AI-caused financial crisis ‘nearly unavoidable’ without regulation: SEC chief

The head of the Securities and Exchange Commission (SEC) warned that a financial crisis caused by artificial intelligence (AI) is “nearly unavoidable” in the next decade without further regulation of the rapidly advancing technology.

“It’s frankly a hard challenge,” SEC Chairman Gary Gensler told the Financial Times. “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.”

“And this is about a horizontal [matter whereby] many institutions might be relying on the same underlying base model or underlying data aggregator,” he continued.

Gensler predicted that a financial crisis could occur in the late 2020s or early 2030s, warning that multiple institutions basing their decisions on the same models could lead to herd mentality and undermine stability.

“I do think we will in the future have a financial crisis … [and] in the after action reports people will say ‘Aha! There was either one data aggregator or one model … we’ve relied on,’” he added.

Under Gensler’s leadership, the SEC is seeking to rein in the use of AI by broker-dealers and investment advisers with a new rule proposed in July. 

The rule, which has faced pushback from Republican lawmakers and industry groups, would bar firms from using predictive data analytics and similar technologies, including AI, in a way that puts their interests above those of investors.

Gensler told the Financial Times, however, that the proposed rule does not solve the “horizontal issue” that he warned could eventually produce a financial crisis.