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SEC's Gensler says AI will cause ‘the crisis of 2027' and crypto is ‘non-compliant' by design

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(Kitco News) - U.S. Securities and Exchange Commission (SEC) Chair Gary Gensler said token issuers and crypto exchanges are “generally non-compliant” by design, and AI could to be the source of “the crisis of 2027 or 2032.”

During a question-and-answer session following his keynote address at a Federal Reserve Bank of Atlanta conference on Monday, he was asked about the agency’s ongoing dispute with Coinbase and why the SEC seemingly doesn't want to publish rules for the crypto market.

Gensler replied that the rules had already been published.

“This is a field that has been operating largely non-compliant,” he said. “Our agency has put out rules about what it is to be an exchange, what it means to be a broker dealer, what it means to be an advisor, or to custody assets, and how to register a securities offering. Those rules are in existence and there's nothing about a new technology that makes it non-consistent with the public policies that Congress has laid out.”

Gensler reiterated that if the public is investing money and is anticipating profit based upon the efforts of others, that constitutes a security and an investment contract, and crypto fits the bill. “There's financial intermediaries in the middle, nodes in the network, and they need to come into compliance if they've got securities on their platforms,” he said.

The SEC Chair was also asked if he believed his agency had fallen behind in enforcement regarding cryptocurrencies. Gensler pointed out that the agency has brought about 140 cases, including 60 while he was at the helm.

He also pushed back against the idea that the cryptosphere is truly decentralized. “It's a false narrative to say that these things are that decentralized,” he said. “They tend towards centralization. If there's 12,000 or 23,000 tokens, you can find some group of entrepreneurs in a website or a Reddit channel or a Twitter channel around most of these.”

Gensler said the SEC is ready to help digital asset issuers and intermediaries come into compliance, but the fault lies in their own structures and business practices. “Their business models tend to be built on non-compliance,” he said. “We wouldn't let the New York Stock Exchange also operate direct on the exchange as market makers, as a hedge fund, and commingle all these things, or to have a token themselves and to raise money off of their own token, leverage off of it, borrow against the token, and not even give public disclosure.”

He said that SEC rules require token issuers to register and have “full, fair and truthful disclosure,” Gensler said, and intermediaries must register and address their conflicts of interests, “otherwise it's going to be problematic.”

Gensler also attempted to link the crypto ecosystem to the recent bank failures in the United States. “Out of the four banks that failed, two of them had significant crypto books, the third one had a significant stablecoin issuer put their deposits there, and it actually led to a depegging for the second largest stable coin operator,” he said. “So there was even some interconnectedness in crypto markets and crypto actors with at least three of these banks.”

Gensler fielded another question about the potential risks to financial stability posed by artificial intelligence, and he expressed grave concern about the potential impact of AI in the near term.

“I think that we're in one of the most transformative times certainly in my life, and even every bit as transformative as the internet itself,” he said, and that it has already started to transform a number of fields, including finance.

He said the concentration of these tools and the financial industry’s reliance on them could entail significant risk. “Will we have more concentration and interconnectedness?” he asked. “How many generative AI based layers are we going to have in the U.S.? Is it going to be two, three, four? It's probably going to be highly concentrated.”

Gensler said that opacity is another recurring issue in the history of financial crises, and it’s an issue with AI as well. “They talk about explainability or opacity, and we've seen financial crises over the decades that come from this, whether it's the opacity in the mortgage market and the credit default swaps market, whether it's other opacities that we've seen in the explainability of the models themselves,” he said.

Gensler said “the crisis of 2027 or 2032” could be caused by people relying on the same AI-based mortgage data aggregator, underwriting tool or sentiment analysis level, with catastrophic results. “Just basic network economics coupled with this remarkable technology.”

As entire industries and areas of the economy begin to rely upon AI, Gensler said the technology could pose a systemic risk in the very near future. “It's the risk of all of the system together relying on concentrated data aggregators, concentrated generative AI that is likely to appear pretty quickly.”

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