Gary Gensler is not an artificial intelligence skeptic. on monday letter At the National Press Club, the SEC chairman said he believes AI is “the most transformative technology of our time, on par with the Internet and mass production of automobiles.” But that doesn’t mean that the famous regulator who has overseen a “crypto crackdown” in the past 12 months thinks that AI will be a good thing for the markets.
As with any major technological advance, Gensler fears there will be “significant challenges for society” as AI goes public. On Monday, the former professor at MIT’s Sloan School of Management outlined the risks he sees AI poses to the global economy, and argued that governments will need to rewrite their rules to deal with the threat.
He warned of possible “big” changes in the labor market and increased competition between the United States and China as the two global superpowers seek to develop artificial intelligence systems, but that was just the beginning of potential problems.
“Artificial intelligence may increase financial fragility,” he said, adding that the technology could eventually become a key feature in “after-action reporting” of the next financial crisis. Make no mistake, he said, this is as big of a deal as the advent of the Internet in the mid-1990s — or the invention of the modern automobile in 1886.
Gensler’s sweeping comments on AI convey his concerns about the fundamental shape of the market in the future, a departure from his recent enforcement actions regarding cryptocurrency, which focus on a technical definition of what is and is not a security. A breakthrough in this matter occurred last week, when a judge issued a ruling on the cryptocurrency Ripple, effectively saying yes it is a security, except when it is not (under specific circumstances). But on the topic of artificial intelligence, Gensler looked into his crystal ball and saw a problem with “grazing”.
The big tech dominance of artificial intelligence and financial stability
A number of economists have warned that the rise of artificial intelligence could lead to significant job losses, particularly for white-collar workers, but SEC Chairman Gensler cares more about the risks to financial markets because AI systems increase their “inherent interdependence.” Among the Global Financial Networks. System.”
He noted that the AI space could end up being dominated by a small number of big tech giants, increasing the odds of “grazing” in markets as investors all get the same signals from AI systems about whether or not to buy. .
“It could promote pastoralism with individual actors making similar decisions because they are getting the same signal from an underlying model or data aggregator. This could encourage monoculture,” he warned.
To Gensler’s Point, 2001 Stady By Marcus Konrad Brunnermeyer, professor of economics at Princeton University, he found that investors’ grazing behaviors “help explain” the stock market crash. and 2022 Stady Asad Ayoub and Ayman Balawi of the University of Pécs in Hungary have confirmed that grazing behavior drives stock prices during bear and bull markets. Gensler warned that this herding behavior would be worse if a few big tech companies took control of the AI field.
“The potential for dominance of one or even a few AI platforms raises issues in terms of financial stability,” he said. “While at MIT, Lilly Bailey and I wrote a paper on some of these problems called Deep Learning and Financial Stability. Recent developments in generative AI models make these challenges more likely.”
Privacy, intellectual property and conflicts of interest
Gensler continued to highlight a few key issues he’s been considering amid the AI launch in his speech Monday.
First, he warned that technology poses some serious challenges when it comes to data privacy and intellectual property, noting that the double strike of Hollywood writers and actors is currently seeking to address some of these issues. Screenwriters explode over compensation disputes and the use of AI in entertainment productions, arguing that technology can replace them, and using their work as training to do so.
Gensler acknowledged in his speech that “we all help train the parameters of AI models,” which leads to the question: “Whose data is this for?” That discussion has “started now,” the SEC chair said, adding that he’ll be watching it closely as it moves forward.
For the SEC, the challenge here is to promote competitive and efficient markets in the face of what could be dominant underlying layers in the middle of the capital markets. I think we have to evaluate that very closely so that we can continue to enhance competition, transparency and fair access to markets.
Gensler also warned brokers and financial advisors that AI could increase potential conflicts of interest in their businesses, hinting at a possible campaign using AI to direct customers toward specific financial products.
“If the optimization function of the AI system takes the interest of the platform into account as well as the interest of the client, this can lead to conflicts of interest. In the field of finance, conflicts may arise to the extent that advisors or brokers are optimizing to put their interests over those of investors.
The warning comes after Gensler told his employees in June to do so Recommendations On what to do to prevent this conflict of interest, which they haven’t announced yet.
Finally, with artificial intelligence creating a host of potential problems for the SEC and government officials, Gensler argued that existing regulations are not “enough” and will need to be “refreshed.”
“Many of the challenges to financial stability that AI may pose in the future … require new thinking about system-wide prudential policy interventions,” he said.
To help modernize the regulations for this new era, Gensler proposed a somewhat ironic solution: artificial intelligence.
“While recognizing the challenges, we at the SEC can also benefit from increased employee use of artificial intelligence in market surveillance, disclosure review, examinations, enforcement, and economic analysis,” he said.
