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On June 16, Michael Hsu, the Acting Comptroller of the Currency gave remarks at the American Bankers Association’s Risk and Compliance Conference about the risks of tokenization and AI on the banking industry. While reiterating his skepticism of cryptocurrency (see our previous blog post here), Hsu cautions that the decentralization and “trustlessness” associated with public blockchains will impose severe limitations on the scalability of tokenization, and its associated benefits. Rather, Hsu advocates for the development of centralized and regulated “trusted blockchains” that, due to the security and safety they offer, are better positioned to facilitate the growth of tokenization at scale in a safe, sound, and fair manner.

For banking, Hsu stated that the adoption of AI has the “potential to reduce costs and increase efficiencies; improve products, services and performance; strengthen risk management and controls; and expand access to credit and other bank services.” However, Hsu warned that AI system training and unpredictable outputs may cause the system to “learn” and behave in a way that is inconsistent with our values, and in turn, may create significant governance and accountability challenges. Hsu pointed to issues surrounding fairness across all users, and AI’s capacity to enable fraud and spread misinformation also warrant close monitoring and coordination with banking regulators. 

Hsu advised banks to approach innovation responsibly, while keeping in mind three principles: (i) innovate in stages, (ii) build the brakes while building the engine, and (iii) engage regulators early and often.

Putting it into Practice: In line with Hsu’s approach to mitigating the risks of rapid innovation, companies will likely need to proactively engage compliance and risk professionals in their development of new products to mitigate the potential for financial, legal, and reputational costs.