The rule recognizing crypto exchanges as broker-dealers is likely to cover them as well.
The U.S. Securities and Exchange Commission (SEC) has adopted a new set of rules for financial services using artificial intelligence, effective from July 26.
The SEC’s proposal aims to deal with potential conflicts of interest that may arise from companies using predictive data analytics, artificial intelligence, and related technologies. The SEC recognizes that artificial intelligence and predictive technologies can be “optimized” for investor interests, but also warns that investors could be harmed if companies prioritize their own interests.
Therefore, the proposal lays out several conditions that companies need to follow. The companies will have to identify, eliminate, or neutralize the impacts of conflicts of interest related to artificial intelligence and predictive analytics. These firms will also need to establish written policies and procedures for compliance and keep records.
If approved, the rules will cover all broker-dealer or investment advisory firms currently using advanced technology to interact with investors, registered under section 203 of the 1940 Investment Advisers Act, including associated personnel.
The SEC has not explicitly stated whether the proposed artificial intelligence regulations will apply to crypto exchanges. However, it is thought to be inclusive due to the SEC’s statement that alternative trading systems related to digital assets have been subject to regulatory requirements as “broker-dealers registered with the SEC” since 2018.
Still, as the artificial intelligence rule is still in the proposal stage, it has not yet been implemented.
Commissioner Peirce Opposes Artificial Intelligence Rules
The SEC successfully voted to propose artificial intelligence rules, but two members – Commissioners Hester Peirce and Mark Uyeda – voted against the proposal.
Peirce noted on July 26 that the proposal was “hostile towards technology and disclosure.” Highlighting that the rule could be applied too broadly, she warned that the SEC already has sufficient regulatory capability.
Peirce is generally known for her openness to cryptocurrencies and other new financial technologies, and this stance seems to extend to applications of artificial intelligence as well.
The SEC also conducted two more votes. One vote was aimed at exempting some online advisers; all five members approved this vote. The other vote was on a final rule requiring companies to disclose cyber attacks; this vote was accepted by a 3-2 vote, putting the rule into effect despite opposition from Peirce and Uyeda.
