OCC leader outlines principles for banks, regulators in deploying tokenization, AI

Banks, and regulators, dealing with potentially transformative innovations like tokenization and artificial intelligence (AI) should consider three principles: innovate in stages, build the brakes while building the engine, and engage regulators early and often, the leader of the regulator of national banks said Friday.

Speaking at the American Bankers Association’s Risk and Compliance Conference in San Antonio, Texas, Acting Comptroller of the Currency Michael Hsu said rapid innovations like tokenization and AI present special opportunities, risks, and challenges for banks and regulators. “While banks need to be adaptive and dynamic to thrive, they also need to safeguard trust by approaching innovation responsibly and purposefully,” he said.

Regarding the three principles, Hsu asserted that innovating in stages is a simple concept. “Start with what can be controlled, expand only when ready, monitor carefully, adjust, and repeat,” he said. “Fortunately, banks with robust new product approval processes are familiar with this approach.”

On building the brakes while building the engine, Hsu recommended that risk and compliance professionals be at the innovation table and have their voices heard. “In the technology space, speed to market is an important factor in innovation,” Hsu said. “Slowing things down is seen as anti-innovative.”

But in banking, he said, giving risk and compliance professionals a seat at the innovation table from the start, and heeding their input, empowers them to identify risks and risk mitigants will help ensure that the products and services that result will be safe, sound, fair and trusted. “This is what supervisors and the public expect, and it makes good long-term business sense,” he said.

Finally, regarding regulators, Hsu asserted that asking for permission, not forgiveness, from regulators will help ensure the longevity of rapid and transformational innovations. “The pressure to be a first mover and take advantage of network effects can incentivize firms to release first and engage with regulators later,” he said. “This ‘ask for forgiveness’ approach may work in certain technology contexts. But it doesn’t work in banking and finance, where public trust is critical to long-term product success, and regulatory approval is a proxy for that trust.”

Acting Comptroller of the Currency Michael J. Hsu: Remarks to the American Bankers Association (ABA) Risk and Compliance Conference “Tokenization and AI in Banking: