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AI Can Make Crypto Safer for Everyone

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Admittedly, this is a strange question – surely two scary technologies are more dangerous than one! — and yet the future of financial innovation may depend on it. The question is all the more urgent with the ongoing collapse of FTX, a major crypto exchange. AI is relevant because it has the potential to make crypto workable for the vast majority of Americans who don’t want to bother with the intricacies of a crypto wallet.

The history of crypto is full of failures of the centralized institutions, not the core decentralized crypto mechanisms. Mt Gox was a Bitcoin exchange based in Japan that went under in 2014. The failure of FTX, which at one point had a valuation of $32 billion, is now part of this history.

Through this and other messes, blockchains have continued to run smoothly. Blockchains, which complete and record transactions, have not been successfully gamed or hacked, even though many billions of dollars would be available to anyone who figured out how to do it.

The failed institutions were those most similar to pre-crypto financial intermediaries such as banks and exchanges. And the reasons they went under were classical rather than high-tech. In the case of FTX, for example, there are allegations that depositor funds were used for other purposes and not held in reserve, a very old story in finance.

Cryptobanks and exchanges have another point of vulnerability: Namely, they can be regulated. The entire structure of US financial regulation is geared towards intermediaries, who can be monitored, who are required to report information and to make a certain amount of capital. In the case of depository institutions, FDIC insurance may be imposed, along with corresponding risk controls. In the case of clearinghouses, the Federal Reserve and the Treasury are likely to serve as lenders of last resort, if such assistance is needed.

My point is not that these regulations are perfect (they are not). It is that the intermediaries cannot run away from their legal obligations from day to day.

To the extent that crypto clearinghouses and exchanges have a future, they will also be regulated, and this is all the more certain after the FTX fiasco. Then the question becomes: How much of the (perceived) efficiency of crypto will remain under such a regulated regime? After all, the original point of crypto was to lower the transaction costs associated with traditional financial institutions. Intermediary costs, reserve requirements and legal compliance costs can more than reverse those benefits.

Intermediaries have nevertheless grown in crypto, for some obvious reasons. Most people simply don’t want the hassle of managing their own crypto wallet, protecting their password, and figuring out how the system works. This is scary, even for people who are sophisticated about finance or technology.

Now enter AI. New AI systems are getting very good at voice recognition, executing commands, understanding text, and even writing their own computer programs. Is it such a stretch to imagine an AI making a crypto wallet easy to use?

You will still keep your crypto in your own wallet, and will not have to trust any intermediary, except of course for the AI ​​itself. If you want, you will give your AI desired commands. Open a wallet for me. Send 0.1 Bitcoin to my brother. Convert all my accounts into cash. And so on.

Essentially, the AI ​​would facilitate your interactions with the system, but without creating a separate corporate entity between you and your funds. If the AI ​​company were to go bankrupt, your funds would still be in your wallet. Likely, the AI ​​program will manage your personal finances more broadly, not just your crypto wallet.

You may wonder if you can trust the company providing the AI. But that question is relatively easily answered with another: Do you trust your smartphone or computer to do online banking? For the vast majority of people, the answer is yes. But if those companies build software programs to intercept or divert consumer fund flows for their own purposes, those efforts won’t last a day and the companies will quickly be out of business and in court.

Crypto skeptics like to point out that crypto has been around for 13 years but still lacks clearly defined legitimate use cases. This is a legitimate concern. At the same time, many technological advances do not blossom until additional pieces of infrastructure are in place. Electricity had been around for decades before it changed factory floors. The Internet originated in the 1960s, but it took decades to revolutionize commerce and communication.

AI and crypto each garner a lot of attention in their own right. The next step – and the best way to ensure there isn’t another FTX debacle – may be to get them to cooperate.

More from Bloomberg Opinion:

• Crypto wants a central bank: Matt Levine

• FTX’s collapse is part of the pandemic hangover: Robert Burgess

• FTX’s unraveling could allow DeFi to grow: Andy Mukherjee

This column does not necessarily reflect the opinion of the editors or Bloomberg LP and its owners.

Tyler Cowen is a Bloomberg opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. He is co-author of “Talent: How to Identify Energizers, Creatives and Winners Around the World.”

More stories like this are available at bloomberg.com/opinion

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