Technological and Economic Threats to the U.S. Financial System – RAND

An Initial Assessment of Growing Risks

Published Feb 13, 2024

by Tobias Sytsma, James V. Marrone, Anton Shenk, Gabriel Leonard, Lydia Grek, Joshua Steier

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Research Questions

What are the emerging threats that the U.S. financial markets face, and what are the risks they pose?
How might these evolving threats be detected, and what countermeasures might be taken to protect U.S. financial markets?

The resilience and stability of the U.S. financial system is critical to economic prosperity. However, the rapid pace of technological and geopolitical change introduce new potential threats that must be monitored and assessed. The authors of this report explore emerging and understudied threats to the financial system, focusing on risks from social media, advances in artificial intelligence, and the changing role of economic statecraft in geopolitics.

Drawing on historical examples, the economic literature, and discussions with subject-matter experts, the authors assess the potential costs and likelihood of four threats: attacks on financial trading models, bond dumping by foreign holders of U.S. debt, deepfakes used to spread misinformation, and memetic engineering used to manipulate beliefs and behaviors. Their analysis suggests these threats pose a limited near-term risk of significant economic damage because of the interconnectivity of global finance and existing safeguards. However, the gradual erosion of financial resilience and institutional trust over time could make attacks more impactful.

Key Findings

Emerging threats to U.S. financial markets—such as attacks on AI-enabled financial models, bond dumping, deepfakes, and memetic engineering—pose a limited risk of significant economic damage because of the high costs of such attacks to adversaries and existing market safeguards.
Risks may increase because of geopolitical tensions and advancing technological capabilities that alter adversaries’ cost–benefit calculations.
The most significant threat is not an abrupt event, akin to a “financial 9/11,” but rather a slow and steady process, akin to “financial climate change.” This phenomenon could occur when disinformation or misinformation diminishes public trust in markets, consequently complicating the distinction between reality and fabrication and thereby escalating market volatility.
Data privacy regulations could limit the threat posed by AI-augmented disinformation campaigns. Regulations would make it harder for malicious actors to collect detailed data that could be used to create and disseminate highly customized messages to influence individual behavior.

Recommendations

Proactive risk management solutions could prevent losses. Advancing AI is likely to play a key role in determining whether an adversary can carry out a successful attack. Thus, policies that encourage the responsible development and use of AI technologies can act as important safeguards to financial stability.
Apart from regulatory policy, economic policies that encourage competition in the AI foundation model market could also increase resilience in the financial sector. Reliance on third-party foundation models could create new sources of systemic risk in the financial sector. Encouraging competition in the market could expand the options available to financial institutions looking to incorporate AI into their operations.
To address evolving threats, regular economic wargames that simulate and assess financial vulnerabilities should be implemented. These exercises would identify weaknesses and shape proactive countermeasures. Previous research has proposed an “Economic Joint Chiefs” framework, which could enhance these wargames by providing a dedicated structure and centralized expertise for their coordination and analysis.
Bringing together stakeholders in finance, technology, geopolitics, and national security could result in a new understanding of how these threats might evolve over the next decade.

This research was conducted within the International Security and Defense Policy Program of the RAND National Security Research Division.

This report is part of the RAND research report series. RAND reports present research findings and objective analysis that address the challenges facing the public and private sectors. All RAND reports undergo rigorous peer review to ensure high standards for research quality and objectivity.

Article link: https://www.rand.org/pubs/research_reports/RRA2533-1.html?

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