At DC Fintech Week, SEC Chair Gary Gensler raised concerns about how financial technology, specifically machine learning, artificial intelligence ("ML/AI") and crypto, has disrupted traditional business models.
Mr. Gensler highlighted that financial technology (i) provides direct access to trading and lending platforms (thereby bypassing regulated brokers), (ii) decentralizes finance, and (iii) increases risk given the development of stablecoins.
Mr. Gensler expressed concerns that digital analytics could:
- be deployed by platforms to optimize for revenue, as opposed to solely for investor returns;
- reinforce societal inequalities embedded in data;
- use modern algorithms that are increasingly more difficult to explain, posing various challenges, including to the Fair Credit Reporting Act requirement that provides for an explanation if a loan is denied; and
- create system-wide issues stemming from herding, interconnectedness and dataset concentration.
Mr. Gensler noted that ML/AI "are changing decision-making and the models behind that decision-making more dramatically than crypto."
Commentary
What are the consequences of Chair Gensler's oft-repeated "technology neutral," but not "public policy-neutral" regulatory approach? From a purely administrative perspective, it seems that technology neutral financial regulation may have the benefit of (i) "future-proofing" law by making it more adaptable to various technological advances and (ii) providing for more equal application of financial regulation by, in effect, treating all new technologies on an equivalent basis. As an economic and public policy matter, technology neutral financial regulation appears to leave financial markets as the primary driver of determining which fintech developments succeed and are broadly adopted.
Yet this approach also raises a number of questions. For example, can financial regulation that seeks to promote public policy goals really ever be called "technology neutral"? Don't the social and political values inherent in public policy goals effectively serve as limits on the scope and role of financial technologies? Relatedly, as has been seen with issues surrounding ML/AI, isn't the development of some technologies rooted, to some extent, in the social and political understandings of the developers? To paraphrase one communications theorist: to what extent is the medium the message?
Assuming technology neutral financial regulation can exist, how can such regulation adequately address and account for new financial products (such as cryptocurrencies) that are, by their very nature, based on and rooted in the development of novel technological platforms (e.g., blockchain and distributed ledger technologies) without considering the underlying technology itself? Can such digitally native financial products really be so neatly separated from their underlying technologies? If so, in which contexts and under what conditions?
It would be helpful to clarify the concept of technology neutrality, and what that means for the SEC's regulation of ML/AI, crypto and other fintech developments.
Cadwalader's Steven Lofchie contributed to this comment.
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