SEC Chairman Gensler Highlights Concerns Regarding AI’s Impact on Financial Markets
In a recent interview with Bloomberg, Securities and Exchange Commission (SEC) Chairman Gary Gensler expressed his worries about the potential threat posed by artificial intelligence (AI) in the financial markets. Gensler referred to AI as the most transformative technology of this generation, stressing its significance and the need to address its implications.
One of Gensler’s primary concerns regarding AI in the financial sector is its capacity to provide financial advice and potentially lead to conflicts of interest. He emphasized the challenge of determining accountability when things go wrong, as AI’s involvement can obscure the identification of responsible parties. Considering the vast sums of money traded within the markets overseen by the SEC, it is only natural for Gensler to prioritize the impact of AI.
During his tenure at MIT, Gensler published a paper titled ‘Deep Learning and Financial Stability,’ co-authored by him, which outlined the risks associated with deep learning specifically in financial markets and the broader system. He argued that existing financial regulations are inadequate to handle the forthcoming changes, highlighting the need for further scrutiny.
What are the potential dangers posed by AI in the financial system? Gensler’s paper discussed several possibilities. He warned that AI models may unintentionally or intentionally coordinate and communicate with each other to optimize outcomes. Moreover, these models could contribute to increased volatility and potentially even financial collapses.
Under Gensler’s leadership, the SEC has already proposed rules for AI usage in financial markets. These rules aim to identify and eliminate conflicts of interest within firms. The proposal is expected to be voted on in 2024.
Despite AI taking center stage at the SEC, Gensler assured Bloomberg that this does not indicate a reduction in efforts to regulate digital currencies and blockchain projects. Gensler emphasized that the industry is prone to scams and fraud, urging investors not to assume they have the same level of protection as traditional securities.
Gensler expressed his concern about various practices within the digital currency sector, including countertrading customers, commingling funds, and market makers taking opposing positions in trades. The SEC recently requested a budget increase to effectively address the risks present in the industry, thereby signaling an ongoing commitment to scrutinize digital currencies alongside the prioritization of AI concerns.
Interestingly, blockchain technology, a core component of many digital currencies, presents a potential solution to some of Gensler’s concerns. Blockchain’s ability to track, trace, and regulate activities across all markets could assist in combatting fraudulent practices and increasing accountability. Dr. Craig Wright, the inventor of Bitcoin, emphasized Bitcoin’s status as a distributed timestamp server capable of creating transparent, publicly accessible records of activities.
While the public would not have access to trading houses’ records and AI model decisions, regulators like the SEC could leverage blockchain technology during compliance audits and investigations to reveal instances of foul play and regulatory breaches. The immutability of public proof-of-work blockchains ensures that records remain tamper-proof, reinforcing their reliability in regulatory activities.
It is unlikely that Gensler is unaware of this potential use case for blockchain technology, considering his background and expertise. Although it may be premature to mandate the use of public blockchains in the recording of AI-related activities, it remains a possible outcome. In that regard, the original BSV blockchain stands out as one of the few capable of handling such requirements at scale.
While addressing concerns about AI’s impact on financial stability and increasing regulations within the digital currency industry, it is crucial to acknowledge the potential role that blockchain can play in mitigating risks and ensuring transparency. As the SEC continues to address the challenges posed by emerging technologies, striking the right balance between regulation and innovation will be essential for the secure and sustainable development of financial markets.
