Regulators are keeping a skeptical eye on cryptocurrencies, but at least one official wants to make sure digital assets aren’t driven out of the banking industry entirely.
Federal Reserve Governor Michelle Bowman has said that banks should be allowed to experiment with cryptocurrencies and that efforts to mitigate the risks associated with this type of activity should not go so far as to drive them out of business altogether. supervised space.
“The Fed and other bank agencies will continue to focus on this area, in light of the significant risks these activities can pose. But the bottom line is that we don’t want to stifle innovation,” Bowman said Tuesday after midday in prepared remarks delivered at a Florida Bankers Association event. “As regulators, we must support innovation and recognize that the banking industry must evolve to meet consumer demand.”
Bowman’s comments come a week after the Fed, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency released a joint statement on crypto risk oversight. In it, the agencies noted their “significant security and soundness concerns” about banks extending credit to crypto firms. They also said it would be “highly unlikely” that banks would be allowed to hold cryptocurrencies or other assets traded on decentralized platforms on their balance sheets.
Bowman acknowledged the events of the past year, including the disappearance of the FTX crypto exchangethe collapse of algorithmic stablecoins such as TerraUSD and doubtful claims about being FDIC insured — including those made by now bankrupt Voyager Digital Holdings — warrant the skepticism of banking supervisors.
Yet, she said, as regulators consider policy changes, they must also consider the risks of going too far.
“By inhibiting innovation, we could push growth in this space towards the non-banking sector, which would lead to much less transparency and a potential risk to financial stability,” she said. “We are thinking about some of these issues and what a regulatory approach might look like.”
In his speech, Bowman also touched on several other regulatory goals on the Fed’s agenda for 2023, including payments, climate-related risks and finalizing the Community Reinvestment Act reforms.
Bowman said FedNow, the real-time payment processing network set to debut this year after years of anticipation, will be transformative, enabling “depository institutions of all sizes and in all communities across the America, to provide secure and efficient instant payment services.
Currently, the only option for processing instant payments is the Real Time Payments Network, a private system operated by The Clearing House, an organization owned by several of the largest banks in the country. While FedNow will be offered at a reduced rate during its initial rollout this summer, the price will eventually match that charged by its private sector competitor, as required by the Currency Control Act 1980.
Bowman noted that when FedNow debuts, it could deliver many innovations some proponents believe could be derived from a central bank digital currency. While the idea of a CBDC gained momentum in Washington last year, some Fed leaders remain deeply skeptical of him.
“The Fed continues to study the idea, although much of what proponents hope to achieve with a central bank digital currency could be delivered through FedNow and existing private payment services,” Bowman said. “In any case, initiatives to make payments faster and more efficient will continue to be an area of focus.”
Bowman, often a proponent of less intrusive regulation, especially for smaller banks and community banks, said recent initiatives around climate risk assessment adhere to longstanding Fed principles.
The central bank will launch a pilot stress-testing program this year that will assess the ability of six of the country’s largest banks to cope with climate-related events. He also offered guidelines on how to manage climate risks for banks with at least $100 billion in assets. Bowman noted that smaller banks have been spared these initiatives, in part because they “already embed and adhere to strong risk management expectations.”
Overall, Bowman said the Fed’s new climate initiatives are largely extensions of existing practices.
“The Fed views its role on climate as a narrow focus on oversight responsibilities and limited to our role in promoting a safe, sound and stable financial system,” she said. “While this climate monitoring effort is a new area of focus, it is a long-standing prudential requirement that banks manage their risks from extreme weather events and other natural disasters that could disrupt operations or to have an impact on the sectors of activity.”
Finally, Bowman reiterated his concerns about proposed changes to the Community Reinvestment Act, which is being updated for the first time in 25 years. In May, when the Fed opened the review process to public commentBowman raised questions about whether new requirements would be too onerous for banks with less than $10 billion in assets.
“I fully support these efforts, but I also share the concern noted in the public comments which suggested that some of the elements included in this overhaul of the CRA framework result in significant new regulatory burden, particularly for smaller and community banks. , “she said on Tuesday. “As we continue this important rule-making process, it will be critical for the Fed to carefully weigh the costs and benefits of any changes before finalizing a proposal.”