The House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion convened a crucial hearing on December 5 to hear from high-level representatives of federal agencies, including the Federal Reserve, Securities and Exchange Commission (SEC), and the Office of the Comptroller of the Monet (OCC), spoke about the increasing influence of new technologies such as digital assets, distributed ledgers and artificial intelligence in reshaping the financial sector.
The hearing underscored the escalating need for robust oversight of digital assets, an increased focus on AI risks, and a cautious approach to deploying distributed ledger technology in federal banking.
In an opening statement, Subcommittee Chairman French Hill said:
“Today, new and emerging technologies such as digital assets, distributed ledgers, quantum computing and greater use of artificial intelligence dominate the discussion.”
He said that for the current hearing, the committee has asked members of government agencies to testify about their work on innovation in those areas.
Agencies tackle crypto problems
Representatives from numerous federal agencies have weighed in on issues related to cryptocurrency. Michael S. Gibson, director of supervision and regulation at the Federal Reserve, said his agency recently announced a new activity surveillance program. This program aims to manage the risks associated with cryptocurrency, Distributed Ledger Technology (DLT) and complex technology-driven collaborations with fintech companies outside traditional banking.
Meanwhile, Valerie A. Szczepanik, director of the Securities and Exchange Commission’s (SEC) FinHub, said her group has devoted a “significant amount of attention and resources” to distributed ledger technology (DLT) and digital assets. Szczepanik highlighted that the SEC’s FinHub team has developed a comprehensive guide to help market participants determine whether digital assets qualify as securities.
Donna Murphy of the Office of the Comptroller of the Coin (OCC) noted the agency’s cautious approach to implementing Distributed Ledger Technology (DLT) in the federal banking system. She added that few banks under the OCC’s supervision have launched crypto products and asserted that the financial industry is instead focusing on tokenizing real-world assets and liabilities as an application for distributed ledgers.
AI risks
Several bodies discussed the risk of artificial intelligence (AI). Gibson testified that banks have begun using AI in fraud monitoring and customer service, adding that AI poses risks in the areas of “data challenges, explainability, bias, cybersecurity and consumer protection.” He also testified that the Federal Reserve is working with other agencies to monitor and learn about banks’ use of AI.
Meanwhile, Donna Murphy said the OCC recognizes the banking industry’s growing interest in AI applications and described several operational benefits. She also noted that banks can use AI to deliver customer service and products.
FDIC member Mark Mulholland acknowledged President Joe Biden’s recent executive order on AI safety and said the agency is reviewing the order. He said the FDIC is exploring the use of AI in its own internal operations but has not approved generative AIs like ChatGPT.
Finally, Ann Epstein of the Consumer Financial Protection Bureau (CFPI) noted that AI has been used to market financial products and provide customer service. She said this could have unexpected results and stressed the need to investigate any effects on customers and the financial services sector.
As representatives from the Federal Reserve, SEC, and OCC address the increasing challenges and opportunities presented by digital assets, distributed ledgers, and AI, the market’s growing calls for comprehensive regulatory guidance for these digital assets becomes all the more apparent.