Kganyago warns of AI and crypto risks
The South African Reserve Bank (Sarb) has reiterated its warning against the risks posed by AI and defended its cautious stance against crypto assets. Governor Lesetja Kganyago told shareholders that AI “will transform how we work by making large datasets much more tractable”.
At the same time, Kganyago noted that AI presents new threats, such as hacking sensitive systems that previously seemed secure. He also highlighted the two sides of stablecoins, which can make cross-border payments faster and cheaper, but also facilitate anonymous transactions and help users evade prudential controls.
Kganyago emphasized that the bank’s task is to achieve a balance between limiting risks and stifling innovation. He referred to the draft Capital Flow Management Regulations published by the National Treasury in April, which will bring crypto assets into the country’s official exchange control and capital flow framework.
The governor conceded that South Africa’s system of capital flow measures has been “cumbersome” and that reforms are under way to modernize the framework. However, he stressed that the bank cannot have weak regulatory frameworks for crypto assets alongside a rigorous system of reporting and permissions for everyone else.
In its half-yearly financial stability review in June, the bank said that crypto asset activity does not currently pose a systemic risk to the domestic financial system. Nevertheless, it continues to monitor developments given the pace of growth in global stablecoin activity and remaining gaps in the regulatory framework.
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The bank also warned that advances in frontier AI pose risks to financial stability by heightening the threat of systemic cyber incidents affecting critical systems and infrastructure. Kganyago defended the new 3% inflation target adopted by the bank, saying it is in line with the inflation rates of peer countries and major economies.
Critics have accused the bank of being hyperfocused on inflation and raising interest rates at the expense of economic growth. However, Kganyago reiterated that the bank’s main task is to protect the buying power of the rand and that it intends to do so by keeping inflation in check.
Kganyago emphasized that the bank’s regulatory framework is designed to limit risks without stifling innovation. He noted that the bank’s efforts to achieve this balance can leave people unhappy, citing the example of the draft cross-border regulations on crypto assets.
As the bank continues to monitor developments in the crypto asset space, it is likely that its regulatory framework will evolve to address the challenges of digital technology. The bank’s cautious approach to crypto assets is driven by its responsibility to limit the dangers of digital technology to the financial system.
The governor’s comments come as the bank faces challenges posed by AI and crypto assets. While these technologies offer opportunities for growth and innovation, they also pose significant risks to financial stability.
