Kristin Johnson, a Commissioner of the Commodity Futures Trading Commission (CFTC) in a bid to address the risks associated with artificial intelligence (AI) in financial markets, has proposed stiff penalties to tackle AI-related fraud. Johnson’s other recommendations include consequences for manipulation, and compliance issues in decentralized finance (DeFi).
AI in Financial Markets and DeFi
According to The Block, in her address at the Sidley Austin and Rutgers Law School Fintech and Blockchain Symposium, Johnson said:Â
“Deploying AI in ecosystems running on blockchain technology raises novel issues for supervision, risk management, and compliance, as well as enforcement.”
Commissioner Johnson while outlining the potential challenges posed by AI in traditional financial markets, as well as in DeFi ecosystems noted that AI has become increasingly integrated into financial services, from brokerage applications to compliance programs and robo-advisers.
She acknowledged that in the context of DeFi, AI is used in automated and algorithmic trading. This according to her can lead to risks of market manipulation and fraud. Johnson admitted that the concerns raised by regulators regarding AI’s broader implications were germane just as is the case with customer protection.
Stakeholders contend though that AI can also detect money laundering transaction patterns, and uncover previously unknown illicit wallets as seen recently with Elliptic, a company specializing in blockchain forensics.
CFTC Concerns and Recommendations
A major worry pointed out by the CFTC Commissioner is the decentralized nature of DeFi. This she noted lacks a central governing authority—a stark contrast to traditional financial markets. The absence of central control complicates regulatory oversight and enforcement leaving compliance responsibility vague.
The U.S government AI safety board recently drafted OpenAI CEO Sam Altman to join the body as one of its members to advise the government, including Homeland Security on the ethical use of AI.
Johnson maintained that AI in DeFi systems may further complicate the regulatory environment. She particularly noted this in terms of supervisory responsibilities and accountability for compliance with longstanding regulations like the Bank Secrecy Act.
The CFTC Commissioner proposed that to address AI within financial markets, there must be stricter penalties for those who intentionally misuse the tech to engage in fraudulent activities, market manipulation, or rule evasion. This is with a view to deter bad actors from exploiting AI for illicit purposes, thereby protecting the integrity of financial markets.
With investors already injecting over $6 billion to accelerate Elon Musk’s Artificial Intelligence (AI) venture, xAI, the regulatory guidelines and penalties by the CFTC will need to be clearly defined to ensure boundaries are maintained.
