tl;dr
Federal Reserve Vice Chair for Supervision Michelle Bowman announced a significant shift in the Fed’s approach to blockchain innovation, removing reputational risk considerations from bank supervision to reduce barriers for banks serving lawful digital asset companies. She emphasized that banks shou...
Federal Reserve Vice Chair for Supervision Michelle Bowman acknowledged that crypto firms have faced debanking due to regulatory uncertainty. At the Wyoming Blockchain Symposium on August 19, Bowman announced a fundamental shift in the Fed’s approach to blockchain innovation. She revealed that the central bank removed reputational risk considerations from bank supervision in late June to tackle barriers preventing financial institutions from serving digital asset companies engaged in lawful activities.
Bowman emphasized that banks should not be penalized for serving customers conducting legal business, asserting that customer selection is the responsibility of bank management rather than regulators. She highlighted the Fed’s shift away from an “overly cautious mindset” toward embracing blockchain technology within the traditional banking system. Bowman warned that regulators must either actively shape technological frameworks or risk losing the banking sector’s economic relevance as innovations bypass banks entirely. To reinforce this change, the Fed is updating examination manuals and supervisory materials to ensure the reputational risk removal policy is firmly implemented.
The Vice Chair outlined a four-principle regulatory framework guiding the Fed’s new digital asset approach. First, regulatory certainty is crucial to alleviate industry concerns about investing in blockchain without clear supervisory standards. Second, tailored regulation calls for supervisors to assess digital asset use cases based on their unique circumstances rather than applying broad, worst-case scenario rules. Third, consumer protection requires compliance with existing laws to prevent unfair or deceptive practices, while incorporating anti-money laundering and safety standards. Finally, American competitiveness is essential to preserving the US’s leadership in financial technology innovation, with Bowman cautioning that inadequate regulation could jeopardize this position.
Bowman also introduced changes to technology integration and supervision, noting that the Fed’s “novel supervision” activities will return to Reserve Bank examination staff, reinstating typical processes to monitor banks’ innovation. She suggested allowing Federal Reserve personnel to hold small amounts of digital assets for practical experience, likening it to hands-on learning rather than theoretical study. Bowman acknowledged tokenization’s potential to accelerate asset transfers, lower transaction costs, and reduce settlement risks, benefiting banks of all sizes, including community institutions.
She further recognized stablecoins as vital components of the financial system following the GENIUS Act’s passage. Bowman encouraged industry participation to help regulators better understand blockchain’s broader problem-solving capabilities, especially in fraud prevention, describing it as a promising area for collaboration between the Fed and the digital asset sector. She concluded by asserting that innovation and regulation work hand in hand to foster more modern and efficient financial systems.