Fed's Bowman: Banks, regulators must embrace emerging tech

The Federal Reserve's top banking regulator is promoting a pro-technology approach, urging a shift away from what she called "an overly cautious mindset" toward banks adopting innovative tools such as blockchain and artificial intelligence.

In a speech Tuesday, Federal Reserve Vice Chair for Supervision Michelle Bowman said regulators must understand new products and services used in the financial sector, rather than focusing solely on the risks they pose.

"Bank regulators approach technology and periods of change with caution and skepticism, concerned about rapid growth, new business models, greater interconnectedness and interdependence, often focusing only on the risks," she said speaking at the Wyoming Blockchain Symposium. "But risks may be offset or at least determined to be manageable when we recognize and consider the potentially extensive benefits of new technology."

Bowman outlined several technological innovations gaining traction in the financial sector, including tokenization, blockchain and artificial intelligence. She warned that if regulators are not open-minded about technology adoption, "banks will play a diminished role in the financial system more broadly."

Regarding tokenization, Bowman said she believes it is poised to expand access to capital markets and facilitate near real-time payments, while also lowering costs. She also mentioned that the GENIUS Act, signed into law by President Donald Trump in July, has pushed stablecoins "to the forefront."

Banking agencies, including the Fed, are currently creating a regulatory framework for the cryptocurrency, she said.

"[Stablecoins] are now positioned to become a fixture in the financial system, with implications and opportunities for the traditional banking system, including the potential to disrupt traditional payment rails," Bowman noted.

In reaction to changing attitudes to cryptocurrency, Bowman said Fed employees could benefit from "hold[ing] de minimus amount of crypto" to better understand how digital assets work.

"I certainly wouldn't trust someone to teach me to ski if they'd never put on skis, regardless of how many books and articles they have read," she said during her speech. "We should consider whether limits on staff investment activities may be a barrier to recruiting and retaining examiners with the necessary expertise and for existing staff to better understand the technology."

The Fed governor urged regulators and the financial services industry to have ongoing conversations with one another regarding technology adoption.

"Banks should be encouraged to explore new technology, to engage in discussions with their regulators about how they can be deployed, and what reasonable supervisory expectations should apply," Bowman added. "In this context, a healthy dialogue and a commitment to learning ensures the bank and examiner relationship can be collaborative rather than antagonistic in tone."

Bowman's commentary comes after the Federal Reserve Board announced the end of a program created in 2023 to supervise how banks use emerging technologies, along with the rollback of several policies related to crypto use.

Its decision to end the Novel Activities Supervision Program, launched two years earlier primarily to monitor banks' crypto adoption, reflects the central bank's improved understanding of the use cases and risks associated with developing technologies, the Federal Reserve said previously.

"We stand at a crossroads: we can either seize the opportunity to shape the future or risk being left behind," Bowman said, closing out her speech Tuesday. "By embracing innovation with a principled approach, we can define the course of history and fulfill our responsibility to promote the safety and soundness of the banking system and financial stability."