On November 30, 2017, Federal Reserve Board Vice Chairman for Supervision Randal Quarles delivered remarks at the 2017 Financial Stability and Fintech Conference sponsored by the Federal Reserve Bank of Cleveland, the Office of Financial Research, and the University of Maryland’s Robert H. Smith School of Business, Washington, D.C. His remarks focused on financial stability and fintech, along with financial innovation.
Quarles observed how new technologies have raised productivity and living standards and contributed to economic growth, along with bringing new conveniences to our lives. He noted that, “[n]ot surprisingly, both the banking industry and technology firms have also been seeking innovations in financial services that mirror and complement changes that have been made in other industries.” Such financial innovation includes changes to consumer lending, financial advice, and retail payments.
He noted that in his new role as vice chairman for supervision at the Federal Reserve, he views innovation “as something that can and should be fostered, but of course [he] must also scrutinize these innovations from a different perspective. That is to say, it is appropriate not only to evaluate the potential of innovations to improve on existing services, but also to judge their ramifications for the safety and soundness of the institutions we supervise and for financial stability.”
Quarles concentrated his remarks on the U.S. payment system, including the “necessary trust and confidence that the system requires, the tension between the need for financial stability and the need to innovate, and the challenges that digital currencies, in particular, present relative to the current system.” In his view, these considerations “highlight the need for a prudent approach to innovation in payment systems.” With respect to payment system innovation, he commented that “we should recognize that there can be a tension between the need for financial stability in the overall payment system and the need to innovate to keep up with the demands of modern technology and lifestyles,” but that this tension is “not necessarily troubling” since innovation does involve some amount of risk. He believes that this tension can be addressed by “balancing the benefits of innovation with the safe and reliable operation of systems and critical activities.” Noting that payment systems present unique challenges to managing the potential tension between financial innovation and stability, Quarles commented that the “essential problem is how to achieve scale and manage financial and technical risk at the same time,” which means that innovation in payment systems can take longer than in other industries.
Regarding private digital currencies, Quarles believes that the financial industry is increasingly recognizing the need to separate the concept of digital currencies from the new technologies – such as distributed ledgers – that the have been employed to transfer assets. He noted that the industry is taking a cautious approach to using new technologies in “limited production settings,” which “appears to reflect the weight of responsibility the financial industry bears for protecting both their customers and their reputations.” Because the “currency” or asset at the core of some digital currency systems is not backed by other secure assets, has no intrinsic value, is not the liability of a regulated banking institution, and in lending cases, is not the liability of any institution, he observed that the treatment and classification of this asset is complicated, especially as it relates to financial stability issues if more wide-scale usage occurs.
Quarles believes that the consideration of a central-bank-issued digital currency to the general public “would require extensive reviews and consultations about legal issues, as well as a long list of risk issues, including the potential deployment of unproven technology, money laundering, cybersecurity, and privacy,” among other issues. That said, he is supportive of continued research into digital currency issues, including highly liquid and secure limited-purpose digital currencies for use as a settlement asset for wholesale payment systems.
In his view, the alternative to privately issued digital currency in the United States is not necessarily a publicly issued digital currency. Rather, Quarles views the near-term alternative as building on the “trusted foundations of the existing payment system” and working to “improve private-sector payment services.” The focus of this appears to be enhancing and improving the banking system’s services. He noted that what the United States currently lacks is “the sort of ubiquitous, real-time payment system that would allow banks and their customers to make transfers and settlements of funds across the banking system instantly, conveniently, and securely all the time.” In closing, Quarles is optimistic that there is potential for a number of these desirable innovations to be offered using a variety of existing and new technologies without posing financial stability risk.
