SEC Chair Gary Gensler Talks AI and Crypto

Published Oct 22, 2024, 4:25 PM

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US Securities and Exchange Commission Chair Gary Gensler talks about the challenges around regulating artificial intelligence and cryptocurrencies with Bloomberg's Ed Ludlow and Caroline Hyde

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We want to welcome our Bloomberg radio and television audience right now to a special conversation with us SEC Chair Gary Glentzler and mister Gensler. The SEC clearly looking closer at the use of AI tools in finance. We know that from the agency's latest exam priorities. But in parallel a year ago, you embarked on this rule making process. And I want to start by asking what sort of additional authority or power you feel you need through a rule that you wouldn't be able to regulate through through examinations.

So let me say this.

I think that the use of artificial intelligence, which has been around for at least ten years, has taken on and it's an important transformative part of our economy. Every bit is transformative, is the internet more? Every bit is transformative as one hundred years ago when we electrified so many things in our markets, our factories, the automobile, the refrigerator. That transformative in finance. It's being used today by many brokerage apps and investment advisors when they're selling to the public, just as when we're looking at movie apps that have figured out long ago that I'm a rom Com type of guy, and I want to watch those movies, and so it's to ensure that in the algorithm, in the actual math of the algorithm, that they ensure that they put the public's interests, their customers interest ahead of the investment advisor and broker dealer.

That's it in a nutshell.

In a nutshell, do you think that there's financial systemic risk still looming large because of adoption of AI and AI models ultimately being too similar from one brokerage to the next.

I do think.

So I said, I like rom coms, so I'll just go with that wonderful movie her. When Scarlett Johanson, you know, played this virtual assistant when she went offline late in the movie three hundred and sixteen, folks were broken hearted. We could see that in finance there's right now two or three large cloud providers that are backing some of the biggest investments in what's called generative AI. As the financial sector more and more relies on those big base models, it is not only possible but likely that some financial crisis in the future is that everybody's relying on it. And whether it's like Scarlett Johansson going offline, or if Scarlett Johansson of the future I'm talking about the AA model is hurting and taking the capital markets off of some you know, various cliff and I think that's a hard project to solve because of the dominance of a few base models likely in the future.

Do therefore more clear rules need to be envisaged.

Here is examination the tool of choice.

So I'm separating out there's important.

Investor protection issues directly about the conflicts, and I think we can do that and proceed for I've asked staff for recommendations on a reproposal of that role. I think a secondary we didn't talk about is fraud.

Fraud is fraud.

If you use the algorithm and the AI model to defraud the public, it's still fraud. But I think that that's going to play out not only for US, but in other agencies around the country, the Federal Trade Commission and elsewhere.

But on these systemic issues.

On these systemic issues, I think it's a tough challenge that global regulators need to come together and how do we protect against what is likely to be a very concentrated, interconnected system that's relying you know, like I say, three hundred and sixteen. Relying on Scarlet Johansson for their love was one thing in a fictional movie.

But what do we do here?

If you're just joining us on Bloomberg Television and radio, we're speaking with the SEC chair, Gary Gensler and mister Ginsy. You're also busy in parallel with the crypto industry. I think there's consensus on the eve of an election that all of those parties involved in responsible want to hammer out some sort of new jurisdictional framework for crypto regulators to make some progress on settling oversight of that industry. Can you talk to us about the work you're doing there and if you're making any progress in that field.

Look, there's nothing incompatible about the ledger technology. You know, it's just this Halloween, it will be sixteen years since Toshinakamoto wrote that white paper, So happy sweet sixteen in a week. There's nothing incompatible about a ledger technology, decentralized ledger technology, and the securities laws. And it's important that in the securities market that investors get to decide on their investments, but they get the proper disclosure that we goard against conflicts of interest and the like, and we're going to continue to do that at the Securities and Exchange Commission. If a market's ever going to have trust, it also needs to come into compliance and a lot of this field, and we've seen the challenges in this field where a lot of people have lost money. Regular investors have lost money in the field that's not providing the fundamental disclosure about their projects, about these investment contracts and these schemes, and that's a field that has a lot of conflicts in the middle of it.

Something interesting has been happening over the last year where you've been focusing on policy and regulation in the Fifth Circuit Court of Appeals, there have been many suits filed in what is a kind of business friendly court. How do you have to respond to that and adjust the policy side in response to the litigation side.

Mist Genza No No. I think it's a really good question. We do everything we do within the law, and how.

The courts interpret the law.

The courts interpret it differently, we adjust.

That's what we do.

It's part of our great democracy. But I do think that we're focused every day on how we drive lower cost in the system. That's why we did Equity Market reform, I would note unanimously through our five member commission. That's why we've worked so hard on the treasury markets, this twenty eight trillion market at the base of our capital markets and driving lower cost which is called efficiency, and lower risk which is called resiliency in these really consequential, significant markets.

Just for a moment, reminding our TV and radio audience, we are in a conversation with SEC Chair Gary Gensler, and just to stick with the crypto aspect for a moment more. There is, though this ongoing narrative that you haven't changed that much, you haven't adjusted much in terms of it is regulation via enforcement? Will that change?

Ultimately?

Do you see laws coming to bear from Congress rather than you having to enforce via enforced and regulate Caroline.

We have benefited for nine decades from robust laws from Congress and rules from various agencies, not just the SEC, but the Commodity Future's Trading Commission, another significant and great agency that I was honored a chair, to help promote the markets, to protect investors, to promote capital formation and the markets in the middle. And that's what will continue to do, whether it's related to the stock markets, fifty sixty trillion dollars stock markets, whether it's related to the treasury markets as I said, nearly thirty trillion dollars, whether it's related to the bonds and fixed income markets, and yes, even related to this newer market, where as I said, all too many people have been hurt. All too many people have lost money and lined up in bankruptcy court to deal with their claims. And fundamentally, what President Roosevelt laid out and has been looked at over the years, Congress could adjust, but at the fundamentally it's about disclosure to the public, so the publicing decide, and then guarding the public against the conflicts and the fraud and things that happen in the capital markets that are unregulated.

We saw that happen in the nineteen twenties.

None of us were alive, but you can read about it, and we don't want that to happen to the investing public and undermine the trust in the overall capital markets as we know them.

Talking of disclosures, one disclosure from former President Trump is that he would fire you ultimately unsurprising to you, I'm sure. But also he's got some plans, purported plans of course to introduce his own crypto platform and has been working on it.

What do you make of that.

I'm not going to comment on any one project. I think your viewing audience can appreciate that.

It's just not what we do.

And so Caroline, I'll let you go to your next question.

Well missed against the I'll jump in.

You talked about the investing public that you serve, right and there is something happening where private credit firms are take private market assets where you could debate the real valuation, and they're wrapping them in products like ETFs that are somewhat sort of more retail friendly. It's a new area, it's something interesting happening, and I know it's an intense interest to our audience. How do you regulate that? And how much are you personally thinking about that?

Right now? Let me put it in context.

There are dollar credit markets where you can your commercial credit and you're borrowing probably worldwideer in access of thirty trillion dollars, and banks and non banks alike play important roles in that. And so what we've private credit existed when I started at Goldman Sachs forty some years ago. I mean, there were direct loans that could be made outside of the banking system, but today you've seen a growing share.

Involved in that.

I think that competition is good for borrowers, investors, savers and the like. That's that's competition in our capital markets. But it still has to sort of comply with the basic tenets of risk management, disclosure, transparency and the like.

Our role in.

It as a capital markets, you know, oversight is an important one. But I think the competition is actually benefiting a lot of borrowers. I would note this, it hasn't at this size, it hasn't lived through a downturn, so it hasn't been tested in you know, the inevitable at some point downturns that would come. There's also some intersections between this private credit merging system and the insurance sector and the banking sector. But particularly it's intersection with the insurance sector. That's you know, bears look and ratings as well, the use of private letter.

Ratings on some of this.

So we're looking at some of this, but I think overall it's capital markets benefiting and the public benefiting from competition.

Apollo in State Street have such a private market ETF pending before the SEC. My colleagues tell me it's controversial. What can you tell me about that specific case study?

I guess I could tell you the same thing I told Caroline earlier, that you know, in a role like mine.

I'm a very asked to be disciplined.

I try to state this with I don't comment on specific prod docs or projects that may be in front of the staff or in front of our five member commission. So I'm going to demure on that. But I hope you're listening public understands why.

Do you worry about that ill liquidity mismatch though a potential one.

Look, there's an ill liquidity mismatch in banks. So our twenty six trillion dollar banking system in the US has twenty trillion dollars in deposits, runnable deposits. Of course, a lot of them are insured, but a lot of them are uninsured. And so banks themselves transform liquidity, transform what's called maturity or duration, And then you think about it.

In the non.

Bank sector, you have, frankly, a better match of maturity of the liability side of a private fund and the assets they hold.

So it may it's not without risk, but.

It might be in a part of the market that they can better bear that ill liquidity risk.

It's really interesting how you've got this is a line of sight. But also everything we've just articulated AI crypto private markets a lot to get on with. And your term is what until June twenty twenty six. But will it run until then? Many feel that perhaps not. What do you want to get done in the remaining months or so?

Look, I think it's the greatest privilege of my life, other than having these three wonderful daughters that I have. But I'm talking about professional privilege. And so every day I come into work and think with my colleagues and fellow commissioners, how do we get things done for the investing public and the issuing public that the markets in the middle work for them, Not that the issuers and the investors are working for the intermediaries and the markets in the middle, but the markets work for them.

So that's like lowering.

Cost through competition, transparency and the like, and access to the markets, and then resiliency trying to use like central clearing and so forth, the backside and the plumbing. So we've gotten we laid out an agenda of fifty or fifty five projects three and a half years ago, we've actually gone.

Across the line, proposed and.

Adopted forty three of those. You can do the math the other projects, A number of them I've asked staff to we consider possible reproposals.

But we're still working.

On some rules around the market, structure of the treasury market, some rules around central clearing and segregation of funds and the like. But we're going to continue to move forward, you know, and elections have consequences.

That's a great thing of our democracy. They do.

SEC Chair Gary Gensler, I'll let you return to some rom coms. Thank you so much.

Thanks

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