Artificial intelligence “could contribute to breakthroughs,” Commodity Futures Trading Commission Commissioner Christy Goldsmith Romero acknowledged in a keynote speech today, but stressed that regulators “must manage risks so we can deliver on these promises.”
Romero’s remarks were the highlight of the first day of the annual Financial Services Conference hosted by the Consumer Federation of America in Washington, DC.
“In terms of protecting financial stability, particularly when it comes to AI models, there can be great promises and great risks,” she said. “It is important that regulators increase their capacity to understand AI and monitor how AI is used in regulated financial services.”
Romero said AI regulation is a “critical issue” and explained that “data and assumptions matter” in AI models. She cited “concentration risk” as a possible disadvantage: Since developing AI can be very expensive, we may only be able to rely on a few models.
“Overreliance on a few AI models could lead to herd behavior,” she said, citing SEC Chairman Gary Gensler.
“Who makes decisions, including determining whether the use of AI is responsible?” Romero asked. “In the CFTC space, the use of AI for algorithmic trading, trade execution, margin calls, collateral management, or other areas that could potentially impact financial stability should be accompanied by strong governance provisions.”
The commissioner said fair lending practices could also be compromised as AI technologies come under fire for intrinsic bias based on incomplete training data.
“Where a technology like AI is evolving rapidly, regulatory coordination is particularly important,” she said. citing a recent executive order on AI issued by President Biden.
The commissioner also warned of potential conflicts of interest and risks posed by cryptocurrency trading platforms whose subsidiaries also perform exchange and clearinghouse functions.
“Regulators should exercise caution when considering changes in market structure and first determine that they do not result in increased risk, particularly to customers and financial stability,” she said.
Romero cited the collapsed crypto exchange FTX as an example of the dangers of “tailor-made” market structures.
“In October 2022, a few weeks before the FTX collapse, I warned about financial stability risks in cryptocurrencies,” she said. “Crypto-related businesses may serve multiple functions that are divided into different entities in traditional finance [and] These conflicts pose a significant risk that they would be disclosed and resolved in a regulated environment.
“In an unregulated environment, the full extent of these conflicts may not be disclosed or resolved, which could lead to cascading losses and risk of contagion,” she recalled in her letter. “We know how FTX’s story ended.”
More broadly, Romero also warned against reversing reforms enacted after the 2008 financial crisis.
“Regulators should not back down and return to an era of uncontrolled risk-taking that is making our financial system unstable and putting consumers in a pinch,” she said, adding that the U.S. “is not retreating from the improved financial stability of the last 15 years.” to let ourselves be guided.” to relax our guard.
She called on public interest groups like the Consumer Federation of America to get involved as regulators consider post-crisis rule changes.
As a derivatives regulator, the CFTC has assumed an important oversight role related to cryptocurrency markets, and the agency has launched dozens of enforcement actions against crypto fraud and manipulation in recent years. Commissioners have also highlighted the need to ensure responsible innovation in this sector.
Goldsmith Romero previously served as special inspector general for a decade, overseeing the government’s response to the 2008 financial crisis. President Biden appointed the CFTC commissioner and took office in March.
Editor’s Note: This story was written with Decrypt AI from sources referenced in the text and fact-checked by Ozawa.
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