SEC’s Gary Gensler: ‘AI May Heighten Financial Fragility’

SEC’s Gary Gensler: ‘AI May Heighten Financial Fragility’

Artificial
intelligence (AI) may play a key role in a future financial crisis, Gary Gensler,
the Chair of the US Securities and Exchange Commission (SEC) has said. Gensler
pointed out that recent advancements in AI could be harmful to the global economy if
a single or a small group of big tech companies dominate the space.

Gensler on AI and
Financial Stability

Gensler
stated this today (Monday) in a
remark prepared to be delivered at the National Press Club in Washington.
Although the SEC Chair noted that AI has the potential to foster greater
financial inclusion and enhanced user experience in the financial industry, he added that the technology could also “play a central role in the after-action
reports of a future financial crisis.”

“AI may
heighten financial fragility as it could promote herding with individual actors
making similar decisions because they are getting the same signal from a base
model or data aggregator,” Gensler explained. “This could encourage
monocultures. It also could exacerbate the inherent network interconnectedness
of the global financial system.”

Gensler’s
remarks come as the recent launch of the chatbots ChatGPT by OpenAI and Bard by
Google has led to a renewed interest in AI adoption. Gensler pointed out that while the SEC is ‘technology
neutral,’ the agency focuses on ‘the
outcomes, rather than the tool itself’.

SEC Eyes
Regulation of AI in the Brokerage Industry

According
to Gensler, AI is already being deployed in the financial industry to run call
centres, account opening procedures, compliance programmes and trading algorithms. The technology has also “fuelled
a rapid change in the field of robo-advisers and brokerage apps,” the SEC boss added.

However,
Gensler believes that conflict of interest may arise when AI systems are
designed to take the interest of both an organization and its customers’
interests into consideration. Earlier this month, the securities
watchdog made a move towards introducing new rules for brokerages deploying AI to interact
with their clients.

Specifically,
the SEC’s Division of Trading and Markets is looking into whether the agency
should introduce rules “related to broker-dealer conflicts in the use of
predictive data analytics, artificial intelligence, machine learning, and
similar technologies in connection with certain investor interactions,”
according to information on the
website of the
United States Office of Information and Regulatory Affairs (OIRA).

The SEC started talks on the proposed
rules as far back as September 2021 and expects that the
new rules could be introduced as soon as October this year.

“As
advisers and brokers incorporate these technologies in their services, the
advice and recommendations they offer—whether or not based on AI—must be in the
best interests of the clients and retail customers and not place their
interests ahead of investors’ interests,” Gensler noted in the remark.

Gensler
Expresses Mixed Feelings on Ripple Ruling

Last
Thursday, after years of a lengthy legal
battle between the SEC and Ripple, a US court in the southern district of New York ruled that the digital asset firm’s sale
of XRP tokens to retail investors did not violate US federal securities
law. However, the judgment, which experts consider a ‘partial victory’ for Ripple, found the sale of the token to institutional investors to be illegal.

On Monday,
Gensler commented publicly on the judgment for the first time, noting that he was
both ‘pleased’ and ‘disappointed’. The SEC boss in an interview with yahoo! finance expressed satisfaction with the part of the ruling
related to
institutional investors and displeasure with the
other concerning retail
clients.

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This article was written by Solomon Oladipupo at www.financemagnates.com.

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