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The Commodity Futures Trading Commission's Kristin Johnson proposed recommendations such as heightened penalties to address artificial intelligence in financial markets, including decentralized finance. 

In a speech delivered at the Sidley Austin and Rutgers Law School Fintech and Blockchain Symposium, Commissioner Johnson outlined her concerns about AI and how that applies to DeFi.

"Deploying AI in ecosystems running on blockchain technology raises novel issues for supervision, risk management, and compliance, as well as enforcement," Johnson said on Friday.

AI has been integrated into financial markets, including brokerage apps, compliance programs and robo-advisers. In DeFi, AI can be used in automated trading and algorithmic trading. AI in general has raised concerns among regulators over risks such as manipulation and fraud, bias and customer protection. 

Johnson said one issue with DeFi is that there is no central party, which separates it from traditional markets. 

"As an initial matter, traditional financial laws and regulations often assume specific organizational or market structures," Johnson said. "Decentralized autonomous organizations and the use of non-intermediated market structures by blockchain-based platforms may depart from these assumptions in important ways. The deployment of AI in DeFi systems may muddy the regulatory waters, particularly with respect to supervisory responsibilities and accountability for compliance with longstanding and critical regulations such as the Bank Secrecy Act, which aims to address the threats of money laundering and illicit finance in our financial system."

Johnson's AI recommendations

Johnson called for the CFTC to take a principles-based approach to addressing AI generally. One of those recommendations includes heightened penalties for those who "intentionally" use AI to engage in fraud, market manipulation, or to evade its rules.

"Bad actors who would use AI to violate our rules must be put on notice and sufficiently deterred from using AI as a weapon to engage in fraud, market manipulation, or to otherwise disrupt the operations or integrity of our markets," Johnson added. 

Johnson also recommended creating an "AI Fraud Enforcement Task Force"  made up of attorneys and investigators within a variety of offices within the CFTC's division of enforcement. She also recommended an inter-agency task force that would include other regulators including the Federal Reserve and the Securities and Exchange Commission. 

Johnson's speech comes days after the CFTC designated its first chief AI officer, Ted Kaouk, and as the agency plans to hold an "AI Day" next week to talk about regulators' approach to AI. 

Is Commissioner Johnson going to Treasury?

On Thursday, House Financial Services Committee Ranking Democrat Maxine Waters, D-Calif., sent a letter to President Biden pressing him to nominate Johnson, a Democrat, to serve as the Assistant Secretary for Financial Institutions at the Treasury Department. 

Waters said Johnson has provided the committee with her expertise on a number of topics, from data privacy to AI to digital assets. 

"In her role as CFTC Commissioner, Commissioner Johnson has prioritized maintaining the integrity of our financial markets," Waters said. "She has pushed the Commission to adopt rigorous capital, collateral, and margin standards. Commissioner Johnson is also leading the CFTC's work on artificial intelligence (AI) and encouraging the Commission to carefully evaluate whether existing regulation is fit-for-purpose or new regulation is required."

Commissioner Johnson declined to comment to The Block when questioned on the matter.