Your daily briefing of some of the most important stories from the crypto, finance, and tech space.
Gensler Expresses New Concerns About AI Centralization
Too many institutions relying on the same AI models could be a recipe for the next financial crisis.
Gary Gensler, the Chair of the SEC best known for his ongoing mission to crush the crypto sector, has once again warned of the risks posed by AI. In a new interview with the Financial Times, he argues that a financial crisis caused by the widespread adoption of AI tools is "nearly unavoidable".
At the root of the problem is the idea that many different institutions could be relying on the same AI tools. There are only a handful of these in existence, and so "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," he said.
His remarks show that, along with crypto, AI could be taking up an increasing amount of the regulator's bandwidth.
Opacity And Interconnectedness
Gensler has previously expressed concerns about how AI might impact the economy. During a Q&A session at a Federal Reserve Bank of Atlanta conference in May, he drew attention to a number of problems inherent in the fast-moving technology, as well as its potential—suggesting that it could be "every bit as transformative as the internet itself".
However, he warned that AI would likely have a limited number of core players, and that these would be highly interconnected. "Will we have more concentration and interconnectedness? How many generative AI based layers are we going to have in the US? Is it going to be two, three, four? It's probably going to be highly concentrated."
Others, of course, disagree, arguing there are much more immediate threats to financial stability.
Systemic Financial Risk
Reliance on such an AI-powered system could result in a new financial crisis, within the next 5-10 years, he said. Partly this an issue of opacity, since there is often uncertainty about how AI reaches the results it does. "They talk about explainability or opacity, and we've seen financial crises over the decades that come from this, whether it's the opacity in the mortgage market and the credit default swaps market, whether it's other opacities that we've seen in the explainability of the models themselves."
If enough people rely on the same financial tools—an AI-based mortgage data aggregator, an underwriting tool, or sentiment analysis level—that could pose a major problem. "It's the risk of all of the system together relying on concentrated data aggregators, concentrated generative AI that is likely to appear pretty quickly."
Expect to hear more about this from Gensler and the SEC in the future, though at this point it's unlikely to displace crypto as a regulatory priority.
Subscribe to our newsletter and follow us on Twitter.