Artificial Intelligence: A Potential Threat to Financial Stability, Warns SEC Chairman

JJohn August 7, 2023 11:09 PM

SEC chairman, Gary Gensler, warns that the future financial crises could be centered around artificial intelligence (AI). He highlights the potential dangers of over-reliance on certain AI models and conflicts of interest inherent in the technology, pushing for new regulations to mitigate these risks.

Artificial intelligence: A crisis catalyst

In a recent interview, Securities and Exchange Commission (SEC) Chairman Gary Gensler issued a stern warning about the potential for artificial intelligence (AI) to precipitate future financial crises. He anticipates these powerful technologies, with their far-reaching economic implications, to be at the heart of such upheavals. Gensler's comments serve as a wake-up call to the financial sector about the inherent risks of AI.

Over-reliance on AI models: A ticking time bomb

Gensler postulates that the future of business systems in the U.S. will see a heavy reliance on a few foundational AI models. This, he warns, paves the way for a 'herding' effect, where all companies base their operations and decision-making processes on the same information, thereby increasing the likelihood of a financial crash. Such over-reliance on a handful of models could echo throughout the economy, potentially triggering instability.

The SEC, under Gensler's leadership, is taking action to mitigate the risks associated with AI in the financial sector. Last month, they proposed a new rule that would mandate investment advisers to eliminate any conflicts of interest within their AI technologies. By doing so, the SEC aims to ensure that the interests of brokers or investment advisers do not supersede those of investors, which could otherwise be a potential fallout of AI implementation.

AI or not, advisors bear the responsibility

Gensler emphasized that despite the rise of AI, the responsibility for any faulty financial advice still lies with investment advisers. Regardless of whether an algorithm or AI system is used, these advisers are bound by a fiduciary duty, a duty of care, and a duty of loyalty to their clients. This underscores the importance of maintaining human oversight and accountability in the era of AI.

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