The informal sector Singularity

At the intersection of cryptocurrencies and the "gig economy" lies the prospect of almost self-contained shadow economies with their own laws and regulations, vast potential for fostering growth, and the possibility of systematic abuse.

There have always been shadow, "unofficial" economies overlapping and in some places overruling their legal counterparts. What's changing now is that technology is making possible the setup and operation of extremely sophisticated informational infrastructures with very few resources. The disruptive impact of blockchains and related technologies isn't any single cryptocurrency, but the fact that it's another building block for any group, legal or not, to operate their own financial system.

Add to this how easy it is to create fairly generic e-commerce marketplaces, reputation tracking systems, and, perhaps most importantly, purely online labor markets. For employers, the latter can be a flexible and cost-efficient way of acquiring services, while for many workers it's becoming an useful, and for some an increasingly necessary, source of income. Large rises in unemployment, especially those driven by new technologies, always increase the usefulness of this kind of labor markets for employers in both regulated and unregulated activities, as a "liquid" market over sophisticated platforms makes it easy to continuously optimize costs.

You might call it a form of "Singularity" of the informal sector: there are unregulated or even fully criminal sectors that are technologically and algorithmically more sophisticated than the average (or even most) of the legal economy.

While most online labor markets are fully legal, this isn't always the case, even when the activity being contracted isn't per se illegal. One current example is Uber's situation in Argentina: their operation is currently illegal due to regulatory non-compliance, but, short of arresting drivers — something that's actually being considered, due in some measure to the clout of the cab driver's union — there's nothing the government can do to completely stop them. Activities less visible than picking somebody up in a car — for example, anything you can do from a computer or a cellphone in your home — contracted over the internet and paid in a cryptocurrency or in any parallel payment system anywhere in the world are very unlikely to be ever visible to, or regulated by, the state or states who theoretically govern the people involved.

There are clear potential upsides to this. The most immediate one is that these shadow economies are often very highly efficient and technologically sophisticated by design. They can also help people avoid some of the barriers of entry that keep many people from full-time legal employment. A lack of academic accreditations, a disadvantaged socioeconomic background, or membership in an unpopular minority or age bracket can be a non-issue for many types of online work. In other cases they simply make possible types of work so new there's no regulatory framework for them, or that are impeded by obsolete ones. And purely online activities are often one of the few ways in which individuals can respond to economic downturns in their own country by supplying services overseas without intermediate organizations capturing most or all of the wage differential.

The main downside is, of course, that a shadow economy isn't just free from obsolete regulatory frameworks, but also free from those regulations meant to prevent abuse, discrimination, and fraud: minimum wages, safe working conditions, protection against sexual harassment, etc.

These issues might seem somewhat academic right now: most of the "gig economy" is either a secondary source of income, or the realm of relatively well-paid professionals. But technological unemployment and the increase in inequality suggest that this kind of labor markets are likely to become more important, particularly for the lower deciles of the income distribution.

Assuming a government has the political will to attack the problem of a growing, technologically advanced, and mostly unregulated labor economy — for some, at least, this seems to be a favoured outcome rather than a problem — fines, arrests, etc, are very unlikely to work, at least in moderately democratic societies. The global experience with software and media piracy shows how extremely difficult it is to stop an advanced decentralized digital service regardless of its legality. Silk Road was shut down, but it was one site, and run by a conveniently careless operator. The size, sophistication, and longevity of the on-demand network attacks, hacked information, and illegal pornography sectors are a better indicator of the impossibility of blocking or taxing this kind of activity once supply and demand can meet online.

A more fruitful approach to the problem is to note that, given the choice, most people prefer to work inside the law. It's true that employers very often prefer the flexibility and lower cost of an unregulated "high-frequency" labor economy, but people offer their work in unregulated economies when the regulated economy is blocked to them by discrimination, the legal framework hasn't kept up with the possibilities of new technologies, or there simply isn't enough demand in the local economy, making "virtual exports" an attractive option.

The point isn't that online labor markets, reputation systems, cryptocurrencies, etc, are unqualified evils. Quite the contrary. They offer the possibility of wealthier, smarter economies with a better quality of life, less onerous yet more effective regulations for both employers and employees, and new forms of work. However, these changes have to be fully implemented. Upgrading the legal economy to take advantage of new technologies — and doing it very soon — isn't a matter of not missing an opportunity, particularly for less developed economies. Absent a technological overhaul of how the legal economy works, more effective and flexible unregulated shadow economies are only going to keep growing; a lesser evil than effective unemployment, but not without a heavy social price.