In This Newsletter

AI-FinTech Intersection
Nicole Valentine Addresses the GMAC Digital Assets Market Subcommittee
Michael Piwowar on ‘Bulls, Bears, and Blockchain’ Roundtable

AI-FinTech Intersection

The pace of artificial intelligence (AI) adoption in the United States is advancing at breakneck speeds. In the first two months after the launch of ChatGPT, the platform grew to 100 million active daily users, Reuters reports. This rapid rise of large language models (LLMs) and generative AI tools is fueling a new generation of tech startups. AI tools boost developer productivity and lower the marginal cost of building software.

This scalable and accessible tech is boosting investment in a variety of FinTech solutions, including automated investment-management platforms, regulatory technology platforms, and financial fraud-monitoring solutions. As this new tech revolution takes shape, key policy considerations also emerge at the intersection of AI and finance.

As users adopt generative AI tools, policymakers and industry leaders are scrutinizing the text that is generated by LLMs for inaccuracies. AI models can “hallucinate.” These hallucinations are confident responses by an AI that do not seem to be justified by its training data. For example, when asked to generate a financial report for a publicly traded company, a hallucinating chatbot might list plausible but inaccurate financial data. While hallucinations may seem like innocent quirks of novel technology, they may become more serious as generative AI is integrated into the customer service chatbots and robo-advisors dealing with the financial futures of people and institutions.

Policymakers and industry thought leaders are also considering the issue of algorithmic bias as AI applications are integrated into more financial tools. Important work has already drawn policymakers’ attention to the challenges of algorithmic biases and data security in the application of AI to medical data in diverse patient populations. This April, Gianrico Farrugia, president and CEO of the Mayo Clinic, called for the elimination of “bias from any AI tool” and AI standards setting in his Power of Ideas essay, “Embracing the AI-Powered Future of Health Care.” As AI is integrated into FinTech, algorithmic bias left unaddressed could perpetuate systemic inequalities in the financial system, especially in the case of credit underwriting, as FinRegLab explores in a new report.

A recent Milken Institute Tech Regulation Digest explored how US lawmakers and regulators are taking up the issue of AI. The Biden administration has introduced an AI Bill of Rights, which lays the framework for developing the American AI sector with privacy, data protection, nondiscrimination, and end users in mind. In May, Senator Michael Bennet and Senator Peter Welch introduced a bill that builds on previous legislation to establish a federal agency dedicated to regulating AI. This June, Senate Majority Leader Chuck Schumer announced his SAFE Innovation Framework for AI development, which echoes many of the White House’s proposals.

Nicole Valentine Addresses the GMAC Digital Assets Market Subcommittee

This July, Nicole Valentine participated in the Commodities Futures Trading Commission (CFTC) Global Markets Advisory Committee (GMAC) meeting as a member of the Digital Assets Market Subcommittee. She remarked on the institutional adoption of tokenized assets and offered insights into two key areas (find her comments at 4:23:32 in the video). She spoke to tokenization as a tool for building trust that will provide evidence of value and ownership that is authentic, complete, reliable, and believable. Institutions will be able to use transparent immutable ledgers to reduce counterparty risk, prevent fraud, and fight financial crime. She also addressed tokenization’s potential as an inclusion opportunity that can lower barriers to entry in financial markets and enable consumers and institutions to tap into the previously unrealized value of existing assets.

The meeting also featured a keynote address by Lynn Martin, president of the NYSE Group and chair of ICE Fixed Income & Data; presentations by Julian M. Sevillano and Matthieu de Vergnes, partner and associate partner at McKinsey & Company, on Tokenization in Financial Services and Beyond; and Per von Zelowitz, director of the New York Innovation Center at the Federal Reserve Bank of New York, who presented on Facilitating Wholesale Digital Asset Settlement: Regulated Liability Network US Proof of Concept Findings.

The program looks forward to continued engagement with the CFTC and committee members as institutions deploy blockchain technology.

Michael Piwowar on 'Bulls, Bears, and Blockchain’ Roundtable

Michael Piwowar, executive vice president of MI Finance, spoke on Baker Hostetler’s “Bulls, Bears, and Blockchain” roundtable with fellow former Securities and Exchange Commission (SEC) commissioners Paul Atkins, Daniel Gallagher, and Troy Paredes. The conversation focused on the SEC’s approach to digital asset regulation and enforcement, the SEC’s stance on AI, and the future of administrative proceedings at the commission.

Piwowar discussed the cases where he sees digital assets and tokens behaving most clearly like securities. He referred to a 2017 SEC investigative report, which examined a decentralized autonomous organization (DAO) engaging in crowdfunding through an initial coin offering (ICO). The report found that, through the lens of the Howey Test, the DAO tokens were securities. Piwowar continued, saying that in the case of many ICOs, the Howey Test can easily be applied, as the DAO was selling an investment of money in a common enterprise to investors with the expectation of profit to be derived from the entrepreneurial or managerial efforts of the DAO.

Piwowar said he agrees with applying the Howey Test to traditional capital-raising activities done with digital assets. However, Piwowar noted that once tokens are used for broader purposes, such as international payment settlement, the Howey Test may not be appropriate, creating a need for Congress to take legislative action.

Piwowar cited the recent ruling in the years-long case between Ripple and the SEC, which presented a loss for the SEC. Ripple is a real-time decentralized gross settlement system, currency exchange, and remittance network open to global financial institutions that use the XRP token. The ruling decided that $728.9 million of Ripple’s initial sales to hedge funds and other sophisticated investors constituted unregistered securities offerings, validating one of the SEC’s claims. However, US District Judge Analisa Torres also ruled that Ripple’s XRP sales on public cryptocurrency platforms do not constitute offers of securities because purchasers did not have a reasonable expectation of profit tied to the company’s efforts. Although this ruling gave major US platforms the confidence to relist the XRP token on their platforms, other speakers at the roundtable speculated that the Ripple case may likely be appealed by the SEC for a different outcome.