Global: SEC Chief Issues Warning About AI’s Potential to Trigger Financial Crisis

Gary Gensler, the head of the Securities and Exchange Commission (SEC), has issued a stark warning, suggesting that artificial intelligence (AI) could pave the way for a financial crisis within the next decade if regulatory measures are not put in place.

Gensler emphasized the substantial challenge in regulating AI. This challenge stems from the fact that numerous financial institutions may be relying on identical foundational AI models. Furthermore, these models may not originate from financial firms but rather from technology companies that do not fall under the purview of the SEC and other Wall Street regulatory bodies.

Gensler articulated this dilemma, stating, “Regulating AI is a formidable task because the landscape of financial institutions might be interwoven with the same core AI models, and these foundational models may not be developed by financial entities themselves. Instead, they may be crafted by technology companies that remain beyond the regulatory oversight of the SEC and other Wall Street watchdogs.”

The SEC head further noted that existing regulations typically focus on individual financial institutions, such as banks, money market funds, and brokers, adhering to a traditional structure. Addressing AI’s cross-institutional nature, he explained, “This issue pertains to a horizontal dimension where multiple institutions might be reliant on a shared foundational AI model or a common data aggregator.”

Gensler elaborated on the potential consequences of widespread reliance on identical AI models. He expressed concerns about herd behavior, where firms could unwittingly act in a uniform manner. He warned, “I genuinely believe that, in the future, a financial crisis may emerge. In post-crisis analyses, people may realize that they overly relied on a single data aggregator or foundational AI model.”

Gary Gensler disclosed that he has engaged in discussions about this matter with entities like the Financial Stability Board and the Financial Stability Oversight Council, highlighting the complexity of this challenge as one that transcends individual regulatory domains.