Skip to main content
Menu Icon
Close

InfoBytes Blog

Financial Services Law Insights and Observations

Filter

Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.

  • House Financial Services Committee questions financial agency representatives on technological implementations

    Federal Issues

    On December 5, the U.S. House Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion held a hearing on “Fostering Financial Innovation: How Agencies Can Leverage Technology to Shape the Future of Financial Services.” The Committee invited representatives to testify from the SEC, OCC, FDIC, CFPB, NCUA, and the Federal Reserve. The representatives fielded an array of questions focused on artificial intelligence, cryptocurrencies, and central bank digital currencies (CBDCs), and broadly focused on the need to balance technological innovation within the financial sector with managing risk.

    On cryptocurrencies, congressional representatives posed questions on the nature of criminal activity among other risks. The discussion addressed bank risks related to crypto assets—while banks do not hold crypto assets, the representative from the Federal Reserve noted how banks may face liquidity risks when holding deposits from crypto-related companies. On CBDCs, the Committee asked for an update on the U.S. CBDC; the Federal Reserve representative mentioned the Fed’s current research on CBDC technologies but noted that the agency is still “a long way off from thinking about the implementation of anything related to a CBDC.”

    On the topic of artificial intelligence, agency representatives discussed how banks are using the technology for fraud monitoring and customer service. The discussion addressed how artificial intelligence technology can create deepfakes using generative models to mimic an individual’s appearance or voice, and thus help scammers bypass traditional security checks. In response, some countries have implemented a secure digital ID that biometrically syncs to one’s smartphone, and the NCUA noted that it is currently evaluating this technology.

    Federal Issues Financial Services Central Bank Digital Currency Fintech OCC FDIC CFPB NCUA Federal Reserve

  • Fed’s Vice Chair remarks on payments innovation, CBDCs, and financial inclusion

    On October 27, Fed Vice Chair for Supervision, Michael Barr, delivered a speech at the Economics of Payments XII Conference discussing the Fed’s place in the payments system and highlighting its role as a bank supervisor and operator of key payment infrastructure. Emphasizing the Fed’s introduction of its FedNow instant payment service (covered by InfoBytes here), which was designed to enable secure instant payments in response to the increasing demand for secure and convenient payment options, Barr encouraged banks to build upon the new payment infrastructure. He also noted that ongoing experimentation with new payment technologies, such as stablecoins, creates a need for regulation, particularly where an asset is “pegged to government-issued currencies.” 

    Regarding central bank digital currencies (CBDCs), the Fed is engaged in research and in discussions with various stakeholders; however, it has not decided on whether to issue a CBDC. The Vice Chair stressed that any move in this direction would require “clear support” from the Executive Branch and authorization from Congress.

    Barr emphasized the Fed’s commitment to working with the international community to improve cross-border payment systems as well as the need for research into both traditional and emerging payment methods, noting that innovation should “promote broad access and financial inclusion.”  Finally, the remarks touched on the Fed’s proposed revisions to the interchange fee cap for debit card issuers, with a call for public input on the matter (covered by InfoBytes here).

    Bank Regulatory Fintech Federal Reserve Payments CBDC Financial Inclusion Stablecoins

  • Fed governor speaks on responsible innovation in money and payments

    On October 17, Federal Reserve Board Governor Michelle Bowman provided remarks on innovation in money and payments, including crypto assets, central bank digital currency (CBDC), and the development of instant payments, in which she laid out her vision for “responsible innovation,” which recognizes the important role of private-sector innovation and leverages the U.S. banking system supported by clear prudential supervision and regulation. With respect to CBDC, Bowman said that she has yet to see a compelling argument that CBDC could address frictions within the payment system, promote financial inclusion, or provide the public with access to safe central bank money any more effectively or efficiently than alternatives. She explained that, given that the U.S. has a safe and well-functioning banking system, the potential uses of a U.S. CBDC remain unclear and, at the same time, could introduce significant risks and tradeoffs. Bowman also expressed skepticism over stablecoins, stating that in practice they have been less secure, less stable, and less regulated than traditional forms of money. Finally, Bowman discussed technological innovations in wholesale payments, which are large-value, interbank transactions. Bowman said that the Fed is researching emerging technologies that could enable or be supported by future Fed-operated payment infrastructures, including depository institutions transacting with “tokenized” forms of digital central bank money. Bowman noted that banks and other eligible institutions already hold central bank money as digital balances at the Fed. She also stressed that wholesale payment infrastructures operated by the Fed “underpin domestic and international financial activities” by serving as a “foundation” for payments and the broader financial system. Because these wholesale systems function “safely and efficiently” today, it is necessary to investigate and understand the potential opportunities, risks, and tradeoffs for wholesale payment innovation to support a safe and efficient U.S. payment system.

    Find continuing InfoBytes coverage on CBDCs here.

    Bank Regulatory Federal Issues Federal Reserve Cryptocurrency CBDC Fintech Digital Assets Money Service / Money Transmitters

  • EU-U.S. release statement on Joint Financial Regulatory Forum

    Federal Issues

    On July 20, participants in the U.S.-EU Joint Financial Regulatory Forum, including officials from the Treasury Department, Federal Reserve Board, CFTC, FDIC, SEC, and OCC, issued a joint statement regarding the ongoing dialogue that took place from June 27-28, noting that the matters discussed during the forum focused on six themes: “(1) market developments and financial stability risks; (2) regulatory developments in banking and insurance; (3) anti-money laundering and countering the financing of terrorism (AML/CFT); (4) sustainable finance and climate-related financial risks; (5) regulatory and supervisory cooperation in capital markets; and (6) operational resilience and digital finance.”

    Participants acknowledged that the financial sector in both the EU and the U.S. is exposed to risk due to ongoing inflationary pressures, uncertainties in the global economic outlook, and geopolitical tensions as a result of Russia’s war on Ukraine. During discussions, participants emphasized the significance of strong bank prudential standards, effective resolution frameworks, and robust supervision practices. They also stressed the importance of international cooperation and continued dialogue to monitor vulnerabilities and strengthen the resilience of the financial system. Participants took note of recent developments relating to, among other things, recent bank failures, digital finance, the crypto-asset market, and the potential adoption of central bank digital currencies.

    Federal Issues Bank Regulatory Financial Crimes Digital Assets Of Interest to Non-US Persons EU Department of Treasury Federal Reserve CFTC FDIC SEC OCC Anti-Money Laundering Combating the Financing of Terrorism

  • FSB finalizes crypto framework

    Federal Issues

    On July 17, the Financial Stability Board (FSB) released its global regulatory framework for promoting comprehensive, international consistency of regulatory and supervisory approaches for crypto-asset activities and stablecoins, while also supporting responsible innovations potentially brought by technological changes. Based on the principle of “same activity, same risk, same regulation,” FSB’s framework consists of two distinct sets of recommendations. The first set of recommendations focuses on regulating, supervising, and overseeing crypto-asset activities and markets at a high level. The recommendations establish a global regulatory baseline for promoting a framework that is technology-neutral and focuses on underlying activities and risks (FSB notes that some jurisdictions may choose to take more restrictive regulatory measures). The second set provides revised high-level recommendations specifically for the regulation, supervision, and oversight of “global stablecoin” arrangements. The recommendations also seek to promote consistent and effective regulation, supervision and oversight of global stablecoin arrangements across jurisdictions to address potential financial stability risks posed at both the domestic and international level, while further “supporting responsible innovation and providing sufficient flexibility for jurisdictions to implement domestic approaches.”

    The final recommendations “take account of lessons from events of the past year in crypto-asset markets, as well as feedback received during the public consultation of the FSB’s proposals,” the announcement said, noting that central bank digital currencies are not subject to these recommendations. The FSB and sectoral standard-setting bodies (SSBs) will continue to coordinate work to promote the development of a comprehensive and coherent global regulatory framework that is appropriate for the risks associated with crypto-asset market activities, including providing more detailed guidance through SSBs and monitoring and public reporting.

    Federal Issues Digital Assets Financial Stability Board Supervision Cryptocurrency CBDC Of Interest to Non-US Persons Fintech

  • Fed governor outlines CBDC risks

    On April 18, Federal Reserve Governor Michelle W. Bowman cautioned that the risks of creating a U.S. central bank digital currency (CBDC) may outweigh the benefits for consumers. Bowman said the Fed continues to engage in exploratory work to understand how a CBDC could potentially improve payment speeds or better financial inclusion, and noted that the agency is also trying to understand how new potential forms of money like CBDCs and other digital assets could play a larger role in the economy. In prepared remarks delivered before Georgetown University’s McDonough School of Business Psaros Center for Financial Markets and Policy, Bowman raised several policy considerations relating to privacy, interoperability and innovation, and the potential for “unintended effects” on the banking system should a CBDC be adopted. She also commented that due to the upcoming rollout of the agency’s FedNow Service in July (covered by InfoBytes here), real-time retail payments will happen without the introduction of a CBDC. With respect to privacy, Bowman cautioned that any CBDC “must ensure consumer data privacy protections embedded in today’s payment systems continue and are extended into future systems.” She added that “[i]n thinking about the implications of CBDC and privacy, we must also consider the central role that money plays in our daily lives, and the risk that a CBDC would provide not only a window into, but potentially an impediment to, the freedom Americans enjoy in choosing how money and resources are used and invested.”

    Bank Regulatory Federal Issues Federal Reserve Digital Assets CBDC Consumer Finance Consumer Protection Payments FedNow Fintech

  • Treasury seeks to advance CBDCs

    Federal Issues

    On March 1, Treasury Undersecretary for Domestic Finance Nellie Liang announced that the Treasury Department will lead a new senior-level working group to advance work on a U.S. central bank digital currency (CBDC). As previously discussed in a Treasury report released last September on the future of money and payments (covered by InfoBytes here), Treasury was called to lead an interagency working group to complement work undertaken by the Federal Reserve Board to consider the implications of a U.S. CBDC. The working group will consist of leaders from Treasury, the Fed, and White House offices, including the Council of Economic Advisors, National Economic Council, National Security Council, and Office of Science and Technology Policy. In the coming months the working group “will begin to meet regularly to discuss a possible CBDC and other payments innovations,” Liang said during a workshop titled “Next Steps to the Future of Money and Payments.” The working group will focus on three main policy objectives: (i) how a U.S. CBDC would affect U.S. global financial leadership; (ii) potential national security risks posed by a CBDC; and (iii) the implications for privacy, illicit finance, and financial inclusion if a CBDC is created.

    To support discussions on a possible CBDC and other payment innovations, Liang said the working group will develop an initial set of findings and recommendations. Those findings and recommendations may relate to whether a U.S. CBDC would help advance certain policy objectives, what features would be required for a U.S. CBDC to advance these objectives, choices for resolving CBDC design trade-offs, and areas where additional technological research and development might be useful.

    Liang commented that the working group will also “engage with allies and partners to promote shared learning and responsible development of CBDCs.” She pointed out that CBDC efforts are already underway in jurisdictions around the world, with 11 countries already having fully launched CBDCs, “while central banks in other major jurisdictions are researching and experimenting with CBDCs, with some at a fairly advanced stage.” Liang stressed that regardless of whether a CBDC is adopted in the U.S., the country “has an interest in ensuring that CBDCs interact safely and efficiently with the existing financial infrastructure; that they support financial stability and the integrity of the international financial system; that global payment systems are efficient, innovative, competitive, secure, and resilient; and that global payments systems continue to reflect broader shared democratic values, like openness, privacy, accessibility, and accountability to the communities that rely upon them.”

    Federal Issues Digital Assets Department of Treasury Of Interest to Non-US Persons CBDC Privacy, Cyber Risk & Data Security Fintech

  • Treasury seeks to mitigate digital asset financial risks

    Federal Issues

    On November 18, Assistant Secretary for Terrorist Financing and Financial Crimes at the U.S. Department of Treasury Elizabeth Rosenberg spoke before the Crypto Council for Innovation. In her prepared remarks, Rosenberg discussed an Action Plan to Mitigate the Illicit Finance Risks of Digital Assets (the “Action Plan”), which, according to Rosenberg, is a roadmap for how the U.S. government, led by Treasury, will bring greater transparency to the digital asset sector. The Action Plan is issued pursuant to President Biden’s Executive Order 14067 “Ensuring Responsible Development of Digital Assets” (covered by InfoBytes here). Rosenburg noted that the Action Plan identifies seven priority actions, including improving global anti-money laundering/countering the financing of terrorism (AML/CFT) regulation and enforcement, strengthening U.S. supervision of the virtual asset service providers sector, and engaging with the private sector. She emphasized that it is “critical” to work with the private sector, and between private sector entities, to detect and counter illicit finance. Rosenberg noted that to deepen Treasury’s insight, the agency released a Request for Comment (RFC) in September, seeking feedback on the Action Plan, the assessment of illicit financing risks, and opportunities to strengthen public-private collaboration.

    As previously covered by InfoBytes, the RFC also sought public feedback on AML/CFT regulation and supervision, global implementation of AML/CFT standards, and central bank digital currencies. Rosenberg discussed two issues addressed in the comment letters: (i) a need for regulatory clarity; and (ii) more public-private engagement. Specifically, she noted that “[m]any of the comments acknowledged that in the United States, virtual asset service providers are subject to a regulatory framework for AML/CFT and have sanctions obligations.” She further noted that “industry commenters identified specific areas, such as questions around decentralized finance (DeFi), where they could benefit from additional regulatory clarity or guidance.” Rosenberg also emphasized that Treasury wants to “ensure that safeguards are in place to promote the responsible development of virtual assets to maintain privacy and shield against arbitrary or unlawful surveillance.” She further noted that the goal and intention of Treasury “is not to deter the development of technologies that provide privacy for virtual asset transfers,” and that Treasury “welcome[s] opportunities to further engage with industry on how these technologies can both promote privacy while also mitigating illicit finance risks and complying with regulatory and sanctions obligations.”

    Federal Issues Digital Assets Financial Crimes Department of Treasury Cryptocurrency Decentralized Finance Anti-Money Laundering Combating the Financing of Terrorism

  • FDIC’s Gruenberg discusses the prudential regulation of crypto assets

    On October 20, FDIC acting Chairman Martin J. Gruenberg spoke before the Brookings Institution on the prudential regulation of crypto-assets. In his remarks, Gruenberg first discussed banking, innovation, and crypto-assets, which he defined as “private sector digital assets that depend primarily on the use of cryptography and distributed ledger or similar technologies.” He stated that innovation “can be a double-edged sword,” before noting that subprime mortgages, subprime mortgage-backed securities, collateralized debt obligations and credit default swaps were considered financial innovations before they were “at the center of the Global Financial Crisis of 2008.” Gruenberg further discussed that such innovations resulted in catastrophic failure because, among other things, consumers and industry participants did not fully understand their risks, which were downplayed and intentionally ignored. He then provided an overview of the FDIC’s approach to engaging with banks as they consider crypto-asset related activities, and the potential benefits, risks, and policy questions related to the possibility that a stablecoin could be developed that would allow for reliable, real-time consumer and business payments. He stated that “[f]rom the perspective of a banking regulator, before banks engage in crypto-asset related activities, it is important to ensure that: (a) the specific activity is permissible under applicable law and regulation; (b) the activity can be engaged in a safe and sound manner; (c) the bank has put in place appropriate measures and controls to identify and manage the novel risks associated with those activities; and (d) the bank can ensure compliance with all relevant laws, including those related to anti-money laundering/countering the financing of terrorism, and consumer protection.”

    Gruenberg pointed to an April financial institution letter from the FDIC (covered by InfoBytes here), which requested banks to notify the agency if they engage in crypto asset-related activities. He added that as the FDIC and other federal banking agencies develop a better understanding of the risks associated with crypto-asset activities, “we expect to provide broader industry guidance on an interagency basis.” Regarding crypto-assets and the current role of stablecoins, Gruenberg noted that payment stablecoins could be significantly safer than available stablecoins if they were subject to prudential regulation, including issuing payment stablecoins through a bank subsidiary. He cautioned that disclosure and consumer protection issues should be “carefully” considered, especially if custodial wallets are allowed outside of the banking system as a means for holding and conducting transactions. Specifically, he said that “payment stablecoin and any associated hosted or custodial wallets should be designed in a manner that eliminates—not creates—barriers for low- and moderate-income households to benefit from a real-time payment system.” Gruenberg added that if a payment stablecoin system is developed, it should complement the Federal Reserve's forthcoming FedNow service—a faster payments network that is on track to launch between May and July of next year—and the potential future development of a U.S. central bank digital currency. In conclusion, Gruenberg stated that although federal banking agencies have significant authority to address the safety, soundness and financial stability risks associated with crypto assets, there are “clear limits to our authority, especially in certain areas of consumer protection as well as the provision of wallets and other related services by non-bank entities.”

    Bank Regulatory Federal Issues Fintech Cryptocurrency FDIC Digital Assets Stablecoins Payments CBDC

  • Fed governor “highly skeptical” of U.S. CBDC

    On October 14, Federal Reserve Governor Christopher J. Waller spoke during the “Digital Currencies and National Security Tradeoffs” symposium presented by the Harvard National Security Journal regarding the U.S. dollar and central bank digital currencies (CBDC). Waller said that he is “highly skeptical of whether there is a compelling need for the Fed to create a digital currency.” Regarding foreign CBDCs, Waller first considered the emergence of foreign CBDCs in a world without the U.S. CBDC. He noted that “advocates for a CBDC tend to promote the potential for a CBDC to reduce payment frictions by lowering transaction costs, enabling faster settlement speeds, and providing a better user experience.” Because of “the well-known network effects in payments,” Waller pointed out that “the more users the foreign CBDC acquires, the greater will be the pressure on the non-U.S. company to also use the foreign CBDC.”

    However, Waller considered that the broader factors underpinning the dollar’s international role would not change. Waller further noted the possibility that a foreign-issued CBDC could have the opposite of its intended effect and make companies even less willing to use that country’s currency. Waller further noted that creating a U.S. CBDC “would come with a number of costs and risks, including cyber risk and the threat of disintermediating commercial banks, both of which could harm, rather than help, the U.S. dollar's standing internationally.” He said he believes that a U.S. CBDC would raise many issues, including money laundering and international financial stability. Waller also considered a scenario in which a privately issued stablecoin pegged to a sovereign currency is available for international payments. He stated that they may be more attractive than existing options due to their ability to provide real-time payments at a lower cost and their ability to provide a safe store of value for individuals residing in or transacting with countries with weak economic fundamentals. He further warned that stablecoins “must be risk-managed and subject to a robust supervisory and regulatory framework.” Waller reiterated that "no decisions have been made" at the Fed on CBDCs and noted that his remarks are intended to provide a free and open dialogue on their utility. He also noted that he is “happy to engage in vigorous debate regarding my view,” and “remain[s] open to the arguments advanced by others in this space.”

    Bank Regulatory Federal Issues Digital Assets Fintech Federal Reserve CBDC

Pages

Upcoming Events