Perspectives
GUARDRAILS, NOT ROADBLOCKS: RETHINKING FINANCIAL REGULATION N obody likes it when regulation slows progress, least of all innovators and entrepreneurs. I know. I’ve spent the past 26 years regulating and supervising financial institutions. Today, I’m a Financial Sector Supervision Advisor to the International Monetary Fund. Governments, banks and—critically—those who trust their banks rely on the work that we do to safegaurd financial systems. So, when new technologies like crypto-assets and AI make a big splash across the industry, we take note of the impact they will likely have.
Don’t get me wrong. I’m a big advocate of technology that advances the industry. In fact, both crypto and AI have the potential to be of great use to the industry— however, particular issues like money laundering, risk management and consumer/investor transparency are elementary. Hence, financial regulation is intended to protect the integrity and stability of the financial system. It is not a “wolf in sheep’s clothing” as former Secretary of the Treasury Henry Paulson once said. It’s a protection! Crypto-assets offer many efficiencies, but without regulation its almost anonymous nature poses a big threat of illicit use and money laundering. Artificial intelligence has the potential to streamline customer interactions and analyze data in ways that are helpful to banks and to customers; but left unregulated, it opens the door to cybersecurity risks, learned discriminatory biases, and homogenized market trends—where consumer preferences and developer responses lead to less diverse, more standardized products and services. Put it this way; financial sector regulation and supervision support the critical role of institutions in financial intermediation, and must stand firmly as a
DAMION MCINTOSH Professor of Practice Department of Finance
strong defense, mitigating risks that would jeopardize our confidence in these systems. If something could go wrong, then there better be a net in place to mitigate its likelihood or minimize its impact. And we do this through regulatory oversight. A big part of that work relies on buy-in. If the prevailing attitude reflects distaste for regulators mitigating the Wild West of AI and crypto, then regulation will always be an enemy. Let’s shift the focus. Innovation without risk mitigation can lead to vulnerability and failure. Regulation and supervision are the lines of defense against financial stability risk.
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