Fed Governor Says Unclear Digital Asset Regulation Putting Banks in ‘Perilous Position’

Federal Reserve governor Michelle W. Bowman says that the lack of clear regulations for crypto assets is placing financial institutions at risk.

In a speech delivered in Austria over the weekend, Governor Bowman says that there is a supervisory gap in how regulators oversee novel banking ventures, including activities associated with the crypto space.

According to the Fed governor, the uncertainty in policies involving digital assets is putting banks in a “perilous position.”

“One area in particular that requires attention is the current approach to the supervision of novel banking activities, which leaves financial institutions in a supervisory void. While there have been some efforts to provide guidance, there remains substantial uncertainty about the permissibility of and supervisory expectations for these activities, including banking as a service, digital assets, and other novel activities. This leaves banks in the perilous position of relying on general but non-binding statements by policymakers only to be criticized at some point in the future.”

The Fed governor adds that banks may eventually suffer if regulators fail to address the supervisory void.

“These changes in supervisory approach could help remediate current shortcomings and build capacity to embrace, evolve with, and respond to emerging risks. Failure to follow this approach could have significant consequences for banks navigating higher interest rates while meeting the credit and financial needs of their customers.”

Bowman also says that the lack of a clear regulatory framework for digital assets is disadvantageous for investors who have already entered the markets.

“The absence of a clear regulatory and supervisory approach creates the risk that regulators may determine novel activities are impermissible or impose new requirements and expectations on these activities after the fact and, for some first movers, after significant investment. If our role is effective supervision and regulation, we must be willing to engage in both the novel and traditional activities.”