If one FTX fiasco, could cause havoc on financial stabilities and on international portfolio management, entailing a brisk ‘bank-run’, there could hardly be an agenda of more import before a body of significant economic strength such as the G20.
We talk of 85% of global GDP, 75% of global trade and 60% of world population. Sigmund Freud had written prophetically, “It sounds like a fairy-tale, this story of what man by his science and practical inventions has achieved on this earth, where he first appeared as a weakling member of the animal kingdom, and on which, each individual of his species must ever again appear as a helpless infant.”(‘Civilisation and its Discontent’).
I had honestly, a great deal of expectations from the G20 last week, on three significant issues of the day a) evolution of a set of uniform disclosures, controls, traceability and accountability norms in respect of crypto assets, b) a set of uniform regulations and audit framework in AI involved transactions recording and reporting thereof, particularly of communicative ones like machine learning and metaverse-entailed chat-bots and discourses with specific focus on the dark-net and c) data and cyber security in general.
Just for an order of the magnitude, the crypto used to have a market capitalisation of $1 trillion and in just seven days in November and early December it fell to $ 825bn. The Bitcoin and Ethereum prices fell by around 65% each! But more than the 200-billion-dollar gone, gone also, was the confidence in the crypto-system, (though wrongful optics as I said) leaving a deeper scar for posterity! Toss goes financial stability!
Eg could we have a framework of ‘mandates’ to the exchange for ‘permissions’ from lay investors for such so-called ‘transparent operations’. The picture today is, none of these offshore exchanges outside purview of US Securities and Exchange Commission (SEC) controls, or The Commodities and Futures Trading Commission (CFTC), are obliged to submit proofs of holdings, reserves, assets and liabilities to investors. Other countries including Western Europe are seen to be scratching at the surface! Then ‘overlaps’, shouldn’t the issuer, the broker, the exchange and the custodian necessarily be separated from each other and isn’t there ought to be an ‘independent’ regulator (like the CFTC) who shall frame guidelines for self-controls, audit, and finally penalise non-compliance.
b) AI involved metaverse and virtual-reality particularly in social media. Most of these G20 countries have left it to designers to add guard-rails in their products. In a report released last week (reported in our national press), researchers at the Carnegie Melon University and The Centre for AI Safety Measures, San Francisco, showed how easy it was to compromise open-source safety-rails in leading chat-bots and generate unlimited amounts of harmful mis-information, dangerous to society.
The consequent question which could have been debated at the G20: if you lose life, fame or property as a consequence of wrongful misuse of AI, whom do you sue? It was reported last week, seven biggest software giants in the US had agreed to share their new standards and tools for AI safety with President Biden. I was in fact expecting next, these would be discussed at the Gurugram G20. I think, an independent authority tasked with data protection and security in the lines of say the NSA which shall connect with all members of the G20 to share and evolve mature solutions could be useful.
The India Story: RBI’s Central Bank Digital Currency (CBDC or e-rupee), a sovereign currency with the same exchange rates as those of the Fiat (physical)Currency. Several countries have issued CBDCs already. like Sweden, China and Jamaica for commercial retail use with adequate cyber-security.
The E-Rupee will obviously have a great degree of anonymity, though it wouldn’t have the element of futures and forward speculations, nevertheless how to trace say, donations to unwanted destinations.
From the deliberations of the finance ministers, on the crypto and on other AI involved cyber threats, I got the impression that the talks were half-baked and even unprepared. After a good eight months of G20 presidency we now grapple with ‘coordinated global understanding’ and ‘consciousness’, we are talking of IMF’s paper on Financial Stability Board “being discussed.” My idea was that we should have come prepared with our response and leadership on these matters! Time is ticking, threats from imposter websites, from fake apps, from hateful AI-mastered contents in social media and from ‘link-stings’ on spurious e-mails will not wait! I read a report last month, and it states, crypto criminals globally made a fortune of 14 billion dollars in 2021 (up 80% over the previous year!)
Controls: It’s good that the Government has brought intermediaries under the ambits of the Money Laundering Regulations and KYC is mandatory. But how to implement these regulations unless reciprocal cross-border arrangements are agreed? What should we propose as the universal nuts-and-bolts of controls, that the regulator shall ensure? Appropriate control and duplication locks, may be! Shouldn’t periodic independent auditors’ verification of the distributed-ledger certified by the compliance officer be made a mandatory process in any standard audit procedure. The custodian’s certification only, will not do. Imports (where the Rupee is accepted), normal controls followed with auditing and reporting settlements is additionally recommended, so that profits on Rupee-arbitrages in a foreign destination are adequately disclosed and taxed. But again, neither the crypto nor AI, nor cyber security can be contained within the borders of one country and that’s precisely why I had great hopes on the G20 platform of July to address these issues finitely!
And before I conclude, AI and the crypto, unlike an atom bomb cannot be restricted within the borders of a country ultimately, at the same time the AI has immense potentials in improving our eco-system. It’s the country and its people who have to be ensured with security. In the same book, Freud also mentions “but only, it is true, in the way that ideals are usually realized in the general experience of humanity.”
(Binayak Datta is a finance professional)