children learn to cooperate when they play in a sandbox with other children, regulators can collaborate effectively with tech producers as they create a new product, Packin notes.
“Regulators effectively say to the tech-powered entities and businesses, ‘Let’s work on this together. Show us what you’re doing and we’ll tell you if it’s acceptable or not,’” she explains. Because AI and blockchain are global, regulating these disruptive technologies is growing ever more difficult, she adds: “These companies don’t need to exist in any one jurisdiction, so they’re everywhere and nowhere at the same time. So, these regulatory sandboxes may be the only way for regulators to have any influence with tech producers.”
So, in the end, how should regulators handle these disruptive technologies like AI and blockchain? Very carefully—like a circus performer on the high wire, balancing carrots and sticks, with an occasional dive into the sandbox.