SEC Chair raises concerns over AI ‘monoculture’ impacting financial system stability

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By Carina

SEC Chair Gary Gensler recently expressed concerns about the potential fragility of the financial system due to the centralization of artificial intelligence (AI). 

Speaking at a Public Citizen-hosted virtual discussion, Gensler compared the growth and centralization of AI to the dominance seen in search engines and cloud services. 

SEC Gensler highlights AI monoculture risk and financial fragility

He highlighted the risk of a “monoculture,” where numerous financial entities might rely on a central data source or a single platform, potentially leading to system-wide vulnerabilities.

Gensler, one of America’s top financial regulators, used an analogy to illustrate his point: “Count up on the fingers of one hand how many cloud providers we have in the U.S., and in even fewer fingers on the hand how many platforms we have to do search, dominant search in this world,” he said. 

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His remarks underscore the dominance of a few companies in these sectors, with Google, for instance, holding 88 percent of the search engine market. 

He emphasized the need for diversity in models and data sources, warning that without it, the financial system could become “pretty fragile.”

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Gensler warns of AI overhype and risks in finance

AI’s ubiquity in financial markets is evident, with nearly 200 S&P 500 companies mentioning it in their earnings calls, as per FactSet data. 

However, Gensler warned of a scenario reminiscent of the late 1990s dot-com bubble, where AI’s hype could lead to overpromising and misleading investors. 

He cautioned, “One shouldn’t greenwash, and one shouldn’t AI-wash,” at a December conference hosted by The Messenger. 

His concerns extend to the financial markets’ reliance on limited AI models, potentially leading to systemic risks and “herding” behaviors.

Gensler’s warnings of AI-triggered financial crisis

Gensler’s apprehensions about AI-induced financial instability have been vocal. 

In an interview with MarketWatch, he stated, “A growing issue is that [AI] could lead to a risk in the whole system,” as financial actors might depend on a few models. 

His blunt assessment in an interview with the Financial Times suggested that AI could ignite a financial crisis within a decade, possibly in sectors like mortgages or equities.

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Consumer watchdog’s report and global economic impact

Consumer Watchdog’s report “Hallucinating Risk,” released on Jan. 11, echoed Gensler’s concerns, suggesting AI could cause the next financial crisis. 

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Justin Kloczko of Consumer Watchdog warned, “Absent proper regulation, the next financial crisis could be caused by AI.” 

The report points to risks in the housing or equity market due to reliance on biased algorithms.

Global economic transformations and inequality concerns

The impact of AI on the global economy is under scrutiny by economists, market analysts, and policymakers. 

The International Monetary Fund (IMF) estimated that about 40 percent of jobs worldwide could be impacted by AI, potentially exacerbating inequality. 

IMF director Kristalina Georgieva noted, “In most scenarios, AI will likely worsen overall inequality.” 

In advanced economies, up to 60 percent of jobs could be affected, with many disappearing or undergoing significant changes due to AI.

Rising global investment in AI amidst Gensler’s risk warnings

Despite these concerns, the international economy is enthusiastic about AI. 

IDC forecasted a substantial increase in corporate spending on AI infrastructure, services, and software, projected to reach $143 billion in 2027, up from $16 billion in 2023. 

They also estimated that worldwide spending on AI systems would surpass $300 billion by 2026, indicating a significant investment surge in this technology.

Gensler’s warnings and the broader economic predictions point to a future where AI’s benefits are counterbalanced by potential risks and challenges, necessitating careful consideration and regulation.

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