U.S. CFTC Seeks Public Input on Use of Artificial Intelligence in Commodity Markets and Simultaneously Warns of AI Scams

The staff of the Commodity Futures Trading Commission (CFTC) is seeking public comment (the Request for Comment) on the risks and benefits associated with use of artificial intelligence (AI) in the commodity derivatives markets. According to the Request for Comment, the staff “recognizes that use of AI may lead to significant benefits in derivatives markets, but such use may also pose risks relating to market safety, customer protection, governance, data privacy, mitigation of bias, and cybersecurity, among other issues.”

The CFTC is the U.S. federal regulator with exclusive jurisdiction over the futures and over-the-counter commodity derivatives markets, and it shares jurisdiction with the Securities and Exchange Commission (SEC) over certain instruments that have characteristics of both commodity interests and securities. The SEC, CFTC, and other regulators¹ have become increasingly concerned and engaged in issues surrounding the impact of AI and other financial innovations on the financial markets.²  

The Request for Comment sets out 20 questions (with subquestions). The staff is requesting public comment on use cases for AI by CFTC-regulated entities (in both the present and the future), AI governance, cybersecurity, the use of AI to engage in fraud and market manipulation, managing the lack of explainability associated with AI models, privacy concerns, customer protection, and effects on competition, among other things.  

The public comment process provides an avenue for interested parties to help set the terms of debate over the form that AI regulation will ultimately take. The CFTC and its staff will look to the public comments in considering their regulatory responses to AI, whether that takes the form of guidance, interpretations, policy statements, or new regulations.  

The public will have until April 24, 2024, to submit comments through the CFTC’s online portal.  

On the same day the CFTC released the Request for Comment, its Office of Customer Education and Outreach (OCEO) published a customer advisory entitled AI Won’t Turn Trading Bots into Money Machines (the Advisory). In the Advisory, the OCEO warned about fraudsters’ “exploiting public interest” in AI to promote trading programs, including cryptocurrency trading schemes, that promise unreasonably high returns to investors. OCEO warned that “AI technology can’t predict the future or sudden market changes.”

In the Advisory, OCEO tells the story of a $1.7 billion Ponzi scheme called Mirror Trading International, run by a citizen of South Africa. South Africa’s hottest scam had everything — bitcoin, social media, multilevel marketing. But, alas, little trading actually occurred, and 23,000 people were defrauded. The CFTC obtained a judgment in default against the scammer in April 2023. He was ordered to pay restitution of $1.7 billion and a civil monetary penalty of another $1.7 billion. The CFTC Division of Enforcement touted the action as “the largest fraudulent scheme involving Bitcoin charged in any CFTC case.” The $1.7 billion penalty was also, at the time, the highest civil monetary penalty ordered in any CFTC case.  

While OCEO cites the Mirror Trading scheme as a warning about the risks of investors’ falling for the “hype” of AI, it is not clear that any AI was actually used or even claimed to be used in connection with the scheme. The fraudsters claimed to be using a “proprietary ‘bot’ or software program” to trade in foreign currency markets. While this appears to be a form of “automated” or “algorithmic” trading, there are few indications that it involved actual artificial intelligence. In any event, the fact that this case was placed at the center of OCEO’s warning about the risks of AI demonstrates that “artificial intelligence” does not mean the same thing to everyone and that even regulators may not yet have a firm handle on what they mean when they use this term.

According to OCEO, before trusting money to trading platforms claiming that AI-created algorithms can generate huge returns, the following steps should be taken:

• Research the background of the company or trader; conduct 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 at lookup.icann.org. 
• Get a second opinion. Talk the investment over with a financial adviser, trusted friend, or family member.
• Know the risks associated with the underlying assets. Also consider the effect that fees, spreads, and subscription costs would have on returns.
• Be wary of the hype around AI, especially when promoted by social media influencers and strangers you meet online. 

The juxtaposition of the Request for Comment with the Advisory (they were released on the same day) is appropriate. The CFTC sees the potential benefits of AI and the potential for significant risk to investors and the markets overseen by the CFTC.

¹The SEC, the North American Securities Administrators Association, and the Financial Industry Regulatory Authority jointly issued an investor alert to draw attention to the increase in investment fraud involving AI. The alert outlines areas of concern that may warrant scrutiny and further investigation from investors before pledging their money. The alert further provides tips on steps to take to protect yourself and your money from fraudsters. 
²The staff notes that the Request for Comment was prompted in part by AI-related guidance issued by the White House, including, in particular, the Biden administration’s executive order encouraging federal agencies to “consider using their full range of authorities to protect American consumers from fraud, discrimination and threats to privacy and to address other risks that may arise from the use of AI ….”