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Money, Banking, and Financial Markets
Artificial intelligence (AI) progress over the past five years is triggering a broad new wave of interest. In sectors ranging from healthcare to transportation, many firms as well as governments hope that AI will cut costs, improve quality, broaden access, and create new goods, services and markets. Meanwhile, AI firms are rushing to create “artificial general intelligence” (AGI) that would surpass human cognition. From there, it seems like only a short step to fully autonomous robots.
In this post, we focus on the impact of AI on financial stability. To foreshadow our conclusions, current forms of AI are likely to amplify existing threats to financial stability. To prepare, public authorities need to adapt their tools (such as capital and liquidity requirements) to safeguard financial stability. Looking further forward, the prospect of autonomous “AI agents” – which can gather and assess information as well as make and implement decisions – means that the day could soon come when timely human intervention to protect the financial system will no longer be feasible. Instead, only agents acting at speed (and with information) at least comparable to those of private-sector AIs will be able to keep finance safe. To address these challenges regulators and supervisors need to invest heavily in AI—hardware, software and skilled personnel. Put simply, only public AI will be able to mitigate the risks that private AI creates.
A recent Wall Street Journal editorial highlighted the stiff competition for the “dumbest economic policy” proposed during the current U.S. Presidential campaign. High on the list are tariffs, food price controls, and opposition to the acquisition of U.S. Steel by a Japanese firm. We suggest adding to this list the recent proposals to establish a national stockpile, or even a strategic reserve, of Bitcoin. Rather than accumulating Bitcoin, we urge policymakers to quickly sell whatever they have or receive.
In the past, we argued that, rather than elaborating a regulatory framework that helps legitimize crypto, authorities should simply let it burn (see here and here). However, now that the SEC has granted U.S. asset managers the authority to offer spot Bitcoin exchange-traded products (ETPs) and the Europeans have a articulated a full set of rules (MiCA), it is no longer feasible for authorities to simply ignore crypto. Even so, the fact that we now need to regulate crypto is surely not a justification for the U.S. government to hoard Bitcoin.