SEC Chair Gary Gensler warns of potential global economic destabilization due to the unregulated development of artificial intelligence (AI) for financial markets applications, particularly by big tech firms.
The transformative power of AI and its risks
In his speech at the National Press Club on July 17, where he later expressed his disappointment about the court’s verdict on the Ripple case, Gensler defined AI as the “most transformative technology of our time, on par with the internet and mass production of automobiles”. He spoke highly of the technology, emphasizing its capacity to enhance efficiency across various sectors, from healthcare and science to finance. Despite the positive sentiment, he voiced concerns about the dangers associated with the uncontrolled expansion of AI technology.
Gensler warned that AI could increase financial fragility and potentially play a significant role in a future financial crisis. He raised concerns over “herding”, a behavior where individual actors make similar decisions due to receiving the same signals from a base model or data aggregator. This could lead to market monocultures, intensifying the network interconnectedness of the global financial system and, thus, its vulnerability. He also addressed the possibility of AI monopolies shaking up the economy, which could further contribute to financial instability.
The SEC’s role in AI regulations
Gensler has called on the agency’s staff to make recommendations for potential regulations that would address how AI might be optimized to prioritize intermediaries over investors. He also spoke about the SEC’s potential for using AI in its regulatory work, saying. that the application of AI could help the agency in market surveillance, disclosure review, exams, enforcement, and economic analysis.
Gensler also acknowledged the pitfalls associated with AI, highlighting biases embedded in predictive AI models, violations of privacy rights, and conflicts of interest. Furthermore, he noted that these systems could also be manipulated for deceptive purposes. In response to these threats, he stated that fraudulent activities involving AI would be subject to enforcement action. He clarified that if anyone “uses artificial intelligence to try to deceive the public, we’re authorized but also mandated by Congress to go after that.”
In conclusion, Gary Gensler’s comments are an urgent call to address the extensive implications of AI’s integration into the global economy. Despite recognizing AI’s potential to revolutionize various sectors, Gensler highlighted the need for comprehensive regulations that safeguard the interests of investors and the stability of financial markets. As AI continues to permeate financial systems, the SEC’s regulatory role could be crucial in ensuring its responsible and equitable use.
