SEC Turns Its Gaze from Crypto to AI

The chairman of the US Securities and Exchange Commission (SEC), Gary Gensler, has announced a new focus on artificial intelligence, transitioning away from the cryptocurrency sector. Gensler, who has previously expressed concerns regarding the cryptocurrency landscape, is now of the opinion that AI represents the technology that truly deserves regulatory scrutiny.

This interest in AI is not new for Gensler; it dates back to 1997 when he became fascinated by the capabilities of artificial intelligence after witnessing Garry Kasparov’s loss to IBM’s supercomputer, Deep Blue. As a professor at MIT, he expanded his knowledge of AI, co-authoring a pivotal paper in 2020 that underscored the risks associated with deep learning in financial systems.

Gensler’s focus now encompasses the potential impact of mass automation in the finance sector, prompting a reassessment of existing regulatory frameworks. He argues that, while AI can significantly enhance the capabilities of financial institutions, it also presents substantial risks that need to be managed. “Mass automation can have cascading implications for trillions of dollars in assets traded in markets under SEC oversight,” he cautions.

One of Gensler’s primary apprehensions relates to the potential for AI to obfuscate accountability during failures. He warns that the synchronization of AI models across major trading firms may lead to heightened market volatility and instability, an area where today’s regulatory frameworks might fall short.

In response to these concerns, Gensler has proposed one of the first regulatory guidelines for AI within the financial sector, advising trading firms and investment managers to rigorously assess their use of AI and predictive analytics for any potential conflicts of interest, particularly when clients’ interests may diverge from corporate profits.

This shift in focus, however, does not imply a reduction in the SEC’s efforts against cryptocurrency. Under Gensler’s guidance, the SEC has taken legal action against prominent crypto entities such as Ripple, Binance, and Coinbase, with several lawsuits still active, indicating an ongoing commitment to combating scams and fraudulent practices in the crypto space.

As AI technology continues to advance rapidly, Gensler’s heightened focus on its implications aims to balance innovation with the imperative of maintaining market integrity and protecting investor interests.