SEC Chair Calls for Immediate AI Regulation to Avert Financial Meltdown

In a recent interview with The Financial Times (FT), Gary Gensler, the chair of the U.S. Securities and Exchange Commission (SEC), expressed grave concerns about the potential risks artificial intelligence (AI) poses to financial stability. Gensler warned that without immediate regulatory measures, a financial crisis triggered by AI is “nearly unavoidable” within the next ten years.

According to The Financial Times, Gensler finds the task of regulating AI to be a complex challenge for U.S. authorities. The FT’s report states that the risks are not limited to individual financial entities but are more of a “horizontal” issue that affects multiple sectors and that the existing regulatory framework is primarily designed to oversee individual institutions like banks and brokers, which makes the cross-sectoral influence of AI a difficult issue to address.

Earlier in July, the SEC had apparently put forth a rule aimed at mitigating conflicts of interest in predictive data analytics. However, report says that this rule was narrowly focused on models used by broker-dealers and investment advisers.

Gensler pointed out that such measures don’t address the broader challenges posed by AI, especially when the foundational models are often created by big tech companies that financial watchdogs do not traditionally regulate:

“It’s frankly a hard challenge. It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, individual brokers; it’s just in the nature of what we do. And this is about a horizontal [matter whereby] many institutions might be relying on the same underlying base model or underlying data aggregator.“

Gensler has been actively discussing this issue in various financial oversight forums, including the Financial Stability Board and the Financial Stability Oversight Council, according to The Financial Times. He believes that tackling the challenges posed by AI requires a collaborative approach across regulatory bodies.

The FT also notes that while the European Union has been proactive in creating stringent AI regulations, the U.S. is still evaluating which aspects of the technology need new laws and that Wall Street has already incorporated AI into several operations, such as robo-advising and account opening processes in brokerage apps.

Gensler’s primary concern, as reported by The Financial Times, is the potential for “herd behavior” in the financial markets. He fears that reliance on the same AI model by multiple parties could lead to market instability and potentially trigger a financial crisis.

The FT further reports that Gensler also discussed the “economics of networks” in AI. He warned that the technology’s inherent need for scale could result in monopolistic practices, a concern that has led to increased scrutiny from lawmakers and other regulatory bodies.

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