CFTC seeks feedback on AI use in compliance, warns against utilization of AI trading bots

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The United States Commodity Futures Trading Commission (CFTC) has called for comments on its approach to using artificial intelligence (AI) in markets that it oversees as well as the potential risks AI might pose to those markets. The financial sector watchdog also warned digital asset investors against placing trust and funds in AI trading bots.

Last week, the CTFC issued a comment request to “better inform them on the current and potential uses and risks of artificial intelligence (AI) in the derivatives markets the CFTC regulates.”

The regulator said the request for comment complements directives President Joe Biden’s administration established for the safe, secure, and trustworthy development of AI.

The Biden administration released an executive order last October with new standards to force AI system developers to report to the Federal Government on their progress and standards for testing before public release.

“To realize the promise of AI and avoid the risk, we need to govern this technology. In the wrong hands, AI can make it easier for hackers to exploit vulnerabilities in the software that makes our society run,” Biden said at the time.

In its request for comment (RFC) on the use of AI in markets under its jurisdictional oversight, the CFTC said any feedback received may impact future guidance, interpretations, policy statements, or regulations, adding that the deadline for comments is April 24, 2024.

“This RFC will further support the CFTC as we strategically identify the highest priorities and return-on-investment projects with AI use cases internally to optimize our data-driven approach to policy, surveillance, and enforcement,” said Chairman Rostin Behnam.

The CFTC seeks input on the definition of AI and its various applications, including trading, risk management, compliance, cybersecurity, recordkeeping, data processing and analytics, and customer interactions. The regulator also asked for comment on the risks of AI related to market manipulation and fraud, governance, explainability, data quality, concentration, bias, privacy and confidentiality, and customer protection.

The call for feedback “prioritizes promoting responsible innovation and ensuring we understand current and potential AI use cases and the associated potential risks to our jurisdictional markets and the larger financial system,” said Benham. “This allows us to better align our supervisory oversight and evaluate the need for future regulation, guidance, or other Commission action.”

The RFC was also backed by CTFC Commissioner Kristin Johnson, who said she “strongly support the Commission’s efforts to advance inquiries regarding the integration of AI in our markets and to explore the need to introduce guardrails to mitigate the risks that AI technologies may present.”

Johnson noted that one month before the RFC, the CFTC’s Market Risk Advisory Committee (MRAC), which she is a sponsor, held its third meeting of the year to address questions about AI in 2024 and beyond.

The MRAC “anticipates offering formal recommendations” on AI and related topics in the coming year, said Johnson, including integrating generative AI in CFTC-governed markets, the relationship between AI and blockchain technology, and the risks presented by these new technologies.

“The RFC released today is an important step towards that goal,” said Johnson.

Meanwhile, the CFTC also warned digital asset investors against relying on AI trading bots to deliver increased profits.

AI trading risks

The CFTC warned investors searching for their next digital asset payout against relying on AI trading bots to deliver. Despite a surge in popularity, the regulator reiterated that AI cannot predict the future.

In a press release published the same day as the agency’s call for comment on AI, the CFTC advised digital asset investors looking to AI for increased returns in 2024 to beware of the false promises of AI trading bots.

“With the growth of the use of AI in everyday life, scammers are making claims that it can generate huge returns using bots, trade signal algorithms, crypto-asset arbitrage algorithms, and other AI-assisted technology,” said the CFTC.

The regulator also warned against being swayed by online celebrities, highlighting that “the prevalence of social media platforms and “influencers” makes it even easier for fraudsters to spread false information.”

In an accompanying Customer Advisory, titled “AI Won’t Turn Trading Bots into Money Machines,” the CFTC explained how scams use the potential of AI technology to defraud investors with false claims that entice them to hand over money or other assets to fraudsters, who misappropriate the funds and deceive investors.

“The advisory warns investors that claims of high or guaranteed returns are red flags of fraud and that strangers promoting these claims online should be ignored,” said the CFTC.

Melanie Devoe, Director of the CFTC’s Office of Customer Education and Outreach (OCEO), reinforced this message, saying, “when it comes to AI, this advisory is telling investors, ‘Be wary of the hype.'”

She went on to add that “unfortunately, AI has become another avenue for bad actors to defraud unsuspecting investors.”

The OCEO is aimed at helping customers protect themselves from fraud or violations of the Commodity Exchange Act through the research and development of financial education materials and initiatives, such as ‘Customer Advisory’ notices.

The agency recommended that before investors trust their money to trading platforms that claim AI-created algorithms can generate huge returns, they should do the following:

• Research the background of the company or trader, such as conducting a reverse image search on key personnel to verify their identities;
• Research the history of the trading website by checking the age of the domain registration;
• Get a second opinion, for example, “talk the investment over with a financial advisor, trusted friend, or family member;”
• And know the risks associated with the underlying assets, taking into account the impact fees, spreads, and subscription costs have on returns.

The CFTC rounded off its warning by reminding would-be investors that they can report any instances of fraud to the CFTC and Federal Bureau of Investigation (FBI).

In order for artificial intelligence (AI) to work right within the law and thrive in the face of growing challenges, it needs to integrate an enterprise blockchain system that ensures data input quality and ownership—allowing it to keep data safe while also guaranteeing the immutability of data. Check out CoinGeek’s coverage on this emerging tech to learn more why Enterprise blockchain will be the backbone of AI.

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