Fed’s Barr: Regulators look to balance fintech’s potential, innovation with appropriate regulation

Fintech’s promise is that it can make financial services better, faster, cheaper and more available to those typically underserved, but excitement over innovative technology can lead to a pace of adoption that “overwhelms” industry and regulators’ ability to “assess and manage underlying vulnerabilities,” Federal Reserve Vice Chair for Supervision Michael Barr told a fintech industry gathering today.

Cryptoassets’ rapid growth—in market capitalization and in reach—and activity outside and inside supervised banks requires oversight that includes safeguards to ensure that crypto service providers are subject to similar regulations as other financial services providers, Barr said. “The same type of activity should be regulated in the same way,” he said. “This principle holds even when the activity may look different from the typical activities we regulate, or when it involves an exciting new technology or a new way to provide traditional financial services.”

Because crypto-related activities pose novel risks, it is important for banks to ensure that any cryptoasset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks. In August, the Fed issued supervisory guidance outlining steps that Fed-supervised banks should take prior to engaging in cryptoasset-related activities. Banks must understand the heightened liquidity risks they face from certain types of deposits from cryptoasset companies, Barr said, adding that there are additional types of cryptoasset-related activities where the Fed may need to provide guidance to the banking sector in the coming months and years.

Stablecoins linked to the dollar are of particular interest to the Federal Reserve, Barr added. “History has shown that money-like assets are subject to runs that can threaten financial stability,” he said. Barr also noted that banks are exploring different models to issue dollar-denominated tokens on distributed ledger networks, and he recommended that they do so only in a “controlled and limited manner.” Banks should engage with regulators “early and often” as they experiment, Barr said, to discuss the benefits and risks of new use cases, ensuring they are consistent with banking activities “conducted in a safe, sound and legally permissible manner.”