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How Regulators Can Support Innovation

How Regulators Can Support Innovation

by Starling Insights

Starling Insights Editorial Board

Mar 21, 2024


In a recent speech, Travis Hill, Vice Chairman of the US Federal Deposit Insurance Corporation (FDIC), discussed the potential for tokenization to transform the financial system and emphasized the need for regulators to support innovation.

Tokenization involves representing real-world assets, such as commercial bank deposits, on distributed ledgers, such as a blockchain. Hill outlined several potential benefits of tokenization, including enhanced efficiency, programmability, and atomic settlement, while also acknowledging the challenges and risks involved, such as regulatory uncertainty and concerns about bank runs.

"Many other organizations and commentators have similarly expressed optimism that tokenization may have a transformative impact on banking and payments," he said. "This process is still in the early stages, with many open questions, but development is happening fast and occurring across the globe."

Hill criticized the current regulatory approach, particularly the lack of clarity and the cumbersome approval process for institutions interested in blockchain and distributed ledger technologies. "I recognize that sometimes it can be difficult for regulators to issue broadly applicable policy in areas where the technology is evolving quickly, but I think our goal should still be to provide as much clarity as is feasible regarding what is permissible and what we consider safe and sound," he said.

Hill's criticisim of the regulatory approach to tokenization included a broader concern about financial regulation. In his speech he advocated for a more transparent and responsive regulatory framework that fosters innovation while ensuring safety and soundness in the banking sector. Hill briefly touched upon issues related to bank failures, posing questions about the role of external auditors, access to the discount window for poorly-rated banks, and lending practices of the Federal Home Loan Banks (FHLBs). He highlighted the need for policymakers to carefully consider the implications of their decisions on struggling banks and the broader financial system.

In conclusion, Hill emphasized the importance of balancing innovation with regulatory oversight to support the evolution of banking and payments while safeguarding against systemic risks. He urged regulators to provide clarity and flexibility to financial institutions navigating the complexities of emerging technologies like tokenization while ensuring robust mechanisms are in place to address challenges related to bank failures and liquidity crises.

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