Technology risk: Big brother

Last month Facebook’s stock dropped about 20% in a single session, wiping out some $120 billion in value and making headlines as the biggest ever one-day drop in a company’s market capitalization. The crash followed a nasty quarterly report that confirmed weaker-than-expected revenue and user engagement metrics. But everybody knows the real reason for the rout.

The social media giant has been under fire for months over moves that effectively dismantled protective barriers in its data privacy infrastructure as well as an ensuing scandal that involved the selling of personal data pertaining to at least 87 million users to UK consulting firm Cambridge Analytica under more than questionable circumstances. To date, more than 90% of the company’s 2.2 billion users are said to have become exposed by various lapses in the company’s privacy policy.

In this context, the financial blowback is hardly surprising, but it may be beneficial for technology investors to consider the significance of the affair in less dramatic circumstances as big data, encryption, and artificial intelligence (AI) deals become increasingly commonplace. These technologies – antithetically focused on transparency, privacy, streamlining, exhaustiveness – are converging in the commercial sphere in ways that will undoubtably result in smaller but innumerable Facebook-style episodes in the years to come.

Risk factors for investors in technologies where ethics are on the line will not only come in the form of market punishment. Regulation around a number of AI applications, especially facial recognition and surveillance tools, is already being hashed out with varying degrees of real momentum in some markets, especially Europe. In March, the EU announced it was building a legal framework for AI regulations and governance of “autonomous systems” although few details have emerged in the meantime.

Many companies are expected to have to redraw their business models as such rules come into place globally and, in almost all cases, pursue some level of data policy review or risk-mitigation budgeting. The problem for investors is that even if the onset of AI and data regulation is inevitable, the critical factors around timing, jurisdiction, and the exact nature of the restrictions couldn’t be more nebulous. Therefore pricing future regulation risk into AI and data investments for the moment may have to be as simple as being mindful of the slipperiest slopes.

One such slope came into stark focus last year when a facial recognition experiment at Stanford University claimed to be able to determine a person’s sexual orientation with 80% accuracy. Scientific achievement aside, the incident was most notable for stoking Orwellian fears about systematized discrimination that, in some countries, could be a matter of life and death. In more pedestrian business scenarios, investors may increasingly be obliged to consider the nuances between differential privacy and data anonymization, two imperfect security solutions tossed up by well-meaning start-ups.

Pascale Fung, a computer engineering professor at Hong Kong University of Science & Technology, says that preliminary negotiations around the regulations that will reshape AI are underway and investors should not be left out of the conversation. Fung, who is the only Chinese member of the Partnership on AI, an ethics think-tank founded by Amazon, Google, and Microsoft, among others, has identified interconnected household appliances as the most regulation-vulnerable category for investors.

“When everything is connected in your home, that is the biggest risk because these companies will not regulate themselves,” Fung tells AVCJ. “Actually, many of them have gone to the government and said, ‘Please regulate us. We don’t know what to do.’ There are so many of these companies in China making devices, smart speakers, vacuums, and the claim is that it’s better service, but at the same time, they know everything about you. The problem for investors is that if they’re not regulated, consumers will not have confidence in using their products anymore.”

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• Topics
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• China
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