The European Union has taken the lead to introduce an Act that regulates AI. Broadly, AI has been analyzed in terms of risks it poses. At one extreme, there is AI that poses an unacceptable risk — say AI that affects people’s rights, biometric systems, facial recognition system, social scoring, predictive policing, system that manipulates human behaviour or exploits people’s vulnerabilities. Such AI is of course, prohibited. At the other extreme, there is minimal-risk AI systems — these could remain unregulated. What is actually regulated is AI that falls in between these two extremes — it is neither in unacceptable risk category nor in minimal-risk category.
The European legislation establishes the EU AI Authority (nodal agency for implementation and enforcement of the AI Act). It has extra-territorial jurisdiction.
Securities Market
Generative AI has sneaked into the securities market. Some thirty years back, this area hardly had any use of technology. Technology entered the scene with some seriousness after the introduction of dematerialized shares. Gradually, we have reached a stage of T+O settlement cycle.
AI is transforming the securities market. The issue is that of data privacy. AI generated algorithms spread into many sectors — including securities market. Regulators have to design laws that govern these technologies.
Algo trading is carried out by automated means. SEBI suggests regulating algo trading. AI can write codes based on instructions fed to it. It bypasses an IT-trained programmer. The algo can violate the securities laws. Who is then accountable — whether the person who allowed AI to create the algo. The principle applied could be the person behind the machine. However, as AI advances, this could require a revisit.
There is robot-advisory which may take center stage in near future. It analyzes vast amounts of data points very quickly. It may require a revision of the regulatory framework.
Judicial Systems
AI can be used for dispensation of justice by integrating it with our judicial system — say resolution of traffic offences or enforcement of securities laws. There is a focus on online dispute resolution. AI can serve as an arbiter or mediator.
Pattern Recognition and Predictive Analysis
AI models can recognize patterns, and by doing so predict the future. It all depends upon the data points AI has access to, and these are coded to think. Algos are deployed to track suspicious activities. SEBI has suggested use of blockchain technology to verify information and to ensure transparency. AI can safeguard investor interest. Such technology should be used with caution. There should be strict safeguards to prevent any misuse.