SEC chairman forecasts AI-fueled financial crisis within a decade

A devastating economic crisis caused by artificial intelligence will arrive within the next 10 years absent more regulation, according to U.S. Securities and Exchange Commission Chairman Gary Gensler.

The stock market’s top cop is increasingly warning of a tech-fueled disaster as he looks to build support for his agency’s proposed regulation related to AI.

Mr. Gensler told the Financial Times that a crisis triggered by AI within a decade was “nearly unavoidable” unless the government intervened to address the technology. He guessed homeowners and stockholders may be affected by the crisis he envisions. 

“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,’” Mr. Gensler said. “Maybe it’s in the mortgage market. Maybe it’s in some sector of the equity market.”

The chairman has long anticipated that AI will cause a financial crisis, but he has sounded more panicked in recent months since his agency proposed new regulations for the technology.  

Ahead of his agency proposing new rules addressing AI in July, Mr. Gensler said at the National Press Club that “AI may heighten financial fragility.”

His remarks were consistent with a paper he co-authored as a professor at the Massachusetts Institute of Technology in 2020 that said a subset of AI called “deep learning” could increase systemic risks. 

In July, the chairman announced his team would propose rules to govern the use of predictive analytics and other tech used by broker-dealers and investment advisers. The proposal pushes investment firms to neutralize any actions putting a firm’s interest ahead of its investors resulting from using new tech tools. 

As his agency has looked for support for the rules, Mr. Gensler’s tone about AI has grown increasingly dire. 

AI technology “will be the center of future crises, future financial crises,” he told The New York Times in August. 

People will call the coming AI disasters “the crisis of 2032 or 2028 or whatever,” Mr. Gensler told Bloomberg, also in August. 

Criticism of the rules proposed by Mr. Gensler’s agency, meanwhile, has grown. 

State financial officers from 15 states expressed opposition to the rules last week in a letter organized under the conservative State Financial Officers Foundation. 

The states’ treasurers and auditors complained that the SEC’s proposed regulation would be expensive and discourage the use of new tech. 

“The SEC justifies the Proposed Rules’ significant costs and sweeping application based on its fear that new technology could create issues, but fails to provide any real-world examples or evidence justifying this fear,” the financial officers wrote. “Rather than focusing on its fears, the SEC should consider the facts: The Proposed Rules will result in higher costs and less competition for our states and for other investors in our states.”

Mr. Gensler told the Financial Times that the rules proposed in July addressing broker-dealers may not reach the Big Tech companies responsible for the AI models used by investors. He called it a “cross-regulatory challenge” and a complicated problem to solve.