Gensler: AI poses risks to financial system

Artificial intelligence poses potential financial stability risks, said Securities and Exchange Commission Chair Gary Gensler. 

“Fraud is fraud, and if you are using AI and you are doing deep fakes in the market, that’s a real risk,” Gensler said Sept. 12 in testimony during an SEC oversight hearing before the Senate Banking Committee. “We have good laws, but these new technologies will challenge these laws,” he said.

Sen. Mark Warner (D-Va.) said American elections and the stability of public markets are most susceptible to potential interference from AI. He expressed concern over the possibility that stock prices could be adversely impacted from false product complaints.    

Seventy percent of financial firms already use AI to detect fraud, predict the probabilities of loan default or late payments, personalize consumer recommendations and marketing and automate customer account openings. 

Acting Comptroller of the Currency Michael Hsu said earlier this summer that AI poses numerous benefits and risks to banks. He called for banks to develop AI and tokenization in “tightly controlled stages where the risks can be identified, measured and managed at each stage,” with engagement by risk managers and compliance professionals. 

The SEC is proposing a rule to require broker-dealers and investment advisers to prove to clients that the technology they use doesn’t place the firm’s interests over the client’s. Sen. Mike Rounds (R-S.D.) said the SEC’s approach to emerging technologies has been hostile. Gensler, who was appointed in 2021 by President Joe Biden, replied that the proposal is “actually technology-neutral.”

During his approximately 2 1/2 hours of testimony, Gensler said crypto tokens and intermediaries must comply with U.S. securities laws, despite the industry being in “wide-ranging noncompliance” with the requirements. “I’ve never seen a field that is so rife with misconduct. It’s daunting,” Gensler said.

During the hearing, Senate Banking Committee Chair Sherrod Brown (D-Ohio) supported the SEC’s recent enforcement actions against crypto firms. Last year, the SEC issued 30 cryptocurrency-related enforcement actions, a 50 percent increase from 2021.

 “The problems we saw at FTX are everywhere in crypto — the failure to provide real disclosure, the conflicts of interest, the risky bets with customer money that were supposed to be safe,” he added. 

Gensler said the SEC’s requirement that advisers with custody of client assets maintain the assets with a qualified custodian covers most crypto funds and securities. The Independent Community Bankers of America has expressed opposition to the proposal.  “The proposal’s revised definition of ‘qualified custodian’ — which would allow financial institutions to act as qualified custodians only if they have possession or control of client assets pursuant to a written agreement — would make some community banks ineligible to be qualified custodians,” the ICBA stated.