By Bo Li
Technological change has long been a driver of human progress. And the financial sector has been no exception. From the development of double-entry book-keeping to the introduction of ATMs and modern payment systems—each wave of innovation has left its mark.
The digital age has accelerated these trends:
- Detailed data on our activities, transactions, and behaviors are now being captured in massive amounts as the Internet Of Things and mobile connectivity have exploded around the world.
- Huge increases in computing power applied to this data are making Artificial Intelligence—or “AI”—less of a Hollywood movie fantasy. And, more and more, AI systems perform tasks that normally require human intelligence.
- Meanwhile, the news is filled with stories of the latest hack of computer systems and resulting loss of service and personal data.
These trends are intertwined technologically, but we are only beginning to understand many of the challenges. From the perspective of financial regulators, the key question is how to reap the benefits of technology in terms of financial inclusion, efficiency, risk management, and oversight, while simultaneously managing the financial stability and integrity risks.
In three separate and recent papers, IMF staff have found strong complementarities across these issues. They point to the need for adapting policy approaches and regulation to these new challenges, and to the need for enhanced cross-border cooperation to address risks that do not have national boundaries. Shortly, we will explore these topics further with the panel today, but let me now highlight briefly the findings from these three workstreams.
First, on the digital economy and data
In today’s digital age, data has become a valuable, globally portable good. But moving it across borders requires countries to have coherent policies that build trust. Without global principles for managing data, we could face deepening digital fault lines between nations, as massive data pools become increasingly isolated. This would be especially costly for smaller and lower-income countries.
Our data can power open finance and AI that can make societies more productive, driving growth, employment, and finance. But there are also dark sides. Data can be captured without our effective consent by large platforms—creating new monopolies and stability risks, and posing challenges to countries to balance individual privacy with needs to protect data from cyber-attacks.
These challenges have important implications for growth, stability, and the international system, which are at the core of the IMF’s mandate and means global cooperation is needed to address them. Today, our panel will discuss how policymakers can address key challenges around data and the digital economy that span financial stability and inclusion, competition, and privacy.
Second, on AI and machine learning
The adoption of these technologies in the financial sector has accelerated in recent years and is now far reaching. Rapid adoption of AI and machine learning in finance can increase efficiency, improve the client experience, and strengthen risk management. They also power the tools used by regulators to strengthen prudential oversight and support the implementation of monetary and macroprudential policies. Think of more efficient supply chains, or lending to previously unbanked small businesses around the world.
But these technologies also bring risks, including from opacity, bias, and the scope for new sources of systemic risk, including from greater interconnectedness. Policymakers will need to confront these issues as they consider potential regulatory approaches. And, as we will discuss shortly, the full extent of the strengths and weaknesses associated with these technologies is yet to be completely understood.
Third, on cyber risk
The profusion of data and digital platforms that connect the world has also increased opportunities for malicious cyber hackers to disrupt sectors that rely on digital systems. One of the undesirable outcomes of the new digital economy and developments in technology is that it widens the attack surface, particularly within the financial sector, which is at the forefront of data generation as well as technology adoption.
In the recent past, supply chain attacks and ransomware attacks have hit the headlines more regularly. Therefore, it is not surprising that cyber risk is one of the topmost concerns of governments, businesses, and consumers. In the financial sector, data confidentiality and integrity as well as the smooth functioning of information systems, are constantly threatened by cyber attackers. This creates a threat to financial stability – and is one that requires attention. Financial systems are at varying states of readiness to manage such attacks, and the international response is fragmented. Our panel discussion will cover the latest IMF analysis in this area, which has identified major gaps that, if addressed, could considerably reduce cyber risk, and help safeguard global financial stability.
Overall, technological advances in finance should be broadly welcome, together with preparations to capture their benefits and mitigate potential risks to the financial system’s integrity and safety. But many steps are needed to strengthen domestic and international policy frameworks on data, artificial intelligence, and cybersecurity; to promote cooperation among countries and regulators, and to build capacity.