Artificial Intelligence & Blockchain

The Law and Regulation of Crypto Assets and Artificial Intelligence.

Artificial Intelligence Law and Regulation

AI is often defined as computers or machines that seek to act rationally, think rationally, act like a human, or think like a human. (Russel and Norvig. Artificial Intelligence: a Modern Approach 3^rd edition, 2010). There is a further distinction made between ‘narrow’ and general AI where narrow AI concerns domain-specific expertise or task completion and general AI deals with AI that is comparable to or outperforms humans.

Although there is no AI legislation in the UK, work has already been undertaken on the impact of the impact of existing legislation on AI and algorithms, and the impact of AI LegalTech/RegTech on legal services. See Artificial Intelligence: Law and Regulation edited by Charles Kerrigan where Jeremy Barnett of St Pauls Chambers is a co-author.

AI systems depend on machine learning algorithms training on large datasets to produce useful and robust predictive models. Datasets have to be varied, verified and semantic segregation to allow computer programs to recognise and understand relevant data.

Work on AI ethics is at its infancy, making regulation difficult. There is still much debate about the starting point, but the OECD AI principles may assist. AI values should include:

• Inclusive growth, sustainable development and well-being
• Human-centred values and fairness
• Transparency and explainability
• Robustness, security and safety
• Accountability

UK law is relevant – see the Guidance on AI and Data Protection issued by the Information Commissioner in July 2020. The current emphasis is on how organisations can explain AI decisions in compliance with data protection laws.

Compliance with Regulation is also a fertile ground for AI to be used, such software being known as RegTech for important issues in Financial Services such as Know Your Customer (KYC) and anti-money laundering legislation (AML). Other areas of interest are fraud detection & prevention, consumer risk assessment, biometrics and identity, service security, compliance workflows, financial risk assessment, diglgence and vendor & third party risk.

In a paper in 2020, Wachter and colleagues called for consistent assessment procedures to define common standards for the assessment and detection of prima facie automated discrimination. In Chapter 26 of AI Law and Regulation the authors contend that this approach is flawed, and argued strongly that AI should not replace Judges and that the approach taken in France [Law 78- 17 6^th January 1978] as amended should be followed in the UK, namely,

‘no judicial decision involving an assessment of a person’s conduct may be based on an automated processing of personal data intended to evaluate certain aspects of his personality. No other decision which has legal effects on a person can be taken solely on the basis of an automated processing of data intended to define the profile of the person concerned or to assess certain aspects of his personality’.

For further consideration of the dangers of rogue algorithms, see Algorithms Law and Regulations, Treleavan Barnett and Koshiyama Computing 2019.

Crypto Assets & Blockchain Law

The core blockchain technologies are as follows:

• Distributed ledger: a decentralized database where transactions are kept in a shared, replicated, synchronized, distributed bookkeeping record, which is secured by cryptographic sealing. The key attributes are resilience, integrity, transparency, and unchangeability, i.e., mostly “immutable.”
• Smart contracts: are (possibly) computer programs that codify transactions and contracts, which, in turn, “legally” manage the records in a distributed

Blockchain underpins the growth of cryptoassets which has developed into an extensive complex and rapidly evolving ecosystem. The UK government’s view, as expressed in ‘Future financial services regulatory regime for cryptoassets: Consultation and call for evidence’ February 2023 is that the UK should become the home of the most open, well-regulated, and technologically advanced capital markets in the world.

Many users believe that crypto is unregulated in the UK, allowing them to promote various types of crypto assets and embark upon fundraising schemes with impunity. Nothing could be further from the truth! The Financial Conduct Authority (FCA) and Bank of England have issued a number of discussion papers, consultation papers, policy statements and regulatory guidance notes on cryptoassets, including the FCA’s consultation paper on financial promotions for cryptoassets (published in January 2022).

In parallel, international organisations such as the Financial Stability Board (FSB), the Bank for International Settlements (BIS), the International Organization of Securities Commissions (IOSCO), the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF) have been developing global standards for many aspects of cryptoasset regulation.

Both retail and institutional participation in the sector continues to grow. On the retail side, most recent surveys show that 5-10% of UK adults now own cryptoassets, an increase of more than 100% over the past 1-2 years.

Institutional participation has been limited but is growing. A n umber of large banks and other traditional financial services institutions with a material presence in the UK are undertaking crypto-related activities including execution, brokerage, market making, custody and tokenisation of traditional assets.

Cryptoasset markets have undergone a turbulent year. Total global market capitalisation of cryptoassets is currently around $0.8 trillion, down around 75% from a peak of roughly $3 trillion in November 2021. The second quarter of 2022 saw the failure of several cryptoasset lending and trading platforms, such as Celsius Network and Voyager Digital. The recent FSB report – published in October 2022 – noted that this episode exposed a number of vulnerabilities in those markets, arising from unsuitable business models, liquidity and maturity mismatches, the extensive use of leverage, and a high degree of interconnectedness within the cryptoasset ecosystem.

These vulnerabilities were exacerbated by limited transparency and disclosures, suboptimal governance models, inadequate consumer and investor protections, and weaknesses in risk management.

These issues have been further emphasised by more recent events surrounding the failure of a major crypto exchange, FTX, which has had widespread and ongoing implications for global crypto markets and prices and has contributed to the failure of another crypto trading and lending platform – BlockFi.

FTX’s failure has underscored important questions around conflicts of interest, market conduct and operational resilience. It has also demonstrated that integrated business models – currently prevalent across the ecosystem – can result in complex and sometimes reinforcing risk profiles.

Jeremy Barnett has advised a number of companies and individuals both in the UK and abroad in respect of the marketing of digital assets in the UK, often in conjunction with a solicitor who specialises in cyrpto assets law and regulation. In one case, they advised an Asian based cryptocurrency in respect of UK regulated/unregulated securities and the provision of E money services as a business in the UK.

If you would like to instruct a barrister with significant expertise in AI and blockchain cases, please get in touch with our clerks today.