The mass adoption of Fourth Industrial Revolution (4IR) technologies could potentially trigger an even bigger than expected transition to a new taxonomy of regulation concerning various areas of human life, including that of finance and the market itself. . New technologies enable new concepts, systems and frameworks, such as driverless cars, postal drone deliveries and central bank digital currencies (CBDCs). For the foreseeable future, the role of technology in our society would go beyond the limits of an elementary subsystem, where its regulation would be assigned to stakeholders or to the market itself.
A persistent theme of this short presentation is the current shift in approaches to technology risk regulation following a rapid shift to wholesale leverage and mass technology adoption. I tend to believe that effective regulatory design for new technologies adopted by the ongoing fourth industrial revolution should, first of all, take into account the preconditions as defined by the dominant product design notions, the perception of technological risk and the social advantages in relation to technological risks. .
Moving away from the voluntary and fragmented use of technologies and towards their mass adoption on a global level, public perception of the risks, role and impact of technologies on society continues to evolve, leading subsequently to a change in approaches to regulation. This is best illustrated by an example of systems with organized complexity such as financial markets where technologies and computerization were mainly concerned with the market itself. Compared to past industrial revolutions, which did not have a direct impact on the banking and financial sector, the current 4IR has a direct influence and impact on the entire global finance sector, which, at this day, is already one of the most digitized sectors of the global economy.
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Financial markets were originally modeled as linear systems. Nowadays, however, they are increasingly global without a single point of control, unpredictable by means of non-linear feedback effects resulting from the interactivities between market actors, and tend towards self-organizing behavior. The complexity or organized hierarchy of financial markets can best be described as resulting from investor demand. There could also exist later in a highly interconnected system of subsystems present in the factor market — a market in financial assets — where late regulatory initiatives, first of all, can be traced to the properties of its parts which seem simple at the start and to the laws of their interpretation as not making it possible to deduce the properties of the set. Like the famous Herbert Simon Notedjustifying the frequency with which complexity is prioritized:
“In most systems in nature, it is somewhat arbitrary where we leave the partitioning and which subsystems we consider elementary.”
He continues: “Physics makes extensive use of the concept of ‘elementary particle’ although particles have a disconcerting tendency not to remain elementary for very long. Only a few generations ago, atoms themselves were elementary particles; today, for the nuclear physicist, these are complex systems…[J]Why a scientist has the right to treat as elementary a subsystem which is in fact extremely complex is one of the questions.
For the foreseeable future, the role of technology in human life would go beyond the bounds of an elementary subsystem, where its regulation would be designated to the industry as postal services for drones, financial regulation for robo-advisor companies or a particular market itself.
In its application, blockchains and other cross-cutting enabling technologies, commonly referred to as the ABCD framework: artificial intelligence, blockchain, cloud and data (Big Data), as well as machine learning and biometrics commonly adopted by the 4IR would not be mandatory limited to enable new business opportunities that promote transparency and the cost and time efficient organization of complex systems. It is fair to predict that the future simplification and transformation of regulatory practices is also within reach.
The innovation life cycle
The innovation lifecycle for 4IR technologies has now shifted from a fluid phase to a more transient phase. The rate of product innovation in an industry or product class is highest during its formative years, the so-called fluid phase, where, in the rich mixture of experimentation and competition, a center of Gravity eventually forms in the form of a dominant product design. .
A dominant conception as a landmark event for an industry (depending on the hypothesis) has the effect of imposing or encouraging standardization so that production or other complementary economies can be sought and perfected. At the same time, it may not meet the needs of a particular class to the same extent as a custom design, nor is it a dominant design necessarily one that embodies the most extreme technical performance. For example, the IBM PC, like the Model 5, offered little disruptive technology to the market, but it brought together familiar elements that had proven successful with users: a television screen, a standard disk drive, a keyboard QWERTY, Intel 8088 chip processor, open architecture and MS-DOS operating system.
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While the ABCD framework of enabling technologies used by fintechs, techfins and regtechs is currently approaching the mainstream design stage, their product design model is primarily driven by regulation, a model similar to most regulated industries, including including the financial sector.
A new meaning and logic behind the regulation of technologies has now emerged, embracing the acceleration of new forms of doing business in the marketplace, a trend that is increasingly being seen in many countries. It seems that the notion of Global Technology Risks (GTRs), which until now has not posed a problem fashionable, will accelerate more and more, forcing changes in regulatory approaches implemented around the world. The reason for this is simple: the general public, who generally tend to underestimate the risks of voluntary activities, as the use of technology has moved from being purely voluntary, such as the transfer of Bitcoin (BTC) to help of blockchain, at the level of wholesale technology. use (e.g. CBDC), is increasingly concerned about upcoming risks requiring an appropriate regulatory response and oversight from regulators.
What seems important to emphasize is that the extent to which these responses should rely on technological advances such as integrated monitoring ultimately depends on the willingness of the industry itself to accept or not these advances for regulation.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Pavel Kulikov is a partner at PLL Legal & CBP in Zürich, Switzerland, advising startups and large corporations on financial market regulation, compliance and private equity issues. His academic research focuses on the new taxonomy for the regulation of technologies in financial markets; DLT regulatory reforms and fintech are often cited on both sides of the Atlantic. Pavel is also the author and host of a popular program LegalTask on Swiss television.