Thanks, Chris, and thanks for the invitation to talk to you right now concerning the alternatives and dangers of innovation. For the needs of our dialogue right now, I will probably be specializing in monetary innovation supported by new applied sciences, or fintech.1 Within the fall of 2017, we managed to get Chris to just accept an invite to talk at a fintech convention in Ann Arbor, so it is about time that I returned the favor. Since then, we now have continued to see main adjustments in applied sciences and the monetary companies and merchandise they assist. In trying over the supplies for that convention, nonetheless, I am struck by how the important thing themes have remained fixed over, not solely the final 5 years, however arguably for hundreds of years. Monetary innovation has at all times introduced promise and danger, and the pressing have to get regulation proper. In 1610, when Dutch retailers and bankers have been in any other case busy creating international finance, a collection of destabilizing financial institution runs additionally moved them to determine a ban on short-selling. Lots of the points we grapple with right now will not be as new as we predict.
Supporting Innovation with Acceptable Regulation
First, let’s begin with the promise. Day-after-day, all of us have numerous interactions with the monetary system—depositing our paychecks, shopping for groceries, paying lease, borrowing, saving, and insuring towards necessary dangers. The promise of fintech is that it could make monetary services and products higher, quicker, cheaper, and extra out there. Monetary innovation supported by new applied sciences can disrupt conventional suppliers by spurring competitors, creating merchandise that higher meet buyer wants, and lengthening the attain of monetary companies and merchandise to these sometimes underserved.
To understand the advantages of innovation, we have to handle related dangers. Now we have seen by historical past that pleasure over progressive monetary merchandise can result in a tempo of adoption that overwhelms our capacity to evaluate and handle underlying vulnerabilities. As we noticed within the lead as much as the World Monetary Disaster, progressive monetary merchandise can masks rising dangers, leading to important harms to companies and households and finally undermining monetary stability. These merchandise can depart shoppers weak if they aren’t coupled with significant disclosures and primary protections towards abusive practices. Innovation can result in disruptions of current markets, which can be helpful, however may generate new systemic dangers.
Guarding towards these dangers is without doubt one of the jobs of monetary regulation and supervision, and I will discuss by just a few examples of how we’re working to take action now. However I might observe with some humility that putting the fitting stability between creating an enabling surroundings that helps innovation and managing associated dangers to companies, households, and the soundness of the monetary system isn’t any simple job. When rules are too prescriptive or regulators too cautious, they run the danger of stifling innovation and locking available in the market energy of dominant contributors in methods that may increase prices and restrict entry. When regulation is lax or behind the curve, it could facilitate risk-taking and a race to the underside that places shoppers, companies, and the financial system in peril and discredits new services and products with shoppers and traders. I imagine everybody has a stake in getting the regulatory stability proper.
Hanging the Proper Steadiness for Crypto-Asset Exercise
Crypto-assets have grown quickly within the final a number of years, each in market capitalization and in attain. However latest fissures in these markets have proven that some crypto-assets are rife with dangers, together with fraud, theft, manipulation, and even publicity to money-laundering actions. Crypto-asset-related exercise, each inside and outside supervised banks, requires oversight that features safeguards to make sure that crypto service suppliers are topic to related rules as different monetary companies suppliers. We proceed to work on this challenge from the overriding precept that the identical kind of exercise needs to be regulated in the identical manner. This precept holds even when the exercise might look totally different from the everyday actions we regulate, or when it includes an thrilling new know-how or a brand new manner to supply conventional monetary companies.
The Board is working with our colleagues on the Workplace of the Comptroller of the Foreign money (OCC) and the Federal Deposit Insurance coverage Company (FDIC) to make sure that crypto-asset-related actions banks might turn out to be concerned in are nicely regulated and supervised, to guard each clients and the monetary system.2 Many of those actions pose novel dangers, and it’s important for banks to make sure that any crypto-asset-related actions they conduct are legally permissible and that banks have applicable measures in place to handle these dangers. In August, the Board issued supervisory steerage that outlines the steps Federal Reserve-supervised banks ought to take previous to participating in crypto-asset-related actions.3
The latest volatility in crypto markets has demonstrated the extent of centralization and interconnectedness amongst crypto-asset firms, which contributes to amplified stress. Whereas banks weren’t immediately uncovered to losses from these occasions, these episodes have highlighted potential dangers for banking organizations. When a financial institution’s deposits are concentrated in deposits from the crypto-asset business or from crypto-asset firms which can be extremely interconnected or share related danger profiles, banks might expertise deposit fluctuations which can be correlated and intently linked to broader developments in crypto-asset markets. As well as, misrepresentations concerning deposit insurance coverage by crypto-asset firms could cause buyer confusion and result in elevated withdrawals at banks offering deposit companies to crypto-asset companies and their clients throughout occasions of stress.
The Fed is working with the OCC and the FDIC on these points and highlighting them to supervised establishments. For instance, it will be important for banks to know a number of the heightened liquidity dangers they might face from sure varieties of deposits from crypto-asset firms. This effort shouldn’t be supposed to discourage banks from offering entry to banking services and products to companies related to crypto-assets. Our work on this space is concentrated on making certain dangers are appropriately managed. Trying forward, there are further varieties of crypto-asset-related actions the place the Fed may have to supply steerage to the banking sector within the coming months and years.
As a result of crypto-assets have proved to be so unstable, they’re unlikely to develop into cash substitutes and turn out to be a viable means to pay for transactions. Nevertheless, stablecoins, which purport to take care of a steady worth, have higher capability to perform as privately issued cash. For that reason, they pose particular, and well-understood dangers, much like different varieties of money-like belongings. Historical past has proven that money-like belongings are topic to runs that may threaten monetary stability. Stablecoins linked to the greenback are of specific curiosity to the Federal Reserve. As Chair Powell mentioned the opposite day, a central financial institution is and can at all times be the principle supply of belief behind cash. Stablecoins borrow that belief, so we now have an abiding curiosity in a robust federal prudential framework for his or her use.
Over time, stablecoins may pose a danger to monetary stability, and you will need to get the regulatory framework proper earlier than they do. Right here too, the Fed is working with different regulatory businesses. The President’s Working Group report on stablecoins that got here out a couple of yr in the past referred to as upon Congress to take the required motion to make sure that stablecoins, significantly people who function a way of fee, are topic to prudential regulation.4 Congress ought to take motion to supply a robust federal framework for prudential oversight, and regulators should additionally use current authorities.
Recognizing the Dangers of Tokenizing Financial institution Liabilities
We’re seeing banks discover quite a lot of totally different fashions to challenge dollar-denominated tokens on distributed ledger networks. The proposals vary from issuance of tokens on non-public, managed networks to facilitate funds inside or amongst banks, to proposals that discover issuance of freely circulating tokens on open, permissionless networks. As banks discover totally different choices to faucet into the potential of the know-how, you will need to determine and assess the novel dangers inherent in these fashions and whether or not these dangers are surmountable. As an example, with some fashions which can be being explored, the financial institution might not have the ability to monitor who’s holding its tokenized legal responsibility, or whether or not its token is being utilized in dangerous or criminal activity. Whereas there may be work underway on technical options for managing these dangers, it stays an open query whether or not banks can interact in such preparations in a way in step with protected and sound banking and in compliance with related legislation. Given these open questions, banks seeking to experiment with these new applied sciences ought to achieve this solely in a managed and restricted method. As banks experiment, I invite them to interact with their regulators early and sometimes to debate the advantages and dangers of latest use circumstances, making certain they’re in step with banking actions performed in a protected, sound, and legally permissible method.
Advancing Buyer Autonomy
Let me point out an instance of the place I feel regulators may play a extra lively function in shaping how innovation is altering the monetary merchandise panorama. Over the previous decade, digitization of monetary companies has led to the creation of huge quantities of buyer knowledge. Development in applied sciences now facilitates higher connectivity and safe knowledge sharing between banks and nonbanks. This has served as the muse for open banking and the event of latest varieties of monetary services and products that supply shoppers higher customization and an end-user expertise with much less friction, in comparison with conventional banking.
Jurisdictions all over the world have taken totally different approaches to open banking. Some, reminiscent of Australia, Britain, and the European Union have adopted a regulatory strategy to facilitate open banking by implementing particular regulatory frameworks which can be constructed upon the ideas of client knowledge rights, knowledge privateness, and competitors. To date, america has taken extra of a market-driven strategy to open banking. The Shopper Monetary Safety Bureau is charged with implementing rules to offer shoppers entry to their monetary knowledge, pursuant to Part 1033 of the Dodd-Frank Act. Whereas this isn’t an “open banking” rule, it is going to set the stage for shoppers to realize higher management with regards to sharing their knowledge with potential suppliers. The objective of this effort is to advance client autonomy, improve competitors for monetary companies, and to supply simpler portability of account data from financial institution to financial institution in addition to nonbank suppliers. I sit up for listening to extra on this from the CFPB.
Offering Public Sector Assist for Cost Innovation
So let me now flip to how the Federal Reserve is taking proactive steps to work with the non-public sector to assist innovation. The Federal Reserve has been engaged on modernizing our fee system for just a few years now, and we’re within the remaining phases of making the FedNow Service, a brand new platform for digital funds that may safely, effectively, and instantaneously transfer cash. FedNow will enhance safeguards on immediate funds, making the monetary system safer. And it’ll enhance entry to the monetary system by lowering fee delays and the excessive prices related to these delays. As I’ve mentioned extensively in my writings and speeches, these prices are significantly borne by these least capable of afford them.5
Banks and repair suppliers will have the ability to construct progressive monetary merchandise utilizing FedNow’s real-time, low price, protected fee rails, benefiting households and companies. We plan to launch FedNow between Might and July subsequent yr.6 It’ll assist to decrease prices, prolong entry, and enhance safety for shoppers and security for the monetary system.
No dialog about funds innovation is full with out point out of central financial institution digital currencies (CBDC). The Federal Reserve has not made any choices about whether or not to challenge a CBDC, and if we imagine it is sensible to take action, we’d need the assist of Congress and the Administration. Within the meantime, we’re doing the work of understanding the technological necessities of such a system, deepening our understanding of potential coverage tradeoffs, and having a look at how different international locations are desirous about and experimenting with CBDCs.
Let me finish the place I started: We have to get the guardrails proper to efficiently assist a dynamic market of progressive monetary services and products. Now we have a accountability to make sure that regulation and supervision foster improvements that enhance entry to monetary companies, whereas on the identical time safeguarding shoppers, monetary establishments, and monetary stability. Thanks.
1. I’m grateful to Christine Graham, Laura Lipscomb, and John Maggs of the Federal Reserve Board for his or her help in getting ready this textual content. The views expressed listed below are my very own and don’t essentially mirror these of the Federal Reserve Board or the Federal Open Market Committee. Return to text
2. Board of Governors of the Federal Reserve System, Federal Deposit Insurance coverage Company, and Workplace of the Comptroller of the Foreign money, “Joint Statement on Crypto-Asset Policy Sprint Initiative and Next Steps,” (PDF) joint press launch, November 23, 2021. Return to text
3. Board of Governors of the Federal Reserve System, SR Letter 22-6/CA-22-6: Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations, August 16, 2022. Return to text
4. See the President’s Working Group on Monetary Markets, Federal Deposit Insurance coverage Company, and Workplace of the Comptroller of the Foreign money, Report on Stablecoins (PDF) (Washington: PWG, FDIC, and OCC, November 2021). Return to text
6. Board of Governors of the Federal Reserve System, “Federal Reserve updates FedNow Service timing to mid-2023, marks beginning of full-scale pilot testing,” information launch, August 29, 2022. Return to text