I disagree. Regulation has given people a false sense of security, leading to them trusting these unknown and untested entities.
Instead of regulation what they need is more transparency. Tell your customers who you are, how you are building your service, what you will do in the case of a disaster.
In this particular case you have someone who is playing with the technology without having even a basic understanding of how to build the required infrastructure.
What's to prevent a firm from lying about who they are and what they are doing? Without regulations (and accompanying penalties for breaking the rules), it's the wild West. It sounds good on a libertarian check list, but in practice the people who can least afford it get absolutely destroyed.
In theory, you'd have trusted independent third-parties that would verify and vouch for your company if you asked them to. Rating Agencies are an example of those.
That's a good question. I don't think regulation really improves things though, it just adds another layer of obscurity and involuntary regulation (is there any other kind?) goes against my libertarian sensibilities.
As for the people who 'can least afford it', well they need to learn how to be paranoid, the sooner the better.
Reputation is, to me, the best way to ensure trust. Build a public reputation through transparency and actions. Of course this takes time, but in the end is better than than an external entity imposing regulations.
Instead of regulation what they need is more transparency. Tell your customers who you are, how you are building your service, what you will do in the case of a disaster.
In this particular case you have someone who is playing with the technology without having even a basic understanding of how to build the required infrastructure.