One of the many applications of AI that is significantly in demand in today’s financial world is Machine Learning.. These programs allow us, through sophisticated statistical techniques (linear and logistic regression, decision trees, random forests, k-nearest, …) to create models that are “trained” with massive amounts of data, and They allow us to: improve client services, manage investment portfolios, detect fraud, perform algorithmic trading, evaluate risks and credit portfolios, among other uses.
AI + Quantum Computing (AI on steroids)
The problem with technological immediacy is that when it seems that we are already entering the maturation phase of a technology, we are shaken by the next wave of evolution. In this case, we talk about QML techniques – Quantum Machine Learning.
Currently, work is being done at accelerated steps to achieve the development of a stable quantum processor, for which China and the USA are mainly competing. In parallel, new Machine Learning models are being developed based on the gigantic computing potential and parallelism of quantum computers.
What will be the expected impact in the financial and business field due to the use of QML?
It is expected that QML will allow us to further enhance the portfolio optimization, the selection of financial assets with risk minimization, improvement in market behavior models, and achieving scenario simulations with more predictive certainty.
But these benefits also come with risks.
Recently the BIS (Bank International of Settlements, known as Basel Banking), published a series of considerations and warnings in reference to quantum computing and its impact on the banking sector (BIS – Project LEAP, June 2023). This document mentions the interest of the banking sector in using quantum algorithms to increase the speed of Monte Carlo simulations. But at the same time it is noted that “Hostile use of this data could have a disruptive impact on important financial services, … with a damaging effect on financial stability”
The consequence of this attempted hostile manipulation of data to generate financial instability is a core point to consider in order to develop responses or defensive strategies, especially in countries with underdeveloped financial markets like ours.
Quantum computing
Within this scenario, possibly the most relevant challenge presented by the advent of quantum computing is not that of creating financial instability, but rather the use ofthe extraordinary computing power of these processors to break cryptographic algorithms on which the security infrastructures of banks, markets, companies and organizations are built.
In the document mentioned above the BIS not only rrecommends that banks begin implementing plans to carry out these security system migrations, but rather warns about so-called “harvest now, decrypt later” strategies. This phrase refers to the suspects that organizations, interest groups or even countries are storing large amounts of encrypted information that is transmitted today safely over the Internet, with the aim of decrypting it in the future, when quantum processors are available.. In this way they could collect sensitive information that we use carelessly today because we are certain that it is invulnerable.
To the future and beyond
There are two additional developments worth highlighting that are being worked on (for now only theoretically) in the field of quantum computing.
One of them, the BB84 algorithm that would allow “securing” an information transmission channel by the mere “observation” of thisand the other the “entanglement” of quantum states that could generate a new form of communication. Nothing less than a network that could replace the current Internet infrastructure!!!
What would be some of the consequences for the financial sector?
An assurance of the confidentiality of information as we never imagined, and the potential replacement of the communication channels that we currently use, such as the SWIFT bank transfer system, intercontinental fiber optic cabling, satellite communication (where companies such as Starlink orbit ), and the list continues…
But the impact of this next wave lies on a more distant horizon, although not for long.
Blockchain and CBDC – Central Bank Digital Currencies
If we talk about our technological radar in the shortest term (and even almost immediate) we have to consider Blockchain technology and one of its applications called CBDC – Digital Currencies of Central Banks.
On January 3, 2009, the “genesis block” was registered, the kickoff of Bitcoin, the flagship of the crypto world. Since that moment, the Blockchain technology that gives life to cryptocurrencies and a vibrant ecosystem, has evolved incessantly, becoming the technological infrastructure on which the DeFi (Decentralized Finance) ecosystem is built.and most of the CBDC initiatives in the world.
As of February 2024, the CBDC Tracker.org organization has ranked CBDC initiatives classified as follows: 4 launches, 20 pilot tests, 26 in the proof of concepts phase, 105 Central Banks in the research/analysis phase. This seems to indicate that CBDCs have already passed the “point of no return.” Especially considering that China has already expressed its intention to use the “digital Yuan” to manage its international trade.
In reference to this technological innovation, we cannot ignore the mention of the DREX – Real Digital, Brazil’s CBDCour main commercial and strategic partner in the region.
The Central Bank of Brazil (BACEN) is carrying out initial tests to integrate the DREX with bank systems, incorporating other uses such as systems that manage securities issued by the Brazilian Treasury. The technology on which these DREX tests are being carried out uses the Hyperledger Besu platform, a variant of the Ethereum Blockchain.
What is important in choosing this technology?
Which leaves the door open to make the traditional financial system compatible with most of the DeFi ecosystem, which has an immense variety of digital financial instruments. These range from cryptocurrencies, through Stablecoins, NFTs (non-fungible tokens), RWAs (real world asset tokens) and reaching complex digital synthetic financial assets. In fact, in June of last year, the new digital assets law came into force in Brazil, designating BACEN as the entity in charge of its regulation and monitoring..
The development of a CBDC does not necessarily imply greater money issuance. But denying the Central Bank this instrument seems to go against the expected short-term integration of digital currencies, such as the recent announcement by the BRICS to use theirs to direct their international trade.
Some final thoughts
The innovative AI techniques used to perform complex data analysis, the advent of quantum computing with its immense potential, the overwhelming push of Blockchain technology in financial activity and the explosion of digital currencies lead us to reflect on the role of the different actors involved, developers and regulators, who must provide new and innovative solutions within the scope of their responsibilities.
More than ever, it is imperative to generate a synergy between the government, private actors and academia to debate, analyze and develop concrete steps in the face of the enormous challenge posed by these technologies.
Professor of Information Technology. Rosario National University
Source: Ambito
David William is a talented author who has made a name for himself in the world of writing. He is a professional author who writes on a wide range of topics, from general interest to opinion news. David is currently working as a writer at 24 hours worlds where he brings his unique perspective and in-depth research to his articles, making them both informative and engaging.
