In an exclusive interview with MarketWatch, Securities and Exchange Commission Chair Gary Gensler expressed his apprehension regarding the widespread adoption of artificial intelligence (AI) technology and warned about its potential to spark a financial crisis. Gensler highlighted the risks associated with generative AI technologies, particularly in the realm of financial investments.

Gensler acknowledged that AI has the ability to revolutionize investment practices by leveraging vast amounts of data to make predictions that were previously unimaginable. However, he emphasized that such newfound powers also come with significant dangers. One of the key concerns raised by the SEC Chair is the "monoculture" that could be created as many financial actors rely on a limited number of AI models.

The "herding effect" resulting from this monoculture can have severe consequences, especially if there is a flaw in the AI model. Gensler cautioned that during times of market stress, this flaw could lead to abrupt and unpredictable price changes, reverberating throughout the financial markets. To illustrate his point, Gensler drew attention to the dominance of one or two major players in markets such as cloud computing and search engines, expressing worries about a similar concentration in the AI technology market.

The fragmented nature of the U.S. regulatory apparatus further complicates this issue, with different agencies having responsibilities for overseeing different sectors. Gensler acknowledged that addressing the potential risks of AI technology is a cross-entity issue, requiring cooperation among regulatory bodies.

While Gensler has been instrumental in the SEC's crackdown on the cryptocurrency industry, including lawsuits against Binance and Coinbase, he has now turned his attention to AI. The SEC is contemplating new rules to regulate the use of AI in financial activities. One proposed rule aims to address conflicts of interest associated with stock brokers and investment advisors using AI-powered algorithms to guide investor decisions.

The industry, however, has pushed back against the proposal, arguing that existing regulations are sufficient to protect investors and that new rules would hinder technological advancements that enhance client experiences. Gensler acknowledged the industry's feedback but remained firm in his belief that regulators need to remain vigilant regarding the impact of predictive analytical tools on financial decisions.

As the SEC continues its efforts to bring order and fairness to the capital markets, Gensler stressed the importance of addressing conflicts arising from AI technology, particularly when it comes to financial matters. While he acknowledged the positive impact of AI in other sectors, Gensler believes that precautionary measures are necessary to prevent potential harm to investors.

The SEC Chair's concerns over the potential risks associated with AI and his determination to regulate its usage in the financial industry solidify his position as one of the most influential figures in the markets. As new rules are contemplated and debated, the future regulation of AI in the financial sector remains uncertain, but Gensler's alarm bells have begun to ring, urging stakeholders to recognize the significance of this potential risk.