A New Regulatory Landscape
Federal Reserve Governor Michelle Bowman's appearance before the House Financial Services Committee signifies a notable shift in the Federal Reserve’s regulatory agenda. She introduced a unified framework designed for both banks and stablecoin issuers. This framework aims to reduce operational risks that arise from innovation and, for the first time, establish consistent rules for entities that are competing for the same users.
Bowman articulated that the expansion of fintech firms and digital-asset companies has fostered an ecosystem where divergent standards currently exist. She emphasized the necessity of aligning this landscape to encourage innovation while simultaneously preventing the creation of artificial regulatory advantages.
Key Elements of the Proposal
The core of Bowman's proposal involves the development of specific requirements for stablecoin issuers concerning capital, liquidity, and diversification. These obligations are established under the Genius Act. This legislation mandates that these companies must register formally and ensure that every token they issue is backed by reserves held one-to-one in dollars.
Bowman believes that this system will enhance the operational quality of the sector and decrease the probability of disruptions caused by stress. This is particularly relevant as issuers grow in scale within short-term markets. Furthermore, she anticipates that regulatory agencies will provide more precise technical definitions. These definitions will clarify what constitutes a digital asset, how new use cases should be evaluated, and the appropriate regulatory scope for hybrid activities that bridge banking and crypto.
Addressing Competition and Uncertainty
This initiative is unfolding within the context of an ongoing dispute between traditional banks and crypto companies regarding access to bank charters. Banks contend that allowing digital firms to operate with the legitimacy of a bank license, without undertaking all the historical responsibilities, would result in an inequitable system. Conversely, for crypto companies, obtaining such a license would formalize a more stable operational framework and reduce the legal uncertainty that currently impedes product development.
Balancing Innovation and Safety
Bowman is advancing this regulatory agenda concurrently with the finalization of Basel III Endgame, a capital framework for large banks that has generated internal debate and political pressure. She stated that the calibration process will not adhere to predetermined targets but will instead be guided by a bottom-up technical assessment. This assessment will be supported by a simultaneous revision of the capital surcharge for systemic institutions. The Federal Reserve has already shared a revised draft with other regulators, which softens earlier proposals for major banks, thereby creating room for negotiation before the final version is published.
Bowman concluded by asserting that innovation and safety should not be viewed as conflicting forces. She advocates for a system where banks, fintech companies, and stablecoin issuers compete under comparable standards, and where regulatory oversight evolves in step with technological advancements.