The race for technological control of money, information and payments systems is creating an unprecedented tension between market innovation and the role of financial regulation. Congress, regulators and financial companies should be coming together to determine the rules of engagement before the velocity of technological take-off makes that effort a futile exercise.
The challenges are staring us in the face. Cryptocurrencies, blockchain and an array of new financial models such as peer-to-peer online marketplace lending are recasting markets and realigning user expectations. Artificial intelligence and machine learning that digests information faster and thinks more effectively and efficiently than humans are changing the way financial products, markets and systems are being deployed, as well as who controls their deployment.
The benefits of more efficient processing of huge amounts of investment, credit, financial and customer information are, however, matched by unprecedented challenges. According to one recent news report, some of the more than 1,500 cryptocurrencies and 500 crypto exchanges that support them are perceived as immune from government oversight and are intentionally or conveniently
When luminaries such as Stephen Hawking, Elon Musk and Henry Kissinger voice concerns ranging from robot uprisings, the merger of humans and machines and the possible subjugation or extinction of humans, it is time to pay attention to the dark side of technology. Indeed, China has reportedly deployed a form of algorithmic governance to monitor its population through facial recognition and social evaluation profiling technologies.
New technologies and peer-to-peer driven markets will greatly impact the role of financial intermediaries and create a new breed of interconnected and systemically important players. Credit decisions driven by programs and machines will raise new and important issues about whether discrimination is more or less likely. But without a single source of creation, standards or enforcement, we must assume that malevolent machines will rise with the intention of causing economic harm.
Consider just one example. Machines that are unleashed to think, learn and operate products, markets and systems and can do it more effectively than humans are like to eventually deduce that it would be more efficient to “operate” markets in a way that guarantees their predicted results and even further, allows them to benefit from the wealth and power that can be amassed using their intellectual superiority. The question of balancing technological innovation and regulatory oversight is an important one, and there is no reason to dawdle.
What should the private and public sectors do?
Giving new products and technologies the ability to determine their place in the market is an important part of the dynamics of our economy. As one product fails, it is often replaced by a newer and better version that is re-engineered to accommodate the consumer preferences and government concerns that caused its predecessor to be shelved.
Blockchain provides an interesting case study. While it supports many cryptocurrencies, if they all disappeared tomorrow, it is likely to be the basis for new applications that support a range of quicker, safer and cheaper informational and payment transactions that will shake up traditional markets by relying on peer-to-peer verification rather than institutional intermediaries.
Technology will either empower or overpower financial services companies. Technological empowerment demands continuing and diligent action by financial companies, governments and regulators. They must both acquire the human and technological resources and knowledge to navigate in this new environment and watch each other. Regulators should be working together, not suing each over the right to regulate new technology companies.
These many tensions demand that we act now to direct our financial future, and there are a number of steps the public and private sectors can take to address these tensions.
To start, Congress, regulators and financial services representatives should work together to develop rules of engagement built around basic principles of security, stability, fairness and competition. They must also secure the human and technological resources to avoid being overpowered and to eradicate the criminal element in technology before it spreads further.
At the same time, current laws must be evaluated to determine whether and how they should be applied or changed to facilitate or limit the roll out of new technological products. Global rules of engagement must also be created, understanding that it only takes one outlier misusing AI to undercut everyone’s systems and standards. Financial technology and traditional financial services companies should be appropriately and fairly supervised according to what they do and they impact they have, rather than what they are called. Congress, the private sector and regulators should also collaborate to devise and implement rules that enable humans and machines to complement rather than subjugate each other.
Finally, these standards must be developed and deployed before the only option is to pull the plug on the machines and systems that we’ve built.
