CFTC Commissioner Johnson Warns of "Increasing Influence" of Social Media on Investors
Commentary by Steven Lofchie
CFTC Commissioner Kristin N. Johnson highlighted concerns over the increasing influence of social media and artificial intelligence ("AI") on individual investor decisions.
In remarks before the CFTC's World Investor Week program, Ms. Johnson highlighted the risk of fraud and misinformation in the digital asset markets, especially through social media. She said that "it is important that social media aid in the distribution of verified information that will help investors to make sound investment decisions" rather than providing misinformation that could "amplify the potential for fraud." She also expressed concern about the increasing integration of AI in financial markets, noting that while AI technologies promise to reduce frictions and enhance efficiency, "there are many reasons to carefully interrogate these promises" to ensure that "potential perils" are mitigated.
To address these problems, Ms. Johnson called for an appropriate regulatory approach to digital assets and the continuation of guardrails for customer protection. She stressed the importance of educating investors and providing them with resources to stay informed about potential scams and abuses. In the context of AI integration, she underscored the importance of (i) "responsible" AI that effectively ensures accountability and (ii) subjecting financial institutions to "sufficiently rigorous evaluation . . . and regulations" regarding systems integration of AI.
Commentary
Over-burdening regulated firms does not protect retail investors; it likely drives regulated firms away from even attempting to serve retail investors. It is unsurprising that retail investors are turning to unregulated sources of information, such as social media. The inevitable effect of rules such as Exchange Act Regulation Best Interest is that they likely make it impractical for regulated broker-dealers to provide investment advice to retail investors. See Choose One - Best Interest or Full Service. The SEC's position with respect to digital assets has the same result; by making it impossible for digital assets to be traded or custodied by regulated broker-dealers or on regulated exchanges, the outcome has been that all trading of digital assets is done by unregulated entities, likely increasing the risks to retail investors.
Commissioner Johnson's remark that it "is important that social media aid in the distribution of verified information" raises many questions. Verified by whom? By the SEC? By Treasury? By FSOC?