Federal financial regulators will soon be able to experiment with artificial intelligence tools without fear of enforcement action, thanks to a bill introduced this week by both parties and chambers of Parliament.
The “Unleashing AI Innovation in Financial Services Act” by Senators Mike Rounds (R-S.D.) and Martin Heinrich (DN.M.) and Representatives French Hill (R-Ark.) and Ritchie Torres (DN.Y.) calls for the establishment of “regulatory sandboxes” for AI testing projects at the Federal Reserve, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the Federal Housing Finance Agency and the National Credit Union Administration.
In these sandboxes, experiments could be conducted “without unnecessary or overly burdensome regulation or the expectation of retroactive enforcement action,” the law states.
Rounds, co-chair of the Senate AI Caucus and ranking member of the Senate Securities, Insurance and Investments Committee, said in a statement that the bill is “designed to promote innovation and economic growth” by allowing select agency officials to explore AI tools in test environments.
“The financial services industry has been using AI for decades, but when there are major technological advances, companies need to be able to innovate,” Rounds said. “By creating these sandboxes, we aim to strike a balance between encouraging innovation and preserving consumer protections to ultimately strengthen our financial system and keep our country at the forefront of global financial technology.”
Heinrich, also a member of the AI Caucus, said financial authorities and the private sector could work together under the bill with the goal of encouraging innovation that protects consumers in the sector.
“To unlock the full potential of AI and ensure it is used responsibly, we need regulatory guardrails based on real-world use cases,” he said in a statement.
According to the text of the law, a “regulated entity” would have to submit an application to its tax authority with a detailed description of the planned AI test project and an “alternative compliance strategy” explaining why regulation should be waived or modified.
The application would also include a proposed test date, an estimate of economic impact, and a list of limitations on size, scope, and growth. Applicants would need to explain why the demonstration serves the public interest, improves access to a financial product, or promotes consumer protection; how it strengthens efficiency or competitiveness, improves compliance, or enhances safety and risk management; why it does not pose a systemic risk to the U.S. financial system or pose a national security risk; and how it is consistent with obligations under anti-money laundering and counter-terrorist financing regulations.
The federal tax authorities would have 90 days to review an application and inform the applicant of their decision. The authorities would be responsible for submitting annual reports on the results of the AI test projects to the Senate and House Banking and Financial Services Committees.
“As new technologies bring about tremendous change in the financial sector, the question of how to balance innovation and consumer protection is always a concern,” Torres said in a statement. “We will continue to push for improved competitiveness and results while ensuring that consumers’ interests remain paramount.”
Hill added: “This is a critical step that will enable both the government and the private sector to collaborate and learn together as the United States needs to take a leadership role in the development and use of AI technology.”
The role of federal financial regulators in regulating AI has been a hot topic in Washington over the past year, with SEC Chairman Gary Gensler raising alarms about the industry’s reliance on large-scale AI models. And more recently, House Republicans and industry leaders have spoken out against rushing to adopt rules to regulate the technology, while calling for regulatory clarity.
Notably, the Treasury Department and the IRS were not included in the list of federal agencies that would participate in the AI Sandbox initiatives. Rounds’ office did not respond to a request for comment on the reasons for her omissions by publication time. In June, the Treasury Department issued a request for information on the opportunities and risks of AI.
