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AI Can Make Crypto Safer for Everyone

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A strange question indeed. Indeed, two terrible technologies he is more dangerous than one!—yet the future of financial innovation may rest on it. The issue has become even more pressing as the collapse of his FTX, a major cryptocurrency exchange, continues. AI is relevant because it has the potential to make crypto work for the vast majority of Americans who don’t want to be bothered with the complexities of crypto wallets.

The history of cryptocurrencies is full of failures of centralized institutions rather than central decentralized cryptocurrency mechanisms. Mt. Gox was a Japan-based Bitcoin exchange that filed for bankruptcy in 2014. His FTX bankruptcy, where at one time he was valued at $32 billion, is now part of this history.

During these and other turmoil, blockchain has continued to operate smoothly. Blockchains that complete and record transactions have not been successfully gamed or hacked.

The institutions that failed are those that most resemble pre-cryptocurrency financial intermediaries, such as banks and exchanges. And the reasons they failed were classic rather than high-tech. This is a very old story in the financial world.

Cryptocurrency banks and exchanges have another vulnerability. This means that it can be regulated. The entire structure of U.S. financial regulation is geared towards intermediaries who need to be monitored and report information and can create a certain amount of capital. For depository institutions, FDIC insurance can be imposed along with corresponding risk management. For clearing houses, the Federal Reserve and the Treasury may act as lenders of last resort should such assistance be required.

I’m not saying that these regulations are perfect (they aren’t). It means that on a day-to-day basis, intermediaries cannot escape their legal obligations.

As long as crypto clearinghouses and exchanges have a future, they will also be regulated. This becomes even more certain after the FTX debacle. After all, the original purpose of cryptocurrencies was to lower transaction costs associated with traditional financial institutions. Brokerage costs, reserve requirements, and compliance costs can more than offset these benefits.

Nonetheless, intermediaries are proliferating in cryptocurrencies for several obvious reasons. Simply put, most people never have to deal with the issues of running their own crypto wallet, securing their passwords, or understanding how the system works. Even for those familiar with it, it’s daunting.

Enter AI. New AI systems are very good at recognizing speech, executing commands, understanding text, and even writing their own computer programs. Is it so impossible to imagine an AI that makes crypto wallets easier to use?

Keep your cryptocurrencies in your own wallet and don’t need to trust any intermediaries, except of course the AI ​​itself. Feel free to give the AI ​​any command you want. Please open your wallet for me. Send my brother her 0.1 bitcoin. Please turn all my accounts into cash. and so on.

Essentially, AI makes it easier to interact with the system, but without creating a separate corporate entity between you and your funds. Even if the AI ​​company goes bankrupt, your funds will remain in your wallet. Perhaps AI programs will manage personal finances more broadly than just cryptocurrency wallets.

You may wonder if you can trust the company that provides AI. But that question is relatively easily answered in another question. Can you trust your smartphone or computer to do online banking? For the vast majority of people, the answer is yes. But if these companies created software programs for their own purposes to intercept or redirect the flow of consumer funds, those attempts would end in one day, and the companies would quickly go bankrupt and face lawsuits. will be

Crypto skeptics like to point out that thirteen years after cryptocurrencies have been around, there is still no well-defined legitimate use case. That’s a valid concern. At the same time, many technological advances will not blossom until additional infrastructure is in place. Electricity has been around for decades before transforming factory floors. The Internet was born in his 1960s, but it took decades to revolutionize commerce and communication.

AI and crypto have each gotten a lot of attention on their own. The next step, and the best way to avoid repeating the FTX debacle, might be to get them working together.

Bloomberg Opinion Details:

• Crypto wants central banks: Matt Levine

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

• Unraveling FTX could enable DeFi growth: Andy Mukherjee

This column does not necessarily reflect the opinions of the editorial board or Bloomberg LP and its owners.

Tyler Cowen is a columnist for Bloomberg Opinion. He is a professor of economics at George His Mason University and a contributor to his blog Marginal Revolution. He is co-author of Talent: How to Identify Empowerers, Creatives and Winners Around the World.

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