Credit: Matthew Bornhorst

SEC’s Gary Gensler Wants To Mitigate an AI-Driven Financial Crisis

BY Andrew Rossow

October 16, 2023

The U.S. Securities and Exchange Commission (SEC) chair, Gary Gensler believes that if we do not implement urgent regulatory measures to address the growing power and influence of artificial intelligence (AI), it could lead to a significant financial crisis within the decade. 

“It’s frankly a hard challenge,” Gensler told the Financial Times. “It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, individual brokers; it’s just in the nature of what we do. And this is about a horizontal [matter whereby] many institutions might be relying on the same underlying base model or underlying data aggregator.” 

“It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, individual brokers; it’s just in the nature of what we do.”

Gary Gensler

Gensler further acknowledged the formidable challenge U.S. regulators currently face, especially because the current risks associated with AI extend across financial markets and originate from models developed by tech companies that fall outside the purview of traditional Wall Street oversight.

But even if current regulatory measures were updated, Gensler says this still wouldn’t address “this horizontal issue…if everybody’s relying on a base model and the base model is sitting not at the broker-dealer, but it’s sitting at one of the big tech companies.”

Gensler admitted that he’s already raised this issue at the Financial Stability Board and at the Financial Stability Oversight Council.

“I think it’s really a cross-regulatory challenge,” he added. 

Unfortunately, the SEC’s attempt in July to address these potential conflicts of interest in predictive data analytics as between individual models for broker-dealers and major tech firms, Gensler says, is concerning. 

Currently, the U.S. continues to operate very slowly in pushing forward AI regulations, as compared to the international market. In July, the EU laid out the first significant powers under its forthcoming Markets in Crypto Assets Law (MiCA), a set of stringent guidelines to reshape the crypto landscape within the 27-nation bloc.

The Biden Administration is expecting to release its initial guidelines for how the federal government can use AI in the summer of 2024. 

Although Wall Street has already integrated AI in various facets, from robo-advisors to account-opening processes, Gensler remains apprehensive about the potential for herd behavior arising from decisions based on the same data models. Such behavior, according to the SEC chair, could undermine financial stability and potentially trigger the next financial crisis, which he says could occur as early as the late 2020s or early 2030s.

Scope 3 Emissions and Climate Change 

The SEC is also finalizing a rule, initially proposed in March 2022, requiring public companies to disclose their direct emissions and emissions derived from energy they purchase, known as scope 1 and scope 2 emissions. 

The SEC also introduced “scope 3 emissions,” where public companies are tasked with tracking “indirect emissions” that are caused by the company’s supply chain or its customers. 

Under the newly proposed rule, Scope 3 reporting would require public companies to provide investors with “material” information on their climate-related risks and proper accounting of carbon emissions that directly result from those operations. 

While Gensler has avoided speaking to any timeline for when the Scope 3 reporting rule would go into effect, he has continued to emphasize that the SEC does not want to force private companies into this meticulous carbon reporting mechanism. 

I’ve asked staff…to make sure that we’re only regulating the public companies and not somehow indirectly the private companies,” Gensler said. He did tell the Financial Times that the SEC intends to do right by the American public by creating a rule “…that’s within the law and is sustained by the courts [and] thinking that through based on the comments [it has received], based on the economics, based on trying to bring some consistency to what’s already happening.”

The proposed rule has also been heavily criticized by corporate America, addressing those emissions that directly stem from products purchased from third parties that are material to the company’s climate change objectives. 

“We try not to do things against a clock,” Gensler told lawmakers in an oversight hearing Tuesday before the Senate Banking Committee. “It’s really when the staff is ready.”

SEC x Binance Lawsuit

The SEC is currently in active litigation, alleging in its initial filing in June that Binance and its U.S. counterpart Binance.US, as well as its founder Changpeng Zhao (CZ) have violated securities law spanning all of its crypto-asset transactions.

In late September, Binance, Binance.US, and CZ filed a Joint Motion to Dismiss.

Editor’s note: This article was written by an nft now staff member in collaboration with OpenAI’s GPT-4.

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