A letter from Braavos

The U.S. Department of the Treasury has released a report delightfully entitled A Financial System That Creates Economic Opportunities: Nonbank Financials, Fintech, and Innovation. No doubt with a name like that everyone ran to pick up a copy.

Well they should because it’s pretty good. It covers a lot of ground including some thoughts around regulating AI in the financial services sector. Here are a few interesting points.

1. They take a backhanded stab at defining AI, and it isn’t bad (p. 53):

The concept of AI can vary meaningfully, but generally is associated with efforts to enable machines or computers to imitate aspects of human cognitive intelligence, such as vision, hearing, thinking, and decision making.

At least someone bothered to think it important to put some reasonable parameters around what they were talking about when referencing AI.

2. The regulatory landscape is complex and regulators should not add unnecessary burdens and should therefore provide greater clarity to encourage AI deployment (p. 59).

3. Multiple varying legislative regimes across multiple jurisdictions are not helpful in terms of deployment of technologies and uniform model laws are to be encouraged (p. 68). This is discussed in terms of the United States but as I have discussed elsewhere, a similar international issue exists (and up here in Canada, a jurisdictional issue arises as well).

4. Time is money (p. 70):

Treasury recommends that if states are unable to achieve meaningful harmonization across their licensing and supervisory regimes within three years, Congress should act to encourage greater uniformity in rules governing lending and money transmission to be adopted, supervised, and enforced by state regulators.

Three years???? Slackers!

Actually I think this is a nice recognition that the time for philosophical cogitation is coming to an end and that we need to start putting regulatory pencil to paper.

5. Help wanted! In a couple of places the report notes that in order to make effective regulation, the regulators are going to have their own expertise in the technological fields.

Agile regulation requires regulators to acquire and understand existingand emerging technologies, to engage with developers and first-movers, and to hire and retain staff with the appropriate technical expertise. (p.171)

Additionally, central banks, ministries of finance, and capital markets regulators must continue building relevant in-house expertise regarding financial innovations such as cloud services, APIs, and artificial intelligence. (p. 183)

It’s a good thought really. I’m writing all this stuff and I have no idea what I’m talking about.