SEC Chairman: AI May Lead to Next Financial Crisis

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Securities and Exchange Commission (SEC) Chairman Gary Gensler has expressed significant concerns about the potential consequences of artificial intelligence (AI) on the financial system. In an interview with DealBook, Gensler outlined his views on how AI could become a systemic risk and the need for responsible regulation.

AI as a Transformational Technology with Risks

Gensler sees AI as a transformational technology set to impact business and society. He co-wrote a paper in 2020 on deep learning and financial stability, concluding that a few AI companies would build foundational models that many businesses would rely on. This concentration could deepen interconnections across the economic system, making a financial crash more likely.

Gensler expects that the United States will most likely end up with two or three foundational AI models, increasing «herding» behavior. «This technology will be the center of future crises, future financial crises,» Gensler said. «It has to do with this powerful set of economics around scale and networks.»

Concerns About Concentration and Regulation

The SEC chief's warnings extend to the potential conflicts of interest in AI models. The rise of meme stocks and retail trading apps has highlighted the power of predictive algorithms. Gensler questions whether companies using AI to study investor behavior are prioritizing user interests.

«You're not supposed to put the adviser ahead of the investor, you're not supposed to put the broker ahead of the investor,» Gensler emphasized.  In response, the SEC proposed a rule  On July 26, 2023  requiring platforms to eliminate conflicts of interest in their technology.  T he SEC's proposal was to address conflicts of interest arising from