WASHINGTON — Securities and Exchange Commission Chairman Gary Gensler warned lawmakers that artificial intelligence could, one day, cause a financial crisis.
Gensler, during an SEC oversight hearing held by the Senate Banking Committee, said that AI is already being used in financial markets and institutions.
"Predictive data analytics and artificial intelligence already have been used and used extensively in finance even before the recent [emergence of] ChatGPT," he said. "It's used in robo advising and brokerage apps, and it's also used by more sophisticated investors who may be listening to this testimony right here and having computers analyze it and making market decisions."
He acknowledged that AI offers some potential benefits, such as making markets more efficient or strengthening compliance with anti-money-laundering and other regulations. Yet he pointed to dangers that the technology could present.
"There are some risks in our capital markets, some which could lead to conflicts in the markets and some that are harder to grapple with," Gensler said. "It may well be that the financial crisis in a number of years, or in 10 years, is because we find everyone in the mortgage market may be relying on one model."
He said that the SEC has put out a proposal on what he called its "conflict of interest" rule, which would prohibit securitization participants from engaging in certain transactions that could incentivize them to structure an asset-backed security in a way that would prioritize the participants' interests above those of investors.
Gensler's interest in AI predates his term atop the SEC. In 2020, as an academic at the Massachusetts Institute of Technology Sloan School of Management, he co-wrote a paper called "Deep Learning and Financial Stability," which details views on how existing "financial regulatory regimes are likely to fall short in addressing the systemic risks posed by broad adoption of deep learning in finance."
The SEC has fielded complaints about the agency's posture toward emerging technologies from some trade groups and Republican lawmakers.
"The new predictive data analytics proposal reveals the commission's rather hostile attitude towards technology," said Sen. Mike Rounds, R-S.D., during the hearing.
Gensler said, in response, that his approach is "technology-neutral."
"If an investment advisor, think about a robo advisor, is telling you their advice and it's purely based on your family and your wealth and so forth, great," Gensler said. "But if they're also taking into account their own interest and profits, their revenues and the like, therein lies a potential conflict. And whether they're using machine learning or other data analytics, there may be a conflict there."
