FRB Director of Supervision Describes Regulatory Approach to Innovation

In testimony before the House Financial Services Committee, Federal Reserve Board ("FRB") Director, Division of Supervision and Regulation Michael S. Gibson described the FRB's approach to the supervision and regulation of innovation.

Director Gibson highlighted the benefits to the financial system of responsible innovation, including (i) improved safety and soundness of banks, (ii) increased operational efficiencies, (iii) reduced costs, (iv) increased opportunities for financial inclusion and (v) new financial products and services. He said that the FRB's approach to innovation rests on four principles:

• the agency will treat novel activities that present fundamentally the same risks in the same way, regardless of where or how the activities occur or the terms used to describe the activities;
• the agency will neither prohibit nor discourage banking organizations from providing banking services to customers of any specific class or type, as permitted by law or regulation;
• the agency will communicate "expectations and approaches to novel activity supervision and regulation to provide a pathway for responsible innovation," (noting the creation of a novel activities supervision program to focus on the risks posed by distributed ledger technology and crypto-asset-related activities); and
• the agency will make continuous outreach to banks, nonbank FinTechs, academics, and others "to exchange views on how technology is changing the banking sector and the financial system as a whole."

As to digital tokens, Mr. Gibson referred to FRB guidance on "the process by which a Federal Reserve-supervised bank can seek to obtain a supervisory non-objection before issuing, holding, or transacting in dollar tokens." He also noted additional guidance which lays out supervisory expectations for all types of third-party relationships, including relationships with financial technology companies. As to AI, Mr. Gibson described the risks including "data challenges, explainability, bias, cybersecurity, and consumer protection." He said that the FRB is tracking emerging practices regarding banks' use of AI and related risk management for fraud monitoring and customer service.