Category: Digital Currency

Artificial Intelligence, Banking, Blockchains, cryptography, Digital Currency, European Central Bank, international aid, Productivity, Yogi Nelson

Central Banks Embrace AI: Opportunities and Risks

Yogi Nelson

Namaste Yogis.   Welcome to the Blockchain & AI Forum, where your technology questions are answered!   Here no question is too mundane.  As a bonus, a proverb is also included.  Today’s question comes from Felipe and he asks whether central bankers view AI as a friend or a foe?

Felipe, you came to the right place.  AI is poised to affect our daily lives in ways we cannot fully anticipate.  However, I suspected central bankers have been pondering what AI might mean for their operations for some time.  That’s why I turned to Bank for International Settlements (BIS) for answers to your question.  Before I share their assessment, a few words about the BIS.

The BIS is located in Switzerland.  Its mission is to support central banks’ pursuit of monetary and financial stability through international cooperation, and to act as a bank for central banks.  To fulfill its mission the BIS conducts extensive research on emerging banking trends, including technology.  To no surprise I discovered a recent BIS report, titled:  Generative Artificial Intelligence and Cyber Security in Central Banking.  https://www.bis.org/publ/bppdf/bispap145.pdf   Let’s examine the report.

BIS conducted a survey of central bank chief information security officers.  Thirty-two responded.  The purpose was to investigate the link between generative AI and cyber risk and to identify the opportunities and challenges that central banks see in the adoption of generative AI tools. According to BIS, the survey was guided by four broad considerations:

1) What is the current status of generative AI adoption by central banks?

2) How do central banks evaluate the benefits and challenges for cyber security associated with the use of generative AI?

3) How prepared are central banks for the “AI revolution” and its expected impact on cyber security and data protection?

4) What are the key strategic, ethical and regulatory concerns regarding generative AI adoption in cyber security?

The findings are below:

Generative AI is Already Here.  The large majority of central banks report are using generative AI tools or are planning to do so soon. Respondents indicated that generative AI offers more benefits than risks, especially with regard to cyber threat detection.

Generative AI Can Outperform Existing Systems but Comes with Risk. The benefits are largely related to automation of routine tasks traditionally performed by humans. However, they also include enhanced threat detection, faster response times to cyber-attacks, learning new trends, and anomalies or correlations that might not be obvious to human analysts. What about the risk?  AI can introduce new vulnerabilities into central banks’ cyber security defenses related to social engineering and zero-day attacks as well as unauthorized data disclosure, are the BIS’ findings.

Employees Preparation.  A general concern is whether bank personnel have sufficient knowledge of AI methodologies and cyber security.  The “good news” is thatgenerative AI could replace staff in cyber security for routine tasks and this shift could free up resources to be reallocated towards more strategic cyber security initiatives, potentially increasing productivity. Nevertheless, AI requires human supervision to ensure ethical and accurate outcomes and continuously train the AI systems.

Reactive to Proactive.  Survey respondents agree generative AI systems will facilitate a shift from a reactive to a proactive approach to predicting and neutralizing threats. A critical consideration is the extent of autonomy to be granted to AI tools in cyber security and the nature of their interaction with humans.

On balance central bankers are committed to AI but will proceed with caution.

I end with a proverb from Belarus: “the sun will look into our window also”.

Until next time,

Yogi Nelson

Artificial Intelligence, Banking, Blockchains, Digital Currency, Yogi Nelson

Understanding the Ripple vs SEC Case: Key Takeaways

Yogi Nelson

Namaste Yogis.   Welcome to the Blockchain & AI Forum, where your technology questions are answered!   Here no question is too mundane.  As a bonus, a proverb is also included.  Today’s question was submitted by Claire, and she wants to understand the legal battle between Ripple and the SEC.

Claire, you came to the right place. I’ll walk you through the twist, turns, and theater, of this legal case, from opening scene to today.  First, we introduce the pugilists.  Standing in the red corner is Ripple.  Ripple is “… the leading provider of digital asset infrastructure for financial services”, according to its website.  Ripple specializes in cross-border payments in real-time, tokenization, and digital assets while meeting regulatory compliance requirements. Full disclosure I own the Ripple token, XRP.  

The SEC takes issue with “… while meeting regulatory compliance requirements”, portion of the Ripple statement.  Accordingly, it filed a lawsuit against Ripple for non-compliance.  But let’s not get ahead of ourselves because in the blue corner is SEC.  SEC is a federal agency.  Essentially, SEC is the securities police.  SEC describes itself as follows: “Founded to help our country respond to the Great Depression, we’re the agency that protects investors from misconduct, promotes fairness & efficiency in the securities markets, and facilitates capital formation for those looking to hire, innovate, and grow.”  With introductions completed, now we examine the case.

In December 2020, SEC sued Ripple alleging the sales and distributions of their token, XRP, constituted an investment contract and thus were subject to registration under the Securities Act of 1933. Although the case was filed in 2020, SEC says the trouble started in 2012 when Ripple was warned by SEC, and its own attorneys, about proceeding without registering XRP as a security. Wait, the story gets juicier.   XRP founder, Larsen, understood this issue because in 2008 he was sued by the SEC for—securities violations–says SEC!  But that didn’t stop Ripple.  Beginning 2013 and continuing until 2020, Ripple sold 14.6B XRP tokens worth over $1.38B, according to the SEC lawsuit. Ripple used the proceeds to fund its operations and enrich their founders–Larsen and Garlinghouse—to the tune of $600M.  SEC goes on to cite numerous examples, that it believes prove Ripple represented itself as a security. 

Click to access comp-pr2020-338.pdf

Judge Analisa Torres, U.S. District Court of the Southern District of New York (Manhattan) and “the” court for securities matters, issued her ruling in 2023.  Judge Torres said…

  • XRP is not in and of itself a security
  • Ripple’s sales of XRP on exchanges are not securities
  • Ripple’s sales of XRP by executives are not securities
  • A wide range of other Ripple’s XRP distributions to developers, to charities, and to employees are not securities
  • Certain Ripple sales pursuant to written contracts were investment contracts and therefore securities

A gigantic victory for Ripple.  SEC retreated and decided to go home, right?  Wrong!

Mr. Gensler, the soon to be former SEC chair, filed an appeal.  However, the appeal was narrow.  The SEC is not challenging whether XRP is a security; it’s not. In fact, SEC clarified in 2023 that it does not consider XRP a security.  By the way, XRP now joins Bitcoin and Ethereum in having explicit legal clarity as a non-security. If SEC didn’t appeal the security issue, what did it appeal?  The SEC appeal is focused on whether Ripple’s own sales of XRP on crypto exchanges and other distributions (i.e., grants and charitable contributions) qualify as investment contracts. The Court agreed with Ripple, ruling that these sales and distributions did not require SEC registration. The SEC is appealing this narrow decision by Judge Torres.   Ripple decided to silently accept the SEC appeal, right?  Wrong again!

Ripple decided to file a cross-appeal.  Oh, the legal fees! Lol.  Ripple’s cross-appeal seeks to preserve all its defenses, including that an “investment contract requires traditional contractual rights and obligations. Ripple says it will continue to challenge SEC lawsuits, defending not just its own interests but those of the broader crypto community in the U.S. and globally. 

Claire, hopefully you are better informed and will continue to follow my blog.  Now I say goodbye with a proverb from Indonesia: “do not tie a knot if you cannot untangle it.”

Until next time,

Yogi Nelson

Banking, Blockchains, cryptography, Digital Currency, Euro, European Central Bank, Uncategorized

Will Europe Adopt a Digital Euro? Key Insights from the ECB

Yogi Nelson

Namaste Yogis.   Welcome to the Blockchain & AI Forum, where your technology questions are answered!   Here no question is too mundane.  As a bonus, a proverb is also included.  Today’s question was submitted by Fatima and she wants to know if Europe will adopt a digital currency?

Fatima, you submitted a timely question indeed.  Central Bank Digital Currencies (CBDG) are a hot topic across the globe.  Over 100 nations are exploring the idea, with some countries further along than others but no nation has yet to fully implement the project.  Today, I’ll share the findings of the European Central Bank (ECB) relative to a possible ECB Digital Currency. In other words, a digital Euro.  Before we jump into the findings, let’s start with what is the European Central Bank?

Unlike some organization, the European Central Bank name aptly describes the institution. Fatima, the ECB is the central bank of Europe!  There are 20 member nations in the eurozone.  Essentially, the ECB sets monetary policy in the eurozone, meaning its job is to ensure price stability, manage the money supply (the Euro), support economic development, manage foreign exchange operations, supervise banks for safety and soundness, and maintain the overall health of Europe’s financial system.  A big job indeed!  Time now to highlight the major points of the ECB digital currency (Euro) report.

https://www.ecb.europa.eu/euro/digital_euro/progress/html/ecb.deprp202406.en.html

INTRODUCTION. According to the ECB, the digital euro project aims is to ensure central bank money evolves alongside current payment preferences and trends, as well as to facilitate electronic payments everywhere in the euro area and strengthen Europe’s strategic autonomy.  Back in 2021, the ECB announced it would conduct a two-year research initiative for the potential issuance of a digital euro.  After two years of research, ECB decided to proceed and recently issued a progress report, which is summarized below.

GUARANTEEING DIGITAL EURO USER PRIVACY. Privacy and data protection are front and central, according to ECB.  The design of the digital euro will include an offline functionality that purportedly offers users a cash-like level of privacy, both for person-to-person payments and payments in physical shops.  For online digital euro payments, the digital euro would not be able to directly link transactions to specific individuals, claims the ECB.  I’m not convinced, are you?

AN OFF-LINE EURO DIGITAL CURRENCY. ECB says it a digital euro would be available for both online and offline use and could be used for person-to-person payments as well as in physical shops. The offline functionality would enable payments to be made without an internet connection, for example at close range, in locations with limited network coverage, and in the event of power cuts.  Sounds promising.

A DIGITAL EURO RULEBOOK. A digital euro needs rules, says the ECB.  Therefore, a single set of rules, standards and procedures to standardize digital euro payments across the euro area will be developed. A common rulebook is necessary to ensure that digital euro payments are accepted throughout the euro area, just like cash payments, and work in a harmonized way. It will allow intermediaries to use its open standards to have immediate access to all markets beyond their domestic borders.

SELECTING PROVIDERS FOR DIGITAL EURO COMPONENTS. ECB signals it needs help!  Thus, in January, the ECB notified vendors it would accept offers to develop the technology needed to implement a digital currency.  Fintech contracting opportunities galore! 

ENVIRONMENTAL ASPECT. Fatima, as a pro-environment person, you might be pleased to learn that the ECB has directed the bidders to incorporate measures that are environmentally friendly. 

COMPENSATION MODEL, AKA, SHOW ME THE MONEY!  According to the ECB, the euro digital currency would be based on acompensation model with fair economic incentives for all involved (e.g. consumers, merchants, banks).  Would you expect the ECB to say anything else?  Lol.  In any case, the ECB says it will be guided by the following principles:

  • A digital euro would be free of charge for basic use and equally accessible in all euro area countries.
  • PSPs would charge merchant fees for providing digital euro-related services to offset the operational costs of distributing a digital euro, as is the case today for other digital means of payment.
  • The fees that merchants pay to PSPs for digital euro services would be subject to a cap to provide adequate safeguards against excessive charges.
  • The ECB would bear the issuance costs, as it does in the production of banknotes.

Fatima, it’s clear the ECB intends to issue a euro digital currency.  The only question is when?

I end with this proverb from Croatia: “what a sober man thinks, a drunk man says.”

Until next time,

Yogi Nelson