Are
cryptocurrencies and artificial intelligence dangerous? The European Securities
and Markets Authority (ESMA) believes so and suggests that the associated risk
level will continue to rise. The regulator provides eight reasons to support
its thesis while also drawing attention to the growing cybersecurity problem in
EU countries.
ESMA
recently released its second ‘Trends, Risks, and Vulnerabilities (TRV) Report’
for 2023. The report delves into various financial market trends, including
significant attention to the risks of cryptocurrencies and AI.
In the
case of the cryptocurrency market, the regulator identifies four main risks,
taking into account volatility, regulations, security, and stablecoins:
- Market
Volatility: ESMA
notes that the cryptocurrency market remains highly volatile. The report
suggests that fluctuations in cryptocurrency prices can have wide-ranging
effects on the financial ecosystem. - Regulatory
Gaps: The report
emphasizes the need for comprehensive regulations to ensure market integrity
and consumer protection. The absence of a unified regulatory framework across
jurisdictions makes the market prone to fraud and money laundering risks. - Cybersecurity
Risks: One primary
concern ESMA highlights is the persistent risk of cyberattacks. The report
mentions a spike in publicly acknowledged cyberattacks on financial entities,
many involving cryptocurrencies. - Stablecoin
Concerns: ESMA
points out that the rising popularity of stablecoins like Tether (USDT) and
Binance USD (BUSD) brings new challenges. The report suggests that the lack of
clarity on how these assets are pegged to traditional currencies can lead to
market instability.
“Financial
market sentiment improved in the first half of the year, despite the market
stress originating from the US banking sector. Nonetheless, the economic
outlook remains fragile and uncertainties continue to drive markets. ESMA is
therefore keeping the overall risk assessment across its remit at the highest
level,” Verena Ross, the Chairwoman of ESMA, commented in the press release.
In the
case of artificial intelligence, ESMA lists three additional risks, including
data privacy, ethical concerns, and the potential for market manipulation:
- Data
Privacy: The report
indicates that the adoption of AI in financial markets poses significant data
privacy risks. ESMA emphasizes the need for robust data protection laws to
safeguard consumer information. - Ethical
Concerns: ESMA
raises ethical concerns surrounding the use of AI, particularly in
decision-making processes that affect consumer well-being. The report suggests
that AI algorithms should be transparent and free from biases. - Market
Manipulation:
Another risk mentioned by ESMA is the potential for AI technologies to be used
in market manipulation schemes. The report warns that AI algorithms could be
employed to distort market prices and deceive investors.
“As ChatGPT
and generative AI become integrated into financial markets, closely monitoring
and addressing potential risks and implications remains essential to ensure
that market participants harness the benefits of these technologies while
continuing to operate in a safe and trustworthy financial ecosystem,” ESMA
commented.
ChatGPT is currently valued at nearly $30 billion, and 75% of individual investors in the UK consider it a trusted source of financial advice.
Growing Number of Cyber
Attacks Concerns ESMA
According
to ESMA, the EU financial sector faces high cyber risk. The main
reason for concern is the potential escalation of Russia’s war of aggression in
Ukraine, leading to widespread cyberattacks on Western targets, such as
financial entities. The risk of escalation is present in the context of ongoing
cyber incidents, often motivated by private financial gains.
“The
increasingly international nature and digitalization of financial sector
activities and the cross-border nature of cyber threats mean that malicious
incidents in one jurisdiction may affect companies and individuals in other
regions and may indicate a general level of risk across countries,” ESMA
stated in the report.
EU
regulations on digital operational resilience (DORA) took effect in
January 2023. They aim to strengthen the security of digital financial
operations, and European Supervisory Authorities (ESAs) are actively preparing
for the new regulations. Their preparations also include implementing an
effective coordinated response at the EU level in the event of a serious
cross-border cyber incident affecting the EU financial sector.
ESMA
continually takes various measures to enhance investor protection. In July, it
published an updated report detailing the advancements made by National
Competent Authorities (NCAs) in refining their practices. Meanwhile, ESMA
also issued a regulatory overview focused on copy trading companies in
September. The overview was designed to bolster investor safety and foster
unified supervision throughout the European Union, aligning with ESMA’s goals.
Are
cryptocurrencies and artificial intelligence dangerous? The European Securities
and Markets Authority (ESMA) believes so and suggests that the associated risk
level will continue to rise. The regulator provides eight reasons to support
its thesis while also drawing attention to the growing cybersecurity problem in
EU countries.
ESMA
recently released its second ‘Trends, Risks, and Vulnerabilities (TRV) Report’
for 2023. The report delves into various financial market trends, including
significant attention to the risks of cryptocurrencies and AI.
In the
case of the cryptocurrency market, the regulator identifies four main risks,
taking into account volatility, regulations, security, and stablecoins:
- Market
Volatility: ESMA
notes that the cryptocurrency market remains highly volatile. The report
suggests that fluctuations in cryptocurrency prices can have wide-ranging
effects on the financial ecosystem. - Regulatory
Gaps: The report
emphasizes the need for comprehensive regulations to ensure market integrity
and consumer protection. The absence of a unified regulatory framework across
jurisdictions makes the market prone to fraud and money laundering risks. - Cybersecurity
Risks: One primary
concern ESMA highlights is the persistent risk of cyberattacks. The report
mentions a spike in publicly acknowledged cyberattacks on financial entities,
many involving cryptocurrencies. - Stablecoin
Concerns: ESMA
points out that the rising popularity of stablecoins like Tether (USDT) and
Binance USD (BUSD) brings new challenges. The report suggests that the lack of
clarity on how these assets are pegged to traditional currencies can lead to
market instability.
“Financial
market sentiment improved in the first half of the year, despite the market
stress originating from the US banking sector. Nonetheless, the economic
outlook remains fragile and uncertainties continue to drive markets. ESMA is
therefore keeping the overall risk assessment across its remit at the highest
level,” Verena Ross, the Chairwoman of ESMA, commented in the press release.
In the
case of artificial intelligence, ESMA lists three additional risks, including
data privacy, ethical concerns, and the potential for market manipulation:
- Data
Privacy: The report
indicates that the adoption of AI in financial markets poses significant data
privacy risks. ESMA emphasizes the need for robust data protection laws to
safeguard consumer information. - Ethical
Concerns: ESMA
raises ethical concerns surrounding the use of AI, particularly in
decision-making processes that affect consumer well-being. The report suggests
that AI algorithms should be transparent and free from biases. - Market
Manipulation:
Another risk mentioned by ESMA is the potential for AI technologies to be used
in market manipulation schemes. The report warns that AI algorithms could be
employed to distort market prices and deceive investors.
“As ChatGPT
and generative AI become integrated into financial markets, closely monitoring
and addressing potential risks and implications remains essential to ensure
that market participants harness the benefits of these technologies while
continuing to operate in a safe and trustworthy financial ecosystem,” ESMA
commented.
ChatGPT is currently valued at nearly $30 billion, and 75% of individual investors in the UK consider it a trusted source of financial advice.
Growing Number of Cyber
Attacks Concerns ESMA
According
to ESMA, the EU financial sector faces high cyber risk. The main
reason for concern is the potential escalation of Russia’s war of aggression in
Ukraine, leading to widespread cyberattacks on Western targets, such as
financial entities. The risk of escalation is present in the context of ongoing
cyber incidents, often motivated by private financial gains.
“The
increasingly international nature and digitalization of financial sector
activities and the cross-border nature of cyber threats mean that malicious
incidents in one jurisdiction may affect companies and individuals in other
regions and may indicate a general level of risk across countries,” ESMA
stated in the report.
EU
regulations on digital operational resilience (DORA) took effect in
January 2023. They aim to strengthen the security of digital financial
operations, and European Supervisory Authorities (ESAs) are actively preparing
for the new regulations. Their preparations also include implementing an
effective coordinated response at the EU level in the event of a serious
cross-border cyber incident affecting the EU financial sector.
ESMA
continually takes various measures to enhance investor protection. In July, it
published an updated report detailing the advancements made by National
Competent Authorities (NCAs) in refining their practices. Meanwhile, ESMA
also issued a regulatory overview focused on copy trading companies in
September. The overview was designed to bolster investor safety and foster
unified supervision throughout the European Union, aligning with ESMA’s goals.
