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Regulators must urgently address the risks posed to financial stability by the concentration of power in artificial intelligence (AI) platforms, according to the chair of the US Securities and Exchange Commission. Gary Gensler warned that without quick intervention, a financial crisis triggered by AI is almost inevitable within the next decade.
Gensler emphasized that regulating AI would be a difficult task for US regulators as the potential risks extend across financial markets and originate from tech companies outside the purview of Wall Street watchdogs.
“It’s a challenging issue,” said Gensler. “Our current regulations focus on individual institutions, but this is about addressing horizontal risks where many institutions rely on the same underlying base model or data aggregator.”
The SEC proposed a rule in July to tackle conflicts of interest in predictive data analytics, but it only addressed individual models used by broker-dealers and investment advisers.
Gensler pointed out that even if current measures were updated, they would not adequately address the horizontal issue of multiple institutions relying on a base model provided by big tech companies. He stressed the need for cross-regulatory collaboration to tackle this challenge.
Regulators worldwide are grappling with how to regulate AI since tech groups and their models do not naturally fall under the oversight of specific regulators. While the EU has drafted tough measures in a groundbreaking law set to be approved by year-end, the US is still evaluating which aspects of AI require new regulation.
Gensler expressed concerns that decision-making based on the same data model could lead to herd behavior that undermines financial stability and sparks the next crisis. He predicted that a financial crisis caused by AI could occur as early as the late 2020s or early 2030s due to the powerful “economics of networks” inherent in AI.
Lawmakers and regulators in Washington have heightened scrutiny of AI, specifically around market stability, data protection, and antitrust concerns. The Federal Trade Commission launched a review of OpenAI, the maker of ChatGPT, to examine consumer harm and data security. Antitrust agencies have also warned about the potential for tech monopolies arising from AI’s structural reliance on scale.
Gensler, known for addressing concentration in capital markets, believes that AI could create competition issues in this area as well. He raised the question of whether market makers would become more concentrated due to AI.
The SEC is also finalizing a rule, proposed in March 2022, that would require public companies to disclose their direct and indirect emissions. Gensler did not comment on whether scope 3 disclosures would be included in the final version of the rule but stated that the SEC aims to create a rule that is within the law, sustained by the courts, and consistent with current practices.
The SEC’s climate proposal has faced opposition from Republican lawmakers and attorneys-general, who argue that the SEC is overstepping its authority. Gensler denies these claims and maintains that the SEC will proceed with rulemaking based on legal considerations and public feedback.
Despite the challenges, Gensler stressed the importance of proactive regulation to mitigate the risks associated with AI and maintain financial stability.
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