Artificial Intelligence: A Double-Edged Sword in the Fight Against Digital Fraud

The increasing powers of Artificial Intelligence (AI) have given rise to new challenges in the fight against digital fraud. Zerodha CEO Nithin Kamath has recently shared his views on how AI is helping to give rise to digital frauds, highlighting the need for stricter measures to combat these threats.

The Rise of Digital Fraud

According to Kamath, the sheer number and variety of digital frauds is astounding. Both SEBI and RBI are trying to educate people and implement measures to combat these frauds. SEBI has published a consultation paper proposing unique UPI IDs for brokers to ensure that investors transfer money only to SEBI-registered brokers and not to scammers using UPI IDs with broker names.

Countering Online Fraud

Yesterday, the RBI announced that it would implement the "http://bank.in" domain exclusively for Indian banks, aiming to counter the numerous phishing sites that mimic legitimate bank websites. Kamath also talked about another major ‘nuisance’ that is on the rise – the proliferation of fake apps that mimic banks, brokers, and payment apps. "Something needs to be done about these apps too," said Kamath.

Mule Accounts and AI-Based Systems

Mule accounts are bank accounts that are used to launder proceeds of crime by fraudsters. In an age when there are strict laws on holding or using large amounts of cash, transactions in the banking system cannot be avoided. An innovative artificial intelligence-based model called the ‘Mule Hunter.ai’ has been developed by the Reserve Bank innovation hub in Bengaluru. Former RBI chief Governor Shaktikanta Das said that this new AI-based system will help banks in reducing instances of digital fraud.

SEBI’s New Framework

SEBI’s newly announced framework will allow retail investors to engage in algo trading – an opportunity previously limited to institutional players. The move comes in response to rising demand from retail participants and aims to strike a balance between accessibility and risk management. Under the updated regulations, brokers must obtain exchange approval for each algorithm and ensure that all automated orders carry a unique identifier for audit tracking.

What Does SEBI Say in Its Recent Circular?

SEBI’s new framework will allow retail investors to engage in algo trading, enhancing automation for retail traders while enforcing stricter compliance measures to safeguard market integrity. The new rules are set to take effect on August 1. SEBI has classified algorithms into two categories: "white box" algos, where the logic is transparent and replicable, and "black box" algos, which function without disclosure. Providers of black box algos must acquire a Research Analyst (RA) license and maintain detailed research documentation.

Conclusion

The increasing powers of Artificial Intelligence have given rise to new challenges in the fight against digital fraud. While AI has the potential to help combat these threats, it also poses significant risks. It is essential for regulatory bodies like SEBI and RBI to implement stricter measures to safeguard market integrity and protect investors from digital frauds.

Article Details

• Published On: February 10, 2025, at 10:27 AM IST
• Category: Most Read