SWARNIM RAI SHRIVASTAVA, SUYASH RAI
The concept of an open network represents a potentially transformative shift in how transactions are conducted over the internet. By providing an approach that facilitates equitable market access for all participants, open networks aim to democratize the digital landscape. They are rooted in the foundational principles of the internet—decentralization and openness—and propose an architecture that can foster inclusivity, flexibility, and equitable access.
Based on discussions that took place at the Global Technology Summit 2023 in New Delhi, this essay explores the multifaceted dimensions of open networks. We cover their purpose, the governance structure they operate under, the challenges they face, and their implications for the future of digital transactions.
THE PURPOSE OF OPEN NETWORKS
The primary objective of an open network is to unbundle transactions on the internet, allowing diverse participants to access the market on equal footing regardless of their size. This approach is envisioned as a “platform of platforms,” characterized by its openness and interoperability. In this context, openness can be interpreted in either way: it may signify the absence of barriers to entry and exit within an ecosystem, or it may imply inclusiveness and flexibility.
Brazil’s Open Finance and Pix payment systems and India’s Open Network for Digital Commerce (ONDC) exemplify open networks in action. They evoke the early days of the internet, where each node holds equal authority, further enhanced by layers of auditability and data minimization for improved governance. Although they are still works in progress, open networks are beginning to demonstrate the benefits of an open, interoperable approach toward breaking market monopolies.
THE GOVERNANCE OF OPEN NETWORKS
Consider ONDC as an example. Three main pillars can be seen underpinning the governance of this open network:The legal entity: A nonprofit entity, independent of public or statutory authority, oversees protocol development and maintenance, thus ensuring governance through voluntary contracts. By doing so, it steers clear of direct public or statutory authority control.
Techno-legal architecture: This involves embedding governance principles into the network’s architecture, thus ensuring built-in fairness, interoperability, and decentralization. Additionally, the open network utilizes digitally signed contracts to streamline transactional governance.
Network policies: These are light-touch regulations that fill gaps left uncovered by existing laws or bilateral contracts. Participants in the network sign an agreement to ensure transparency and prevent disputes.
In ONDC’s case, governance is tiered as follows: the base layer is formed by digitally signed transaction-level contracts; the middle layer is formed by network participant agreements and community-driven open network policies; and the topmost layer is formed by the applicable laws of the land, such as those on consumer protection, safety standards, and taxes. The terms of the transaction are determined by the parties involved in the open network. Any new governance principles proposed for the network are subject to a democratic process held in open consultation with network participants. Some open networks may also necessitate a cross-border framework to facilitate international interactions.
The establishment of a governance mechanism, such as a council, is essential to administer network policy matters. This mechanism should embody principles of fairness, reasonable conduct, and nondiscrimination. Additionally, a peer-review mechanism allows participants to share experiences and raise issues. Entities like ONDC have established independent bodies for appellate dispute resolution so that checks and balances in the system are maintained. To combat risks like coordinated malicious activities, institutional accountability is also required.
REGULATORY BALANCES AND FINANCIAL SUSTAINABILITY
Open networks face the challenge of addressing regulatory risks in a way that prevents overregulation and simultaneously ensures long-term financial sustainability. Balancing regulation and flexibility is crucial for the success of the network. The risk of network facilitators evolving into regulatory bodies must be carefully managed. Ensuring financial sustainability is also crucial and requires thoughtful consideration of the best mechanisms for doing so. The role of private investments, government funding, and conflict-of-interest issues are all pertinent considerations in this regard.
Data governance, particularly regarding the protection of personal data, is a core aspect of open networks. They also face challenges like spam and phishing, which necessitate robust protection mechanisms. To help preserve the integrity and quality of the network, various sellers and service providers can be differentiated through performance-based scoring and badging. Another challenge is maintaining transparency, which is essential for both sellers and buyers. Initiatives like South Korea’s MyData place a strong emphasis on user consent prior to data sharing and thus demonstrate the potential of open networks in financial markets.
THE ROLE OF THE STATE AND THE PRIVATE SECTOR
To achieve the objective of ensuring sustainability while striking a regulatory balance, it is important to establish clear roles for the state and the private sector. Large private sector players can play a crucial role in strengthening open networks through initiatives like accelerators and collaborations. Meanwhile, the state’s primary role is to support policies that sustain the open network ecosystem without exerting its control. This includes enabling startups to join open networks and maintaining governance standards on the network. Though the state’s role is confined to supporting a sustainable ecosystem, questions have been raised as to whether it should use its coercive power to force open access to existing networks.
WHAT’S NEXT FOR OPEN NETWORKS?
The future of open networks lies in embracing technologies like artificial intelligence, building ancillary services, and ensuring data verification. A principle-based, economically rational approach is essential for creating a sustainable open network ecosystem. Coordination among participants, a government presence with minimal coercion, and a focus on regulation are also pivotal.
Open networks offer a novel approach to digital transactions, emphasizing equitable access, decentralized governance, and enhanced transparency. While challenges such as financial sustainability, regulatory balance, and data governance need to be addressed, the potential benefits of open networks for democratizing the digital landscape could be immense. The commitment of all stakeholders, including the state, the private sector, and network participants, is vital to realizing the full potential of open networks. Collaborative efforts can lead to a more inclusive, efficient, and fair digital ecosystem, echoing the foundational principles upon which the internet was built.
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