- The financial markets have begun to incorporate AI into various products and services.
- The use of AI in DeFi systems has the potential to complicate regulatory matters.
Concerning the use of AI in the financial markets, particularly decentralized finance, Kristin Johnson of the Commodity Futures Trading Commission (CFTC) has suggested measures including increased fines.
Johnson expressed her worries on artificial intelligence and its implications for deregulation of financial markets in a speech she gave at the Fintech and Blockchain Symposium co-hosted by Sidley Austin and Rutgers Law School.
Johnson stated:
“Deploying AI in ecosystems running on blockchain technology raises novel issues for supervision, risk management, and compliance, as well as enforcement.”
Complicating Regulatory Matters
The financial markets have begun to incorporate AI into various products and services, such as robo-advisers, compliance programs, and brokerage applications. Algorithmic and automated trading are two areas where DeFi may make use of AI, as per Johnson.
Regulators are worried about potential dangers associated with AI, including prejudice, manipulation, and fraud, as well as issues related to consumer protection. According to Johnson, one problem with DeFi is that, unlike conventional markets, it does not have a central party.
The Commissioner further added:
“Decentralized autonomous organizations and the use of non-intermediated market structures by blockchain-based platforms may depart from these assumptions in important ways.”
The use of AI in DeFi systems has the potential to complicate regulatory matters, especially when it comes to supervisory duties and responsibility for following important and long-standing rules like the Bank Secrecy Act, which is meant to combat the dangers of illicit financing and money laundering in our financial system.
Johnson urged the CFTC to tackle AI in general with a principles-based strategy. More severe punishments should be meted out to those who “intentionally” manipulate markets, commit fraud, or otherwise circumvent AI regulations.
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