SEC's Gary Gensler and an AI Future

Market Overview and ASML

• The NASDAQ has seen its first back-to-back losses in six weeks, with a current decline of about 0.10%, amidst caution about the future and warnings of a global slowdown from the IMF (1m3s).
• ASML's shares were up 3% at the high of the session, but have fallen over 15% since the early release of earnings last week, with intense focus on the company in the context of AI and chip investment (1m40s).
• The CEO of ASML discussed the future of the chip industry and the impact of U.S. regulation at the Bloomberg Tech Summit in London, noting that China's focus is on mainstream semiconductor, with demand booming in 2021 and 2022 (2m6s).
• ASML struggled to deliver tools to meet the high demand in China, resulting in a backlog, and the company's normal business in China is around 20-25% of total business, with the current level of 50% being an anomaly due to past lack of supply (3m10s).

Impact of US Regulation on ASML and China

• Export controls on China have prevented the country from accessing advanced technology, placing it 10-15 years behind in this area, with the regulations having a fundamental impact on China's ability to advance in the field (4m45s).
• The CEO believes that the United States will continue to apply pressure on China, and the question is what restrictions make sense for the Netherlands and Europe in terms of national security and interests (6m16s).
• The current focus in China is on mainstream semiconductors, which is different from AI, and this distinction is a key part of the discussion (6m33s).
• The pressure in the landscape will continue, and the discussion is expected to become more sophisticated over time with higher stakes (6m43s).

AI and Semiconductor Industry Trends

• There are concerns about potential export controls from the US to China related to the lead edge of chips and increased tensions in the supply chain (7m10s).
• The growth in the AI side of the semiconductor industry is notable, with companies like etching tools experiencing growth, while the mainstream side is trying to normalize (7m43s).
• Finding a balance between the AI and mainstream sides of the chip industry is crucial as the industry looks to the future (8m6s).
• The outcome of the US election and the change in administration in January may impact regulatory issues and policies, including tariffs, which could affect the industry (8m29s).
• The AI perspective is a key consideration, but the current oversupply of autos and industrials struggling may make it tougher to invest in the near term (9m5s).
• However, as interest rates come down and the economy stays strong, there is potential for long-term growth in the industry (9m30s).
• Cyclical industries like semiconductors go through ebbs and flows, and investors need to play through these cycles (9m41s).
• There is a risk that the industry is overdone and over-invested, particularly if hyper-scalars pause their investments in AI (10m4s).
• However, in a three to five-year outlook, the growth on both the AI and mainstream sides is expected to equal out and provide opportunities for investors (10m31s).

Investment Opportunities in ASML

• ASML is considered to be at the cutting edge of technology, and there is no company in China that can do what they do, making them a potential investment opportunity (10m48s).
• Chip equipment makers like ASML are down substantially from their highs, providing an opportunity for investors to get in, particularly for long-term growth (11m11s).

SEC Monitoring and SAP's Growth

• The SEC is monitoring the potential for hyper-scalars to start making their own chips, rather than relying on companies like NVIDIA, due to supply issues, and this is being tracked on a quarter-by-quarter basis (11m49s).
• The SEC expects to continue discussing AI for some time, as there are still many areas to unfold, and there could be a killer app that surprises everyone (12m42s).
• SAP's shares have jumped to a record high after the company announced an increase in cloud revenue, with cloud revenues now making up more than any other source of revenue (13m36s).
• SAP's core cloud offering has grown 36% and has exceeded the 30% growth market for the 11th quarter, with 84% of cloud revenue generated by this offering (14m17s).
• SAP's backlog, which is the 12-month committed subscription, is growing at 29%, providing visibility on growth lying ahead (14m35s).
• SAP's market cap is up 50% year-to-date, and the company is bumping against the 15% cap in Germany, which is a challenge (14m51s).
• SAP's CFO, Dominik Asam, would like to see the 50% cap disappear and is focusing on the large pool of capital available in the United States (15m16s).
• Asam is open to a secondary listing, and the company will continue discussions with stakeholders (16m1s).

AI Adoption and Regulation

• A tech investment giant emphasized the need for leaders to stop just investing money in AI and instead show how they use AI to be more productive and distribute more, as younger people are already using AI tools like ChatGPT to study more (16m46s).
• Gary Gensler and the SEC are looking at tools and finances, and have been working on a rulemaking process for the past year, with the goal of helping growth markets lead the new revolution happening now (17m32s).
• A CEO to watch has investments across emerging markets, including South Africa, where they are adopting generative AI and cutting costs, as well as exposure in India and Southeast Asia (17m55s).
• Chipotle is rolling out an artificial intelligence assistant aimed at improving efficiency, covering many administrative tasks in the recruiting process, and hopes to cut the time it takes to hire workers (18m22s).
• Meta is fighting back against fake celebrity scams by using facial recognition software to match celebrity images in ads with those in their service, to prevent scammers from stealing data and money (19m21s).
• Meta is also testing a new way to verify identities, using a video selfie, which would match the video to photos associated with the account, and could take about a minute, with the video and data being deleted immediately after (20m17s).
• The motivation behind this is to automate the process of verifying identities, as 3.3 billion users across different services are getting locked out every day, and human verification is not keeping up (21m15s).
• Meta has a complex relationship with facial recognition technology, having been sued in the past for using it to profit without giving users appropriate recognition or opt-in options (21m50s).
• The SEC is looking at tools and finances, and Gary Gensler is working on a rulemaking process, but feels that additional authority or power is needed through a rule to regulate certain areas that cannot be regulated through examinations (23m1s).
• The use of artificial intelligence has become a transformative part of the economy, similar to the electrification of markets and factories 100 years ago, and is being used by many brokerage apps and investment advisors to sell to the public (23m17s).
• AI is used to ensure that public interest and customer interest are put ahead of investment advisor interests in algorithms (24m12s).
• There is a risk of financial systemic risk due to the adoption of AI and AI models being too similar from one brokerage to the next (24m28s).
• The financial sector's reliance on a few large cloud providers backing the biggest investments in generative AI increases the likelihood of a financial crisis in the future (25m7s).
• The dominance of a few base models in the future could lead to a concentrated and interconnected system, making it a hard project to solve (25m38s).
• Clear rules need to be established to address investor protection issues and conflicts of interest (25m47s).
• Fraud is a significant issue that will play out not only in the SEC but also in other agencies around the country and the Federal Trade Commission (26m7s).
• Global regulators need to come together to protect against the risks of a concentrated and interconnected system relying on a few large cloud providers (26m29s).

SEC's Regulatory Focus and Crypto Oversight

• The SEC is working on establishing a new jurisdictional framework for crypto regulators to make progress on settling oversight of the industry (27m8s).
• The SEC's work on crypto regulation is focused on ensuring that investors get proper disclosure and that conflicts of interest are guarded against (27m52s).
• The SEC will continue to regulate the crypto industry to ensure that markets have trust and ease of compliance (28m4s).
• The SEC's policy and regulation efforts are guided by the law and the courts' interpretation of the law (29m0s).
• The focus is on driving lower costs in the system, which is why equity market reform was done unanimously through the commission, and work is being done on treasury markets to drive lower costs and lower risk (29m17s).
• The narrative that there hasn't been much change or adjustment in terms of regulation via enforcement may change, with rules possibly coming from Congress rather than being enforced (29m56s).

Market Regulation and Investor Protection

• Robust laws from Congress and rules from various agencies have benefited the markets for nine decades, and the goal is to continue promoting markets, protecting investors, and promoting capital formation (30m16s).
• Disclosure to the public is crucial, allowing them to decide and guarding against conflicts and fraud in capital markets, which is what President Roosevelt laid out and has been looked at over the years (31m18s).
• The investing public should be protected from unregulated capital markets, which can lead to undermining trust in the overall market, as seen in the 1920s (31m32s).
• Former President Trump's plans to introduce his own crypto platform were not commented on, as it is not what the SEC does (32m5s).
• Private credit firms taking private market assets and wrapping them in products like ETFs that are more retail-friendly is a newer area of interest, and the SEC is thinking about how to regulate it (32m48s).
• The private credit market, which is over $30 trillion, involves important roles from banks and nonbanks, and while competition is good for borrowers and investors, it still needs to comply with risk management and disclosure (33m2s).
• The private credit market has not lived through a downturn and has intersections with the insurance sector and the banking sector, particularly with the insurance sector and ratings (33m59s).
• The SEC is looking at the private credit market, but overall, it is benefiting from competition in the capital markets (34m31s).
• The case study of Apollo and State Street's private market ETF pending is not commented on, as it is not what the SEC does (34m51s).
• Gary Gensler does not comment on specific products or projects that may be in front of the staff for the commission, and he hopes the public understands why (34m56s).

Financial System Risks and Gensler's Agenda

• There is a liquidity mismatch in banks, with the US banking system having $20 trillion in deposits, a lot of which are uninsured, and banks transforming liquidity and maturity or duration (35m20s).
• In the non-banks sector, there is a better match of maturity of the liability side of a private fund and the assets they hold, which might be in part of the market that can better bear that illiquidity risk (35m45s).
• Gensler's term is until June 2026, and he wants to get things done for the investing public, including lowering costs, transparency, and access to markets, and resiliency to use central clearing (36m23s).
• The SEC has laid out an agenda of 50 or 55 projects, and they have proposed and adopted 43 of those, with the remaining projects still being worked on, including rules around market structure and treasury markets, and segregation of funds (37m14s).
• The election has consequences, and Gensler will continue to move forward with the SEC's agenda (37m43s).

Bitcoin, Election Impact, and Regulation

• Bitcoin's price has fluctuated, and there are ETF inflows of $2 billion, with the election potentially impacting crypto and regulation (38m21s).
• The election means that the new administration's disposition toward innovation, including Bitcoin innovation, will be important, and a thoughtful and studied approach to regulation is hoped for (38m50s).
• The US has an advantage in the crypto space, with many top founders and innovative companies based in the country, and a regulator that sees the advantages of having that activity in the US can continue to foster innovation (39m53s).
• Bitcoin innovation is not happening in a silo, but is relevant to other industries, such as the transition to renewable energy and the explosion of interest and opportunity in generative AI (40m23s).
• The SEC Chair is happy that both Vice President Kamala Harris and former President Trump are paying attention to participants in the ecosystem, and both have advanced policy agendas, indicating an intention to partner with the industry to study and apply a thoughtful approach (41m24s).
• The focus is on the inaction of policy itself and action rather than campaign promises, and it appears that both campaigns have an intention to partner with the industry (41m43s).
• There is reason to be optimistic regardless of the outcome of the election, as both candidates are paying attention to the space and have advanced policy agendas (42m17s).

Bitcoin's Role in Energy and Finance

• The conversation about crypto poses risks to the financial system, rather than how to use underlying technology within the financial system to modernize global finance (42m27s).
• The SEC Chair thinks that Bitcoin can help facilitate energy stability, as it is a price-responsive coin that can off-take energy at low prices when there is low demand and shut off in peak times (43m29s).
• Bitcoin's ability to contribute to the stability of the grid and allow healthy growth of renewable generation is beneficial to the LLM ecosystem stability (43m59s).
• Proof of work and state is something that other parts of the ecosystem have had to deal with, and everyone is waiting to see how it will develop (44m10s).
• Bitcoin has matured as a store of value, with the Bitcoin ETF reaching over 20 million in aggregate assets in less than a year, exceeding the launch of gold ETFs (44m52s).
• Stablecoins have found product market fit internationally and within the U.S., and are coming to the Bitcoin payment system, with the Lightning Network processing over $80 million in value a month (45m23s).
• The Lightning Network has launched payment channels that can handle other assets, including stablecoins, bringing the market to the Lightning Network (45m41s).