Barr addresses innovation – including crypto, stablecoins, tokenization, FedNow, CBDCs – in wide-ranging speech

Regulating financial institutions innovations – including stablecoins, payment systems, tokenizing bank liabilities and more – is critical to the safety and soundness of the overall financial system, the Federal Reserve’s top supervisor said Wednesday.

Fed Board Vice Chair for Supervision Michael Barr said enthusiastic adoption of innovative financial products can overwhelms consumers’ ability to assess and manage underlying vulnerabilities.

“As we saw in the lead up to the Global Financial Crisis, innovative financial products can mask emerging risks, resulting in significant harms to businesses and households and ultimately undermining financial stability,” Barr told the DC Fintech Week conference in Washington, D.C. “These products can leave consumers vulnerable if they are not coupled with meaningful disclosures and basic protections against abusive practices. Innovation can lead to disruptions of existing markets, which may be beneficial, but may also generate new systemic risks.”

Among other financial innovations, Barr addressed:

  • Crypto assets: Calling some of the assets “rife with risks” including fraud, theft, manipulation, and exposure to money-laundering, Barr said the Fed is applying an overriding principle that the same type of activity should be regulated in the same way. “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,” Barr said. He noted the Fed was working with the other federal banking agencies “to ensure that crypto-asset-related activities banks may become involved in are well regulated and supervised, to protect both customers and the financial system.” He asserted that many of those activities pose novel risks, “and it is important for banks to ensure that any crypto-asset-related activities they conduct are legally permissible and that banks have appropriate measures in place to manage those risks.”
  • Deposits from crypto-asset industry: Barr contended that banks may experience deposit fluctuations that are correlated and closely linked to broader developments in crypto-asset markets when their deposits are concentrated in those from the crypto-asset industry or from crypto-asset companies that are highly interconnected or share similar risk profiles.“ In addition, “misrepresentations” regarding deposit insurance by crypto-asset companies “can cause customer confusion and lead to increased withdrawals at banks providing deposit services to crypto-asset firms and their customers during times of stress.” He said the banking agencies are working together to highlight the issues to banks and other supervised institutions.
  • Stablecoins: Asserting that stablecoins could, over time, pose a risk to financial stability, Barr said it was important to “get the regulatory framework right before they do.” He called on Congress to take action to provide a strong federal framework for prudential oversight, and urged regulators to use their existing authorities.
  • Tokenizing bank liabilities: Barr warned banks to recognize the risks of this activity (in which dollar-denominated tokens are issued on distributed ledger networks). “Banks looking to experiment with these new technologies should do so only in a controlled and limited manner,” he said. “As banks experiment, I invite them to engage with their regulators early and often 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.”
  • FedNow launch: Barr reiterated the Fed’s plans to unveil its new payments platform between May and July of 2023. “It will help to lower costs, extend access, and improve security for consumers and safety for the financial system,” he contended.
  • CBDC: Barr noted that “no conversation about payments innovation would be complete without mention of a central bank digital currency (CBDC).” He quickly added, however, that the Fed has not yet made any decisions about whether (or not) to issue a CBDC. “If we believe it makes sense to do so, we would want the support of Congress and the Administration. In the meantime, we’re doing the work of understanding the technological requirements of such a system, deepening our understanding of potential policy tradeoffs, and taking a look at how other countries are thinking about and experimenting with CBDCs.”

Federal Reserve Board Vice Chair for Supervision Michael S. Barr: “Managing the Promise and Risk of Financial Innovation”