SEC Chair Gary Gensler Warns about Looming Financial Crisis Linked to AI

Gary Gensler, the chairman of the United States Securities and Exchange Commission (SEC), has warned that the increased adoption of artificial intelligence (AI) tools across various industries could pose “nearly unavoidable” risks to the financial ecosystem.

In an interview with the Financial Times, Gensler expressed apprehensions that the unchecked proliferation of AI could potentially trigger a financial crisis within the next decade if proper regulations are not implemented.

Widespread Use of AI Could Cause Financial Crisis

According to the SEC Chair, the concentration of power in AI platforms poses a significant challenge to financial stability, as various financial institutions may rely on a single underlying AI model, often hosted by major tech companies rather than traditional financial institutions.

Highlighting the complexities of regulating AI, Gensler stressed that the current regulatory framework primarily focuses on individual institutions, which may not effectively address the broader systemic risks associated with the widespread use of AI across the financial landscape.

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

Regulating AI Poses Significant Challenge

Another primary concern the SEC chair raised centered on tech companies dominating the provision of enterprise-level, cloud-based large-language AI models. According to him, this limited availability forces many financial institutions to rely on a single supplier’s AI model for critical decision-making. Consequently, any error in this singular AI model could have far-reaching consequences, potentially impacting the broader economy.

Gensler disclosed in his conversation with the Financial Times that regulating AI poses a significant challenge. The SEC chair noted that updating existing financial regulations might not adequately address the risks posed by AI in the market. He further stated that the current regulatory framework lacks sufficient emphasis on “horizontal” technologies like AI, which multiple financial institutions extensively utilize.

Additionally, Gensler pointed out the complications stemming from the cloud-based infrastructure of many machine learning products. Rather than operating on their own servers, financial institutions often rely on third-party tech companies to operate their AI models. He highlighted that this reliance on external infrastructure adds another layer of complexity to the regulatory landscape.  Gensler claimed:

“Even if current measures were updated, it still doesn’t get to this horizontal issue . . . if everybody’s relying on a base model and the base model is sitting not at the broker-dealer, but it’s sitting at one of the big tech companies. And how many cloud providers [which tend to offer AI as a service] do we have in this country?”

SEC Chair Calls on Financial Agencies for Collaboration

Given the intricate nature of the issue, Gensler suggested that multiple federal agencies may need to collaborate on establishing regulations for AI.

He mentioned his efforts in addressing the matter at the Financial Stability Oversight Council, a government body focused on managing financial risks, which comprises representatives from various federal agencies, including the SEC.

“I’ve raised this at the Financial Stability Board. I’ve raised it at the Financial Stability Oversight Council. I think it’s really a cross-regulatory challenge,” said he.

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Chimamanda is a crypto enthusiast and experienced writer focusing on the dynamic world of cryptocurrencies. She joined the industry in 2019 and has since developed an interest in the emerging economy. She combines her passion for blockchain technology with her love for travel and food, bringing a fresh and engaging perspective to her work.