Michael S Barr: The Federal Reserve's role in supporting responsible
innovation
Speech by Mr Michael S Barr, Vice Chair for Supervision of the Board of Governors of
the Federal Reserve System, at the Federal Reserve Bank of Philadelphia Seventh
Annual Fintech Conference, Philadelphia, Pennsylvania, 8 September 2023.
* * *
Thank you for the opportunity to speak today, in the midst of a wave of innovation in the
payments system. There are a range of important players in the payments system and
the Federal Reserve has important roles as a supervisor as well as a payments
operator.
Regardless of who is providing the service, our payments system needs to meet
fundamental principles. Among those core principles is ensuring that the payments
infrastructure supports broad access and promotes financial inclusion. Payments are
essential for everyday life, and too often, low- and moderate-income households and
small businesses don't have access to the payments services they need at a
reasonable cost. Moreover, as the payments system evolves, it needs to provide strong
consumer protections. The payments system needs to welcome competition, provide
consumers with choices, and support innovation. The payments system should
empower consumers to have better control over their financial lives, including their
identity and financial data. And more broadly, our payments system should promote
efficiency, convenience, speed, low cost, resiliency, privacy, and security. Finally, our
payments system must and does rely on trust, and this trust must be maintained as the
system is updated. This includes trust that the payments system is not used for illicit
purposes, that lawful payments will always be honored, and that neither the government
nor private actors will act improperly based on use of the payments infrastructure.
Not that long ago, the Federal Reserve was facilitating payments by moving bundles of
checks around the country on trucks and trains! And we still have important work to do
to ensure that those who rely on checks can get their funds in a timely way and that the
system is not exposed to fraud.
But more recently the focus has been on improving our electronic payments
infrastructure. The Fed has long operated the Fedwire Funds Service, used by banks to
conduct large-value, same-day transactions among themselves. In addition, the
automated clearinghouse (ACH) service supports batch payments of more modest
value. While the Fedwire Funds Service and ACH transactions have served the
economy well for decades, the economy has changed dramatically over that time.
There is a demand for faster payments, and the Fed has recognized that today's
households and businesses would benefit from ready availability of funds 24x7.
So, in July, the Fed launched the FedNow Service®, a new service to make instant
payments secure and convenient. FedNow enables instant payments to be processed
on any day of the year for a broad array of transactions. The FedNow Service is core
payments infrastructure available to all depository institutions, including large banks,
regional banks, community banks, and credit unions. It is those institutions that will
determine whether real-time payments are available to everyone. We have provided the
rails. Innovation by private depository institutions will determine whether these services
reach a broad range of households and businesses. While current volumes on FedNow
are small, I expect that participation will grow over time and be a significant addition to,
and advance on, the existing payments infrastructure.
I view the FedNow Service as complementary to the private sector instant payments
services offered today, and as banks build on these rails, customers can get better
service. Individuals could have instant access to their paychecks and be able to spend
them same day, rather than waiting several days for checks to process. Or consumers
could pay bills at the last minute on the due date, potentially avoiding late fees. And
small businesses would benefit from timely payment as well. The benefits could be
farreaching and will be especially significant for low- and moderate-income households.
Banks and their service providers are already thinking creatively about how they can
leverage these new payments rails to meet customer needs for immediate funds
availability. Efforts by banks to meet the demands of their customers will support more
robust offerings, and I look forward to engaging with banks about how they could be
advancing financial inclusion objectives with faster payments services.
Separately, we are engaged in efforts to understand the next generation of payments
technology and how it can be used to support a secure and efficient payments system.
As the pace of innovation increases, the payments landscape continues to evolve with
the emergence of new programmable payments platforms, including those built on
distributed ledger technology and blockchain technology, and new forms of digital
assets, such as cryptocurrencies, stablecoins, and central bank digital currencies
(CBDCs). Given the new capabilities they could enable, we are seeing increased
interest in and experimentation with these innovative technologies. This
experimentation is happening in the private and public sectors, both domestically and
internationally. In my view, as both the issuer of U.S. currency and an operator in the
payments system, the Federal Reserve must understand these developments and the
tradeoffs they introduce. Our engagement with innovation is crucial so that we can
continue to support a safe and efficient payments system into the future.
We continue to speak to a broad range of stakeholders and conduct basic research in
emerging technologies that might support a CBDC payments backbone, or for other
purposes in the existing payments system. For example, the Fed's CBDC research
program is currently focused on system architecture, notably how ledgers that record
ownership of and transactions in digital assets are maintained, secured, and verified, as
well as tokenization models-that is, the design of the digital analog to the paper bank
note that permits a transfer of value between two parties without direct facilitation by the
issuing central bank.
Of course, investigation and research are very different from decision making about
next steps in terms of payments system development, and we are a long way from that.
The Federal Reserve has made no decision on issuing a CBDC and would only
proceed with the issuance of a CBDC with clear support from the executive branch and
authorizing legislation from Congress. Given the importance of this infrastructure,
investigating the potential opportunities, risks, and tradeoffs for payments innovation is
just one way the Fed fulfills its role in supporting the responsible innovation that enables
a safe and efficient U.S. payments system.
Now let me turn my attention to recent actions by the Federal Reserve that are aimed at
promoting responsible innovation in financial services more broadly. Last month, the
Federal Reserve announced that it has created a novel activities supervision program
to focus on the supervision of risks posed by novel, technology-driven activities at
1
banks. At present, these activities include those involving crypto-assets, distributed
ledger technology, and complex technology-driven bank partnerships with nonbank
fintechs. That said, this program will grow as new technologies emerge. By dedicating a
team of supervisory experts to the oversight of novel, technology-driven activities, our
aim is to provide clarity as well as timely and relevant feedback to the institutions we
supervise. We want them to continue to work to take advantage of innovations, while
also supporting their ongoing safety and soundness.
One innovation that crosses both payments provision and bank safety and soundness
issues is stablecoins, which can also be described as digital tokens that aim to maintain
a stable value relative to a government-issued currency, such as the U.S. dollar. When
an asset is pegged to a government-issued currency, it is a form of private money.
When that asset is also used as a means of payment and a store of value, it borrows
the trust of the central bank. So, the Federal Reserve has a strong interest in ensuring
that any stablecoin offerings operate within an appropriate federal prudential oversight
framework, so they do not threaten financial stability or payments system integrity.
To provide clarity for banks interested in engaging with these assets, we recently issued
guidance on the process by which a Fed-supervised bank can seek to obtain a
2
supervisory non-objection before issuing, holding, or transacting in "dollar tokens." As
the Board of Governors announced in January, before those banks engage in these
activities, they are advised to obtain a written supervisory non-objection from the Fed
verifying that they have appropriate risk management and systems in place to identify
and control potential risks, such as those related to cybersecurity and compliance with
anti-money-laundering laws.3
The guidance only covers the activities of the banks over which we have supervisory
authority. But there are big risks when the Federal Reserve does not have direct
supervisory and regulatory authority. I remain deeply concerned about stablecoin
issuance without strong federal oversight. As I mentioned earlier, stablecoins are a form
of money, and the ultimate source of credibility in money is the central bank. If
nonfederally regulated stablecoins were to become a widespread means of payment and
store of value, they could pose significant risks to financial stability, monetary policy,
and the U.S. payments system. It is important to get the legislative and regulatory
framework right before significant risks emerge. We appreciate the work Congress has
been doing on this important issue and look forward to further engagement to ensure
that there is a robust federal framework for all stablecoins.
As everyone in this room knows, innovation never stops. We are continuing to explore
new technologies so we can continue to support a robust payments system that meets
the needs of the public. We are committed to supporting responsible innovation, both
through our provision of payments rails and through timely and relevant supervisory
feedback to the institutions we supervise.
Looking ahead, we will continue to engage in exploring new technologies, including
those that could be used to further advance our provision of payments rails. As I
mentioned, this work involves continuing to study the next generation of ledger
technology. In conclusion, I want to applaud the Federal Reserve Bank of Philadelphia
for supporting the stakeholders coming together at these conferences, giving us
opportunities to learn from each other as we engage in this important work.
1
Board of Governors of the Federal Reserve System, "Federal Reserve Board
Provides Additional Information on Its Program to Supervise Novel Activities in the
Banks It Oversees," press release, August 8, 2023.
2
Board of Governors, "Federal Reserve Board Provides Additional Information on Its
Program."
3
This requirement is consistent with the supervisory nonobjection requirement
applicable to national banks pursuant to interpretive letters issued by the Office of the
Comptroller of the Currency. (See OCC Interpretive Letter No. 1174 (January 4, 2021)
and OCC Interpretive Letter No. 1179 (November 18, 2021).)