DIA - Regulating AI

2023-09-18 16:13:29 ET

Summary

• Original support for cryptocurrencies came from libertarian sources seeking to create a government-free currency.
• The concept of unregulated markets is attractive, but reality shows that unregulated markets can be taken advantage of.
• Government intervention in cryptocurrencies can be seen as both necessary for protection and potentially negative.
• Where is the appropriate regulation and oversight going to come from?

The original support for cryptocurrencies came from libertarian sources.

The goal was to create a "currency" that did not have anything to do with the government or with regulation.

As an ideal, this particular view of the world is very attractive.

The concept of free markets, unencumbered by government regulations, seems like something we would like to strive for.

But, then reality set in.

Create a currency with no government rules or regulations?

That is not really practical.

People take advantage of unregulated markets and do things that are not in the best interest of the market or of the "true" user of the market.

Fraud and other sources of corruption always seem to enter into a "new" marketplace that is not, in some way protected.

However, the entrance of government into the picture can leave one also leave one with a bad taste in one's mouth.

Take, for instance, the picture that Andy Kessler draws in the Wall Street Journal :

"Doesn't the tech industry know the real goal of Congress and unions is to slow AI just enough to insert themselves into the cash, control, and maybe even censorship stream?"

"This is digital extortion. They're saying: 'We'll let you grow but we get our cut.'"

Well, this, one could say, is the other side of the picture.

That is, we are drawing the picture of possible market conditions for AI products and services.

At one end...totally free, unregulated markets.

At the other end...rules and regulations that benefit others, while leaving the market "less than efficient."

Then there is the in-between.

But, how does this work out?

Well, there is another picture of this situation.

The ones just described are ones assuming complete information.

That is not exactly how the world works.

Radical Uncertainty

Another article in the Monday Wall Street Journal discusses a new book, one written by the mathematician Coco Krumme titled " Optimal Illusions ."

In the review, Ms. Krumme is described as exploring "why the quest for the best so often falls short."

"The hidden assumption behind optimization, she notes, is that all relevant variables can be identified and accounted for in order to achieve the ideal outcome."

"Yet unknowns and uncertainties can upend the most carefully laid plans."

Ms. Krumme then issued the warning,

"Optimization was invented, over time, with the idea of making a system, or a society, more perfect."

"We often see the opposite happening."

And, this is precisely the case with new innovation.

With a new innovation, we cannot identify or account for, "all relevant variables."

We cannot identify or account for, the "ideal outcome."

Therefore, when we start to regulate and control a "new innovation" and we come up short. We cause the market to create solutions that are not optimal. We cause less-than-ideal outcomes and operating procedures. We cause investments to be inefficient.

And, so we move on into the future with a lot of the pathways taken as "just plain wrong."

But, we need rules and regulations going forward. Totally free markets, as mentioned above, have problems because people can misuse the markets and can harm those who conduct their business with honesty and integrity.

So, what do we do?

The Current Situation In Crypto

Right now, it appears as if the movement of regulators in the Crypto markets has had results that many feel were not warranted.

Scott Chipolina writes in the Financial Times :

"The recent tumult in crypto markets, and ensuing regulatory crackdowns on the sector's major players, have dented the appeal of their underlying blockchain technology to traditional finance operators."

An unintended consequence.

"At the height of enthusiasm for crypto in 2021, blockchain technology commanded mainstream attention...."

"The sector also drew sizeable investments from venture capital funds during the market's record-setting bull run. According to capital markets data provider PitchBook, investors poured roughly $30 billion into crypto projects in both 2021 and 2022."

"This year, though, the figure is set to be nearer $10 billion as investors' exuberance has subsided and the regulatory pressure on companies at the epicenter of blockchain has prompted traditional finance to reconsider its approach to a technology once heralded as a new dawn for banking."

In other words, regulatory efforts have resulted in a potentially very useful innovation living way below its possible contribution to the world.

What To Do?

This is a very delicate situation.

Investors, and, I would argue, innovators need regulation.

Bad things can happen.

There need to be some protections.

Bernard Mensah, president of international, Bank of America, writes in the Financial Times that:

"Governments will need to have a clear vision of how to both regulate and capitalize on technology's opportunities and disruptive power."

"Will we see more following the lead of the UAE, the first country to appoint a dedicated Minister of AI?"

But, still, radical uncertainty prevails.

And, as Mr. Mensah states,

"many of the most exciting new technologies will still fail."

But, government...and regulation...need to avoid.. if possible...being a major cause of the failures.

Regulation is needed. Regulation is very difficult to carry out successfully.

And, we don't, as Mr. Kessler suggested, need "Congress and unions" carving out their portion of the rewards.

Investors

Innovation is vital to the modern world.

We need to have people taking risks to start up something new.

We need investors to put their money into these startups and early-stage initiatives.

We need investor protection against all the other greedy people who attempt to steal a piece of the pie.

Where is the leadership going to come from?

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