SEC chair warns AI could cause a financial crash within a decade

What happens when every algorithmic trader on Wall Street gets the exact same sell signal at the exact same millisecond?

SEC Chair Gary Gensler thinks he knows the answer, and it is not pretty. In an interview with the Financial Times, Gensler warned that it is nearly unavoidable that artificial intelligence will trigger a financial crash within the next decade, potentially hitting by the late 2020s or early 2030s.

The real culprit will not necessarily be rogue algorithms, but the financial system's collective rush to build on top of the same handful of tech giants.

Wall Street's shared brain

Ever since generative AI burst onto the scene, big banks have been in a fierce arms race to deploy it.

Morgan Stanley rolled out an AI assistant powered by OpenAI's GPT-4 last month to help financial advisers parse market data. Rival JPMorgan has reportedly filed a patent for IndexGPT, a specialized model designed to help traders pick securities.

Yet Gensler argues this creates a dangerous monoculture. When every firm relies on the same underlying base models or central data aggregators, independent thinking evaporates.

He predicted that after the next crash, investigative reports will inevitably conclude that the entire mortgage market or an equity sector blew up because everyone was secretly leaning on the exact same model.

A vertical cop facing a horizontal threat

Making matters worse, regulators simply are not built to police this kind of danger.

Gensler described AI as a cross-regulatory challenge. Traditional financial oversight is inherently vertical, designed to monitor individual brokerages, specific banks, and discrete funds.

AI, however, is a horizontal threat that cuts across the entire economy. A single failure at a tech company outside the SEC's immediate jurisdiction could trigger cascading systemic risk inside Wall Street.

Financial institutions seem to sense the danger, too. Even while experimenting with proprietary tools, giants like Goldman Sachs, Deutsche Bank, and Bank of America moved quickly earlier this year to ban employees from using public chatbots like ChatGPT on the job.

Why it matters

Gensler's warning cuts right through the usual AI hype to expose the biggest structural flaw in tech-driven finance: when everyone uses the same math, everyone makes the same mistakes.

For everyday investors, this is a clear cue to remain skeptical of AI-driven portfolio management. When automated trading strategies crowd into identical positions, liquidity can evaporate in seconds, leaving individual investors holding the bag.

For the tech sector, this points toward an inevitable regulatory collision. If the SEC starts viewing frontier model developers as systemic financial threats, providers like OpenAI, Microsoft, and Google could soon face the same heavy compliance burdens historically reserved for clearinghouses and central banks.

The catch is that the SEC currently lacks the clear authority to regulate Silicon Valley infrastructure. Until Washington sorts out who actually polices horizontal algorithmic risk, Wall Street will keep sprinting into the same digital bottleneck.