AI Risk Bonds: A Market-Based Mechanism for Governing Liability

Strict regulations like the EU AI Act target high-risk applications, but low- and medium-risk systems sit in a regulatory void, quietly accumulating into systemic risk. This paper proposes Al Risk Bonds, inspired by catastrophe bonds: developers issue bonds tied to predefined adverse events like specification gaming or sustained hallucinations. Investor principal is held in escrow and released to compensate victims if triggered. The market does the governing: weak safety specifications drive up costs, making reckless development financially unsustainable.