WEBVTT - SEC Chair Gary Gensler Talks AI and Crypto

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>We want to welcome our Bloomberg radio and television audience

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<v Speaker 2>right now to a special conversation with us SEC Chair

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<v Speaker 2>Gary Glentzler and mister Gensler. The SEC clearly looking closer

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<v Speaker 2>at the use of AI tools in finance. We know

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<v Speaker 2>that from the agency's latest exam priorities. But in parallel

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<v Speaker 2>a year ago, you embarked on this rule making process.

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<v Speaker 2>And I want to start by asking what sort of

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<v Speaker 2>additional authority or power you feel you need through a

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<v Speaker 2>rule that you wouldn't be able to regulate through through examinations.

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<v Speaker 3>So let me say this.

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<v Speaker 1>I think that the use of artificial intelligence, which has

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<v Speaker 1>been around for at least ten years, has taken on

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<v Speaker 1>and it's an important transformative part of our economy. Every

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<v Speaker 1>bit is transformative, is the internet more? Every bit is

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<v Speaker 1>transformative as one hundred years ago when we electrified so

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<v Speaker 1>many things in our markets, our factories, the automobile, the refrigerator.

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<v Speaker 1>That transformative in finance. It's being used today by many

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<v Speaker 1>brokerage apps and investment advisors when they're selling to the public,

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<v Speaker 1>just as when we're looking at movie apps that have

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<v Speaker 1>figured out long ago that I'm a rom Com type

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<v Speaker 1>of guy, and I want to watch those movies, and

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<v Speaker 1>so it's to ensure that in the algorithm, in the

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<v Speaker 1>actual math of the algorithm, that they ensure that they

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<v Speaker 1>put the public's interests, their customers interest ahead of the

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<v Speaker 1>investment advisor and broker dealer.

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<v Speaker 3>That's it in a nutshell.

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<v Speaker 4>In a nutshell, do you think that there's financial systemic

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<v Speaker 4>risk still looming large because of adoption of AI and

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<v Speaker 4>AI models ultimately being too similar from one brokerage to

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<v Speaker 4>the next.

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<v Speaker 3>I do think.

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<v Speaker 1>So I said, I like rom coms, so I'll just

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<v Speaker 1>go with that wonderful movie her. When Scarlett Johanson, you know,

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<v Speaker 1>played this virtual assistant when she went offline late in

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<v Speaker 1>the movie three hundred and sixteen, folks were broken hearted.

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<v Speaker 1>We could see that in finance there's right now two

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<v Speaker 1>or three large cloud providers that are backing some of

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<v Speaker 1>the biggest investments in what's called generative AI. As the

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<v Speaker 1>financial sector more and more relies on those big base models,

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<v Speaker 1>it is not only possible but likely that some financial

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<v Speaker 1>crisis in the future is that everybody's relying on it.

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<v Speaker 1>And whether it's like Scarlett Johansson going offline, or if

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<v Speaker 1>Scarlett Johansson of the future I'm talking about the AA

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<v Speaker 1>model is hurting and taking the capital markets off of

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<v Speaker 1>some you know, various cliff and I think that's a

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<v Speaker 1>hard project to solve because of the dominance of a

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<v Speaker 1>few base models likely in the future.

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<v Speaker 3>Do therefore more clear rules need to be envisaged.

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<v Speaker 4>Here is examination the tool of choice.

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<v Speaker 3>So I'm separating out there's important.

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<v Speaker 1>Investor protection issues directly about the conflicts, and I think

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<v Speaker 1>we can do that and proceed for I've asked staff

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<v Speaker 1>for recommendations on a reproposal of that role. I think

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<v Speaker 1>a secondary we didn't talk about is fraud.

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<v Speaker 3>Fraud is fraud.

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<v Speaker 1>If you use the algorithm and the AI model to

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<v Speaker 1>defraud the public, it's still fraud. But I think that

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<v Speaker 1>that's going to play out not only for US, but

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<v Speaker 1>in other agencies around the country, the Federal Trade Commission

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<v Speaker 1>and elsewhere.

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<v Speaker 3>But on these systemic issues.

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<v Speaker 1>On these systemic issues, I think it's a tough challenge

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<v Speaker 1>that global regulators need to come together and how do

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<v Speaker 1>we protect against what is likely to be a very concentrated,

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<v Speaker 1>interconnected system that's relying you know, like I say, three

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<v Speaker 1>hundred and sixteen. Relying on Scarlet Johansson for their love

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<v Speaker 1>was one thing in a fictional movie.

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<v Speaker 3>But what do we do here?

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<v Speaker 2>If you're just joining us on Bloomberg Television and radio,

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<v Speaker 2>we're speaking with the SEC chair, Gary Gensler and mister Ginsy.

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<v Speaker 2>You're also busy in parallel with the crypto industry. I

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<v Speaker 2>think there's consensus on the eve of an election that

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<v Speaker 2>all of those parties involved in responsible want to hammer

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<v Speaker 2>out some sort of new jurisdictional framework for crypto regulators

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<v Speaker 2>to make some progress on settling oversight of that industry.

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<v Speaker 2>Can you talk to us about the work you're doing

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<v Speaker 2>there and if you're making any progress in that field.

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<v Speaker 1>Look, there's nothing incompatible about the ledger technology. You know,

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<v Speaker 1>it's just this Halloween, it will be sixteen years since

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<v Speaker 1>Toshinakamoto wrote that white paper, So happy sweet sixteen in

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<v Speaker 1>a week. There's nothing incompatible about a ledger technology, decentralized

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<v Speaker 1>ledger technology, and the securities laws. And it's important that

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<v Speaker 1>in the securities market that investors get to decide on

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<v Speaker 1>their investments, but they get the proper disclosure that we

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<v Speaker 1>goard against conflicts of interest and the like, and we're

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<v Speaker 1>going to continue to do that at the Securities and

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<v Speaker 1>Exchange Commission. If a market's ever going to have trust,

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<v Speaker 1>it also needs to come into compliance and a lot

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<v Speaker 1>of this field, and we've seen the challenges in this

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<v Speaker 1>field where a lot of people have lost money. Regular

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<v Speaker 1>investors have lost money in the field that's not providing

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<v Speaker 1>the fundamental disclosure about their projects, about these investment contracts

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<v Speaker 1>and these schemes, and that's a field that has a

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<v Speaker 1>lot of conflicts in the middle of it.

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<v Speaker 2>Something interesting has been happening over the last year where

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<v Speaker 2>you've been focusing on policy and regulation in the Fifth

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<v Speaker 2>Circuit Court of Appeals, there have been many suits filed

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<v Speaker 2>in what is a kind of business friendly court. How

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<v Speaker 2>do you have to respond to that and adjust the

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<v Speaker 2>policy side in response to the litigation side.

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<v Speaker 1>Mist Genza No No. I think it's a really good question.

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<v Speaker 1>We do everything we do within the law, and how.

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<v Speaker 3>The courts interpret the law.

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<v Speaker 1>The courts interpret it differently, we adjust.

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<v Speaker 3>That's what we do.

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<v Speaker 1>It's part of our great democracy. But I do think

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<v Speaker 1>that we're focused every day on how we drive lower

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<v Speaker 1>cost in the system. That's why we did Equity Market reform,

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<v Speaker 1>I would note unanimously through our five member commission. That's

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<v Speaker 1>why we've worked so hard on the treasury markets, this

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<v Speaker 1>twenty eight trillion market at the base of our capital

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<v Speaker 1>markets and driving lower cost which is called efficiency, and

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<v Speaker 1>lower risk which is called resiliency in these really consequential,

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<v Speaker 1>significant markets.

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<v Speaker 4>Just for a moment, reminding our TV and radio audience,

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<v Speaker 4>we are in a conversation with SEC Chair Gary Gensler,

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<v Speaker 4>and just to stick with the crypto aspect for a

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<v Speaker 4>moment more. There is, though this ongoing narrative that you

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<v Speaker 4>haven't changed that much, you haven't adjusted much in terms

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<v Speaker 4>of it is regulation via enforcement? Will that change?

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<v Speaker 3>Ultimately?

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<v Speaker 4>Do you see laws coming to bear from Congress rather

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<v Speaker 4>than you having to enforce via enforced and regulate Caroline.

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<v Speaker 1>We have benefited for nine decades from robust laws from

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<v Speaker 1>Congress and rules from various agencies, not just the SEC,

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<v Speaker 1>but the Commodity Future's Trading Commission, another significant and great

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<v Speaker 1>agency that I was honored a chair, to help promote

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<v Speaker 1>the markets, to protect investors, to promote capital formation and

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<v Speaker 1>the markets in the middle. And that's what will continue

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<v Speaker 1>to do, whether it's related to the stock markets, fifty

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<v Speaker 1>sixty trillion dollars stock markets, whether it's related to the

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<v Speaker 1>treasury markets as I said, nearly thirty trillion dollars, whether

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<v Speaker 1>it's related to the bonds and fixed income markets, and yes,

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<v Speaker 1>even related to this newer market, where as I said,

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<v Speaker 1>all too many people have been hurt. All too many

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<v Speaker 1>people have lost money and lined up in bankruptcy court

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<v Speaker 1>to deal with their claims. And fundamentally, what President Roosevelt

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<v Speaker 1>laid out and has been looked at over the years,

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<v Speaker 1>Congress could adjust, but at the fundamentally it's about disclosure

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<v Speaker 1>to the public, so the publicing decide, and then guarding

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<v Speaker 1>the public against the conflicts and the fraud and things

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<v Speaker 1>that happen in the capital markets that are unregulated.

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<v Speaker 3>We saw that happen in the nineteen twenties.

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<v Speaker 1>None of us were alive, but you can read about it,

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<v Speaker 1>and we don't want that to happen to the investing

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<v Speaker 1>public and undermine the trust in the overall capital markets

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<v Speaker 1>as we know them.

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<v Speaker 4>Talking of disclosures, one disclosure from former President Trump is

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<v Speaker 4>that he would fire you ultimately unsurprising to you, I'm sure.

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<v Speaker 4>But also he's got some plans, purported plans of course

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<v Speaker 4>to introduce his own crypto platform and has been working

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<v Speaker 4>on it.

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<v Speaker 3>What do you make of that.

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<v Speaker 1>I'm not going to comment on any one project. I

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<v Speaker 1>think your viewing audience can appreciate that.

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<v Speaker 3>It's just not what we do.

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<v Speaker 1>And so Caroline, I'll let you go to your next question.

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<v Speaker 3>Well missed against the I'll jump in.

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<v Speaker 2>You talked about the investing public that you serve, right

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<v Speaker 2>and there is something happening where private credit firms are

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<v Speaker 2>take private market assets where you could debate the real valuation,

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<v Speaker 2>and they're wrapping them in products like ETFs that are

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<v Speaker 2>somewhat sort of more retail friendly. It's a new area,

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<v Speaker 2>it's something interesting happening, and I know it's an intense

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<v Speaker 2>interest to our audience. How do you regulate that? And

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<v Speaker 2>how much are you personally thinking about that?

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<v Speaker 3>Right now? Let me put it in context.

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<v Speaker 1>There are dollar credit markets where you can your commercial

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<v Speaker 1>credit and you're borrowing probably worldwideer in access of thirty

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<v Speaker 1>trillion dollars, and banks and non banks alike play important

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<v Speaker 1>roles in that. And so what we've private credit existed

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<v Speaker 1>when I started at Goldman Sachs forty some years ago.

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<v Speaker 1>I mean, there were direct loans that could be made

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<v Speaker 1>outside of the banking system, but today you've seen a

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<v Speaker 1>growing share.

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<v Speaker 3>Involved in that.

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<v Speaker 1>I think that competition is good for borrowers, investors, savers

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<v Speaker 1>and the like. That's that's competition in our capital markets.

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<v Speaker 1>But it still has to sort of comply with the

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<v Speaker 1>basic tenets of risk management, disclosure, transparency and the like.

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<v Speaker 3>Our role in.

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<v Speaker 1>It as a capital markets, you know, oversight is an

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<v Speaker 1>important one. But I think the competition is actually benefiting

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<v Speaker 1>a lot of borrowers. I would note this, it hasn't

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<v Speaker 1>at this size, it hasn't lived through a downturn, so

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<v Speaker 1>it hasn't been tested in you know, the inevitable at

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<v Speaker 1>some point downturns that would come. There's also some intersections

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<v Speaker 1>between this private credit merging system and the insurance sector

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<v Speaker 1>and the banking sector. But particularly it's intersection with the

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<v Speaker 1>insurance sector. That's you know, bears look and ratings as well,

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<v Speaker 1>the use of private letter.

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<v Speaker 3>Ratings on some of this.

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<v Speaker 1>So we're looking at some of this, but I think

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<v Speaker 1>overall it's capital markets benefiting and the public benefiting from competition.

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<v Speaker 2>Apollo in State Street have such a private market ETF

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<v Speaker 2>pending before the SEC. My colleagues tell me it's controversial.

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<v Speaker 2>What can you tell me about that specific case study?

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<v Speaker 1>I guess I could tell you the same thing I

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<v Speaker 1>told Caroline earlier, that you know, in a role like mine.

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<v Speaker 3>I'm a very asked to be disciplined.

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<v Speaker 1>I try to state this with I don't comment on

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<v Speaker 1>specific prod docs or projects that may be in front

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<v Speaker 1>of the staff or in front of our five member commission.

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<v Speaker 1>So I'm going to demure on that. But I hope

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<v Speaker 1>you're listening public understands why.

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<v Speaker 4>Do you worry about that ill liquidity mismatch though a

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<v Speaker 4>potential one.

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<v Speaker 1>Look, there's an ill liquidity mismatch in banks. So our

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<v Speaker 1>twenty six trillion dollar banking system in the US has

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<v Speaker 1>twenty trillion dollars in deposits, runnable deposits. Of course, a

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<v Speaker 1>lot of them are insured, but a lot of them

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<v Speaker 1>are uninsured. And so banks themselves transform liquidity, transform what's

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<v Speaker 1>called maturity or duration, And then you think about it.

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<v Speaker 3>In the non.

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<v Speaker 1>Bank sector, you have, frankly, a better match of maturity

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<v Speaker 1>of the liability side of a private fund and the

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<v Speaker 1>assets they hold.

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<v Speaker 3>So it may it's not without risk, but.

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<v Speaker 1>It might be in a part of the market that

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<v Speaker 1>they can better bear that ill liquidity risk.

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<v Speaker 4>It's really interesting how you've got this is a line

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<v Speaker 4>of sight. But also everything we've just articulated AI crypto

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<v Speaker 4>private markets a lot to get on with. And your

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<v Speaker 4>term is what until June twenty twenty six. But will

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<v Speaker 4>it run until then? Many feel that perhaps not. What

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<v Speaker 4>do you want to get done in the remaining months

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<v Speaker 4>or so?

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<v Speaker 1>Look, I think it's the greatest privilege of my life,

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<v Speaker 1>other than having these three wonderful daughters that I have.

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<v Speaker 1>But I'm talking about professional privilege. And so every day

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<v Speaker 1>I come into work and think with my colleagues and

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<v Speaker 1>fellow commissioners, how do we get things done for the

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<v Speaker 1>investing public and the issuing public that the markets in

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<v Speaker 1>the middle work for them, Not that the issuers and

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<v Speaker 1>the investors are working for the intermediaries and the markets

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<v Speaker 1>in the middle, but the markets work for them.

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<v Speaker 3>So that's like lowering.

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<v Speaker 1>Cost through competition, transparency and the like, and access to

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<v Speaker 1>the markets, and then resiliency trying to use like central

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<v Speaker 1>clearing and so forth, the backside and the plumbing. So

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<v Speaker 1>we've gotten we laid out an agenda of fifty or

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<v Speaker 1>fifty five projects three and a half years ago, we've

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<v Speaker 1>actually gone.

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<v Speaker 3>Across the line, proposed and.

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<v Speaker 1>Adopted forty three of those. You can do the math

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<v Speaker 1>the other projects, A number of them I've asked staff

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<v Speaker 1>to we consider possible reproposals.

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<v Speaker 3>But we're still working.

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<v Speaker 1>On some rules around the market, structure of the treasury market,

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<v Speaker 1>some rules around central clearing and segregation of funds and

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<v Speaker 1>the like. But we're going to continue to move forward,

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<v Speaker 1>you know, and elections have consequences.

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<v Speaker 3>That's a great thing of our democracy. They do.

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<v Speaker 4>SEC Chair Gary Gensler, I'll let you return to some

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<v Speaker 4>rom coms. Thank you so much.

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<v Speaker 3>Thanks