Regulators Must Manage Risks to Harness AI Breakthroughs: CFTC Commissioner
Artificial intelligence (AI) has the potential to drive significant breakthroughs in various industries, including finance. However, Commodity Futures Trading Commission (CFTC) Commissioner Christy Goldsmith Romero emphasized the importance of managing risks associated with AI in her keynote address at the annual Financial Services Conference hosted in Washington, D.C. She highlighted the need for regulators to increase their capacity to understand and monitor the use of AI in regulated financial services.
Romero acknowledged that while AI can bring great promise, there are also substantial risks involved, especially in terms of protecting financial stability. One potential risk she mentioned is concentration risk, where excessive reliance on a few AI models may lead to herd behavior. To prevent this, she emphasized the need for strong governance provisions in the use of AI for algorithmic trading, trade settlement, margin calls, collateral management, and other areas that could impact financial stability.
The commissioner also expressed concerns about fair lending practices being influenced by AI technologies that may have inherent bias due to imperfect training data. With the rapid evolution of AI, Romero stressed the importance of regulatory coordination, referencing a recent executive order on AI from President Biden.
Furthermore, Romero cautioned against potential conflicts of interest and risks associated with cryptocurrency trading platforms owning affiliates involved in exchange and clearinghouse functions. She urged regulators to exercise caution in making changes to market structures and ensure that any modifications do not increase risks to customers or financial stability.
Looking back at the collapsed cryptocurrency exchange FTX, Romero highlighted the dangers of bespoke market structures that lack proper disclosure and resolution of conflicts of interest. She warned against rolling back reforms enacted after the 2008 financial crisis, emphasizing the need to maintain and improve financial stability.
As the derivatives regulator responsible for overseeing cryptocurrency markets, the CFTC has been actively involved in enforcing actions against crypto fraud and manipulation. The agency has also prioritized responsible innovation within the sector.
Goldsmith Romero, who previously served as Special Inspector General overseeing the government’s response to the 2008 financial crisis, was appointed as a CFTC commissioner by President Biden in March.
Balancing the potential of AI with the risks it poses is crucial for regulators to ensure the responsible and effective use of this technology in the financial industry. By managing these risks, regulators can harness the breakthroughs that AI promises while safeguarding financial stability and consumer interests.