Fed’s Waller: AI and tokenization offer both risks and rewards

Both tokenization and artificial intelligence technology hold considerable promise for the banking industry, but they also come with risks, Federal Reserve Governor Christopher Waller said today during a speech at a cryptocurrency conference in Florida. Tokenized assets—which are central to blockchain technology—offer fast or even near real-time transfers on a full-time basis, he said. But that benefit isn’t unique to blockchain, which the Fed’s soon-to-be-launched FedNow offering the same service, he added. Another potential advantage of tokenized assets is that they are “programmable” and have “smart contract” functionality. Smart contracts can have bugs and potential cyber vulnerabilities, while instantaneous settlement raises its own set of risks, “but there is considerable promise.”

As for AI, banks are already testing the technology in a variety of areas, from marketing to creating better chatbots, Waller said. At the same time, AI models rely on high volumes of data, which can complicate efforts to detect problems or biases in datasets. There is also the “black box” problem where even AI developers sometimes struggle to understand how their creations arrive at certain outputs.

“All of these innovations will have their champions, who make claims about how their innovation will change the world; and I think it’s important to view such claims critically,” Waller said. “But it’s equally important to challenge the doubters, who insist that these innovations are much ado about nothing, or that they will end in disaster. The world will change, and we should encourage innovations that show promise for benefitting society, including the financial services sector.”