Fed’s Michelle Bowman Calls for Open Approach to Crypto and AI Regulation

TLDR

• Michelle Bowman warns banks risk irrelevance without adopting blockchain, AI, and crypto.

• Fed aims to end “reputational risk” penalties for banks serving digital asset firms.

• Bowman calls for balanced AI regulation to enhance fraud detection and customer service.

• The Fed works on a digital asset framework to expand banking access and improve efficiency.

Michelle Bowman, a Federal Reserve Governor, called for greater openness from the U.S. banking system toward blockchain, cryptocurrencies, and artificial intelligence (AI). She warned that banks could become irrelevant if they resist technological innovations.

Bowman’s remarks were made at the Wyoming Blockchain Symposium, where she emphasized the importance of banks embracing digital assets. According to Bowman, financial institutions that fail to adapt risk losing out to faster, cheaper alternatives offered by emerging technologies.

Digital Asset Framework to Expand Banking Access

Michelle Bowman confirmed that the Federal Reserve is working to develop a comprehensive digital asset framework. This framework aims to bridge the gap between traditional finance and decentralized finance.

“The Fed is committed to shifting its culture towards greater openness, especially as technological advances continue to reshape financial services,” Bowman explained. She highlighted the Fed’s role in helping financial institutions gain access to blockchain and crypto innovations while ensuring that regulatory structures remain clear and fair.

This move is expected to enhance access to banking services, especially for smaller financial institutions, by eliminating outdated supervisory barriers that currently prevent collaboration with digital asset companies.

Tokenization and Stablecoins: The Future of Financial Systems

Another important point Michelle Bowman addressed was the role of tokenized assets and stablecoins. She noted that tokenization has the potential to transform the way ownership transfers are handled, offering quicker and more cost-effective transactions.

“Banks, even community banks, stand to benefit from the near real-time transactions enabled by tokenization,” said Bowman. She also discussed stablecoins’ role in improving payment systems, particularly after the passing of the GENIUS Act.

Bowman emphasized that regulations governing stablecoins need to be tailored to real risks, ensuring that rules are clear and fair. As the digital asset sector grows, she stressed that a robust regulatory framework will be crucial for stablecoins to integrate seamlessly into the broader financial ecosystem.

AI’s Role in Banking and Financial Systems

In addition to blockchain and crypto, Michelle Bowman addressed the growing influence of AI in banking. She pointed out that AI could revolutionize the way banks detect fraud, manage risks, and improve customer service.

However, Michelle Bowman also recognized the potential risks AI could pose and emphasized the need for a balanced regulatory approach.

In a recent conversation with Sam Altman, CEO of OpenAI, Bowman discussed the dual-use nature of AI, noting that it could both protect and exploit financial systems. She called for ongoing regulation to ensure that AI’s use remains secure and beneficial.

Fed Ends “Reputational Risk” Penalties for Banks

In a major policy shift, Michelle Bowman announced that the Federal Reserve will no longer allow examiners to penalize banks for servicing legal businesses based on reputational concerns. This change aims to remove barriers that have historically restricted banks from engaging with digital asset firms.

By ending these penalties, the Fed hopes to foster a more inclusive financial ecosystem where innovation is not stifled by outdated reputational risk considerations. This policy shift aligns with Bowman’s vision of a dynamic financial system that embraces new technology while safeguarding stability.

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