▶ 0:03:25The Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence will come to order. Without objection, the Chair is authorized to declare recess at any time. Today's hearing is titled Innovation at the speed of markets, how regulators keep pace with technology. Without objection, all members will have five legislative days within which to submit additional material to the Chair for inclusion in the record. I now recognize myself for 4 for an opening statement.
▶ 0:03:54We meet at a moment when the pace of technological change is not just accelerating, it's redefining the very foundations of our financial systems. Innovation in areas like artificial intelligence, digital assets, and real-time payments is reshaping how Americans save, how they invest, and how they transact. The question before us is not whether this transformation will occur, it will.
▶ 0:04:21The real question is whether our regulatory framework is prepared to meet the moment. Regulators must evolve as quickly as the technologies that they oversee. A static approach to supervision in a dynamic environment is a recipe for failure. Agencies need the tools, expertise, and flexibility to understand the emerging risks without stifling innovation and the innovation that drives our economic growth.
▶ 0:04:51That means embracing new supervisory technologies, investing in talent, and engaging directly with innovators, not as adversaries, but as partners in building a safer and more resilient system. At the same time, we must be clear that fostering innovation is not optional. It's essential to maintaining the United States global leadership.
▶ 0:05:13If we fail to create an environment where financial institutions and entrepreneurs can reasonably that innovation will simply move With it will go jobs, investment, and influence over the standards that will govern the future of financial markets. We should want the next generation of financial technologies to be developed here in the United States, grounded in transparency, accountability, and the rule of law.
▶ 0:05:41Regulators cannot and should not navigate this moment alone. Congress has an absolutely important role to play. We must provide clear direction to ensure that agencies approach innovation in a consistent, accountable, and transparent manner. Fragmentation and uncertainty serves absolutely no one. Through thoughtful oversight and where necessary legislative action, we can establish guardrails that both encourage innovation and and protect consumers.
▶ 0:06:12Our responsibility is to strike that balance. If we get this right, we'll not only keep pace with change, but we'll also secure America's leadership in the financial system. I want to thank our witnesses for being here today, and I look forward to today's discussion. I'll now recognize the ranking member of the subcommittee, Mr. Lynch, for 4 minutes for his opening statement.
▶ 0:06:31Thank you very much, Mr. Chairman. Thank you for holding this hearing. I want to thank our witnesses for your willingness to testify. We are grateful for your your expertise and and your perspective. Uh Mr. Chairman, I'd like also uh as ranking member of this subcommittee, I've had the opportunity to participate in multiple hearings on fintech innovation and new products and and new technologies.
▶ 0:06:53I want to be clear that I I wholly embrace the idea that uh innovation in financial services can be a tremendous good. Uh new tools and new uh can actually expand access to credit and capital, lower costs for consumers, and help families and build financial security. But that promise, I believe, depends on whether new products serve those goals and and whether adequate consumer protections are in place to ensure that they do.
▶ 0:07:24I'm concerned that recent regulatory developments suggest where we might be moving in the opposite uh at the direction of this White House. Um under the Trump administration, agencies are doing the opposite. The SEC has dismantled several of the teams that are responsible for managing uh the the incidents of scams and frauds. Uh the White House has dismantled FinHub, which is the dedicated office that built the agency's technical expertise on digital assets and fintech.
▶ 0:07:55and related to crypto, there's no cop on the beat. the SEC has dropped most of the cases that they've had against firms that had been uh uh charged with uh misconduct. And uh at the Consumer Financial Protection Bureau, whose very mission is to ensure industry compliance with federal consumer protections, the Trump administration has gutted the uh by sending layoff notices to over 1,500 employees.
▶ 0:08:24Even at this hearing, and I appreciate, you know, you can only have a panel of of of uh a certain size because of the length of the hearing. We don't have the CFPB here. We don't have the SEC here, which are the two agencies that would bring enforcement actions to protect those those consumers and investors. Uh with that, Mr. Chairman, uh I appreciate your willingness to to break This is an important issue.
▶ 0:08:48I'm I'm grateful that that we're bringing this up, and uh I will yield uh my remaining time to the full committee ranking member, Ms. Waters of of uh California.
▶ 0:09:04If you'd like.
▶ 0:09:05Thank you very much.
▶ 0:09:09Mr. Chair, I'm deeply disappointed in Committee Republicans' decision to exclude the Consumer Financial Protection Bureau's testimony at today's and how [clears throat] the federal financial regulators are approaching innovative uh technologies. While the chairman has said he would invite acting director Voight uh to testify, we're still waiting for his long overdue testimony and the chance to hold them accountable.
▶ 0:09:38Last Congress, we heard from agencies on how they're engaging with newer [clears throat] technologies, yet today Republicans didn't even bother inviting the one agency dedicated to consumer protection. Now, while I'm disappointed, I'm not surprised. The Trump administration and House Republicans have done everything they can to silence the Consumer Financial Protection Bureau, our consumers' biggest advocate.
▶ 0:10:06While these are dark days for the CFPB and the American consumer, I'm hopeful change is coming this November. And if you like, you have the chair, why don't you tell us why you didn't invite them a year back.
▶ 0:10:20The gentleman yields back. The gentleman yields back. Uh the I now recognize the chairman of the full committee, uh Mr. Hill, for 1 minute for an opening
▶ 0:10:27Thank you, uh Chairman Style. Today's hearing focuses on a critical challenge for our financial system. Financial innovation is accelerating rapidly. Federal agencies have to keep pace with these new technologies, and that is a challenge inside a big federal compliance and supervisory bureaucracy. This raises important questions about whether the agencies have the structure and the expertise to respond And we must ensure that our regulators evolve alongside the markets, the very markets that they oversee.
▶ 0:10:56That means examining how agencies organize their innovation efforts and ensure strong coordination with industry and technical leaders, whether through dedicated offices, embedded capabilities, or designated leadership. It also requires that agencies have the technical capacity to fulfill their mandates while enabling emerging technologies to flourish here in the US.
▶ 0:11:19I look forward to today's discussion on how we can make that regulatory approach stronger and more agile and promote innovation to ensure that America leads the world in financial technology. Thank you, Mr. Chairman. I yield back.
▶ 0:11:31The gentleman yields back. Today, we welcome the testimony of four witnesses. First, we have uh Mr. Randall Gwyn, the director of the Division of Supervision and Regulation at the Federal Reserve Board. We have Mr. Jay Gallagher, the senior deputy comptroller and chief national bank examiner at the officer at the office of the comptroller of the currency. We have Mr. Ryan Billingsley, the director of the Division of Risk Management Supervision at the Federal Deposit Insurance Corporation. And we have Ms.
▶ 0:12:00Amanda Parkhill, the acting director of the Office of Examinations and Insurance at the National Credit Union Administration. We thank each of you for taking your time to be here. Uh each of you will be recognized for 5 minutes to give an oral presentation of your testimony. Uh without objection, your written statements will be made part of the record. Uh we'll now start with you, Mr. Gwyn. Uh you're recognized for 5 minutes for your opening remarks.
▶ 0:12:23Thank you very much, Chairman Style, Ranking Member Lynch, and other members of the subcommittee. Thank you for allowing me to testify today on behalf of the Federal Reserve Board. The Board recently announced that it intends to facilitate innovation in a manner consistent with safety and soundness and preserving US financial Innovation can improve the customer experience, expand product offerings, lower costs, increase credit availability, enhance efficiencies for banks, businesses, and customers and support economic
▶ 0:12:53growth. Innovation is not without risk, however, and the Federal Reserve is committed to its mission of identifying and encouraging firms to mitigate any risks that threaten their safety and soundness or that threaten US financial stability.
▶ 0:13:08Banks are generally free to choose their own business models and risk profiles, but when their activities threatens uh safety and soundness or financial examiners act like referees in a soccer match who raise yellow or red cards in the form of supervisory observations, matters requiring attention, enforcement actions, or other supervisory measures.
▶ 0:13:31One way to strike the right balance between facilitating innovation and protecting the safety and soundness of the banking system is to be more transparent and encourage feedback from the public. We do this when we propose new rules because the Administrative Procedure Act requires us to provide public notice and But most of our supervision is hidden from public view.
▶ 0:13:56To receive public feedback on our supervision, we need to voluntarily lift the curtain so that more of our supervision is visible to the public. The Vice Chair for Supervision and I are deeply committed to making our supervision more transparent and publicly accountable.
▶ 0:14:13We demonstrated that commitment by releasing to the public in November our statement of supervisory operating We demonstrated it again in January when we published the operating manuals for supervising the largest and most complex banking organizations. We will continue to demonstrate this commitment by releasing to the public many other procedure manuals and instructions to staff that have previously been kept confidential.
▶ 0:14:41My written testimony focuses on three areas: artificial intelligence, digital assets, and bank fintech partnerships. AI can improve operational efficiencies and enhanced risk management To facilitate the deployment of AI Federal Reserve staff are working to better understand the available and emerging technologies. We are also exploring potential use cases to improve our own assessment and supervision of banking risk.
▶ 0:15:13Digital assets can offer many benefits to both banks and their customers. For example, payment stablecoins and tokenized deposits hold the potential to enable faster and cheaper payments. The Federal Reserve has taken a number of steps to better enable banks to engage with digital asset technologies.
▶ 0:15:31Looking ahead, we are considering how to provide additional clarity for banks that want to engage in digital asset Bank fintech partnerships can provide a channel for banks of all sizes to access new technologies. They can promote a level playing field by allowing community banks to compete with larger banks that have more resources to invest in their own Thank you again. I look forward to any questions you may have.
▶ 0:15:59Thank you very much. Uh, Mr. Gallagher, you're now recognized for 5 minutes for your opening remarks.
▶ 0:16:04Chairman Steil, Ranking Member Lynch, and members of the subcommittee, thank you for the opportunity to appear before you. It's an honor to discuss the Office of the Comptroller of the Currency's work implementing one of Comptroller Gold's strategic priorities, which is supporting and keeping pace with responsible innovation within the federal banking system. The OCC was founded more than 160 years ago to ensure a safe, sound, and fair national banking system.
▶ 0:16:31Today, the OCC supervises more than 1,000 institutions that hold $17.9 trillion in assets, 2/3 of all US commercial banking assets, and have more than $90 trillion in assets under administration. Since joining the OCC in 1992, I have had the opportunity to supervise banks of all sizes and complexities. Today, I serve as the Senior Deputy Comptroller and Chief National Bank Examiner.
▶ 0:16:56In this role, I lead the Chief's Office in efforts to develop risk analysis, policy, and data and systems management that support bank I also oversee the Office of Financial Technology, which supports innovation by facilitating industry engagement on bank fintech partnerships, artificial intelligence, digital assets, tokenization, and other emerging
▶ 0:17:21The OCC plays a central role in facilitating and defining responsible innovation across the federal banking system. Accordingly, the OCC is improving how it evaluates new products and services, identifies potential risks, and serves as a resource to banks as they support a healthy US economy.
▶ 0:17:40Specifically, the OCC champions safe and sound innovation through its chartering process, through its approach to digital assets and artificial intelligence, and by facilitating bank and technology firm relationships and partnerships. The OCC is uniquely responsible for chartering national banks. Renewed interest in chartering is a welcome return to the norm and a sign of a healthy banking system.
▶ 0:18:02As a technology neutral regulator, the OCC evaluates all applicants in an even-handed fashion based on their proposed activities and consistent with applicable law and regulations. The technology that an applicant employs to deliver financial services and products should not determine whether an application for a charter is approved or The decision should be made based on whether an applicant meets the applicable standards and comply and can comply with the OCC's high supervisory With respect to digital assets,
▶ 0:18:33the OCC fosters safe and responsible innovation by first providing a supervisory environment for digital asset-focused businesses to grow safely. Next, clarifying banks' ability to engage in permitted digital asset activities, including through a first-of-its-kind payment stablecoin regime under the genius act. Digital assets and distributed ledger technology offer banks new opportunities to remain dynamic and competitive.
▶ 0:19:00As adoption rates increase at OCC-supervised banks, our goal is to ensure banks understand, manage, and mitigate their risks appropriately. Consistent with that goal, the OCC aims to foster an environment that provides new and existing banks of all sizes and to engage with payment stablecoins in a safe, sound manner. Last month, the OCC issued a notice of proposed rulemaking to implement the Genius Act. We look forward to stakeholders' comments as we implement the law's requirements.
▶ 0:19:31In addition to implementing a federal framework for permitted payment stablecoin issuers, the OCC is facilitating the adoption of artificial intelligence by inter- interested banks to improve business functions. The use of AI among banks is not new. recent developments, particularly generative and agentic AI, offer banks opportunities to automate and improve core operational, customer service, and other activities in novel ways.
▶ 0:19:59As these technologies evolve, the OCC aims to ensure adoption proceeds in a manner consistent with safety, soundness, and applicable law. Many banks utilize third-party technology providers to gain a competitive edge in a rapidly evolving marketplace. As the market continues to evolve, the OCC is actively developing regulatory approaches that right-size supervisory expectations, emphasize risk management, and position the OCC to support community banks that utilize these relationships.
▶ 0:20:30The federal banking system must remain dynamic, competitive, and fair. By providing banks with a path to safely embrace new technologies and modernizing supervision, the OCC is ensuring the long-term relevance of the federal banking system. The OCC remains committed to engaging with Congress, the public, and other stakeholders on the policies and priorities outlined in my testimony. I look forward to answering your questions.
▶ 0:20:54Thank you very much, Mr. Gallagher. Mr. Billingsley, you're now recognized for 5 Chairman Chairman Steil, Ranking Member Lynch, members of the subcommittee, I'm pleased to appear before you at today's hearing to examine how federal bank regulators are keeping pace with technology and innovation. Fostering innovation in the banking system and embracing technology in our internal operations are critical to fulfilling the FDIC's mission.
▶ 0:21:22As technologies like artificial intelligence and distributed ledger technology are being developed and deployed across the economy, it is essential that we enable banks to adopt these and other technologies while maintaining our expectations that they conduct their activities in a safe and sound manner and in compliance with consumer protection laws. The FDIC takes a technology neutral, open-minded approach to innovation that strikes the right balance between prudent risk management and evolving with the times.
▶ 0:21:50Supervision reform has been a significant area of focus for the FDIC over the past year, and as part of that effort, we are taking taking steps to support bank adoption of new technologies that removes unnecessary involvement from supervisory staff. We are seeing banks adopt a range of technologies to improve operational efficiencies, expand product offerings to meet customer needs, and enhance the customer interactions.
▶ 0:22:16Banks are increasingly using AI and machine learning in several areas, including the fraud detection, AML and credit underwriting. Banks are testing and implementing new technologies to help bank staff respond to customer questions, summarize customer service calls, and summarize loan applicant financial Banks are providing banking services to crypto asset entities, and we we expect to additional use cases to continue to emerge in all of these areas.
▶ 0:22:46A critical component of a bank's adoption of technology pertains to their ability to engage and partner with third We are evaluating a number of options to reduce regulatory barriers to banks' relationships with third parties, including working to update examination guidelines and refocus our priorities on material financial risks.
▶ 0:23:06Under Chairman Hill's leadership, the FDIC has taken an open more open-minded to banks seeking to engage in digital asset activities while maintaining our supervisory expectation that these just like any other activity, be conducted in a safe and sound manner. Last year, the FDIC rescinded a prior notification requirement for banks, removing a barrier to responsibly participating in permissible crypto asset activity.
▶ 0:23:33The FDIC recently issued a proposed rule to implement elements of the GENIUS Act that would establish a framework for FDIC-supervised banks to issue payment Consistent with the Act, we expect to propose prudential requirements for payment stablecoin issuers to soon, and we look forward to receiving comments on that proposal. Just as the FDIC must allow banks to adopt new technologies that enhance the efficiency of their operations, it's critical that the FDIC's own technology adoption keep pace.
▶ 0:24:04The FDIC continues to advance a multi-year IT modernization initiative designed to enhance the agency's technology environment. We are also piloting AI for internal staff use and expect to roll tools out to the workforce later this year. We are investing in workforce training to support the adoption of AI and other technologies.
▶ 0:24:26In closing, I would like to thank and acknowledge the team at the FDIC for their dedication, professionalism, and ongoing ability to deliver on the FDIC's mission. It is an honor to be associated with them and serve alongside them. Again, I appreciate the opportunity to appear before you today and happy to answer any questions.
▶ 0:24:43Thank you very much, Mr. Billingslea. Ms. Parkhill, you're now recognized for 5 minutes.
▶ 0:24:49Chairman Style, Ranking Member Lynch, and members of the subcommittee, thank you for inviting me to discuss the efforts of NCUA to encourage innovation in financial technology. NCUA's mission is to enable access to financial services by facilitating safe, sound, and resilient credit unions. In meeting this mission, NCUA is aware that overregulation can stifle innovation and growth.
▶ 0:25:10Last December, NCUA launched the NCUA Deregulation Project, a long-term initiative aimed at methodically reviewing all regulations and revising them as needed, with the initial focus on any that are obsolete, duplicative of statute, intended to serve as guidance, or unduly burdensome. Currently, there are 15 notices of proposed rulemaking available for public comment in the Federal Register. NCUA is unique unique among regulators, serving as both a regulator and insurer.
▶ 0:25:37There are approximately 4,300 federally insured credit unions that serve 145 million members. This includes over 2,600 federally chartered credit unions and nearly 1,600 state chartered credit As cooperatives, credit unions are well positioned to embrace the spirit of innovation, finding new ways to maximize efficiencies, pool resources, and meet member needs.
▶ 0:25:58Credit unions understand the connection between financial technology and They have a long history of embracing technologies that enhance member service, including AI-powered tools for loan underwriting, virtual assistants, and fraud detection. The financial services industry is rapidly evolving with advances in AI, blockchain, and digital assets. NCUA is committed to supporting credit unions as they evaluate and implement these technologies.
▶ 0:26:23To that end, the agency added an AI resources page to our website in August 2025, and it includes use cases, AI implementation, risk management, data security, and cybersecurity risks. NCUA actively seeks stakeholder feedback on challenges related to technology adoption, which include regulatory interpretation, due diligence burdens on smaller firms, restrictive long-term contracts with service providers, and limited API access that can make integration difficult for smaller These
▶ 0:26:53insights inform NCUA's ongoing work to ensure our regulatory framework supports responsible innovation. In December 2024, the NCUA board voted to integrate financial technology expertise into the agency's examination and supervision program, a key component of safeguarding the share insurance fund. This realignment ensures our supervisory staff can effectively assess new technologies and their associated risks and opportunities.
▶ 0:27:18Beyond supervising how credit unions adopt technology, NCUA is also exploring how technology can enhance our own NCUA is using AI for content generation to flag anomalies in call report data submissions, forecast loan performance to support risk analysis, identify credit unions with elevated risk, and enhance cybersecurity operations.
▶ 0:27:38NCUA is also evaluating opportunities through the General Services Administration's US AI shared services, which provides federal agencies with access to multiple AI models in a FedRAMP secure environment. An internal working group is assessing various tools, including estimated costs, use cases, and security and privacy considerations. These collaborative efforts will inform our strategy and decisions about deploying additional AI capabilities. The GENIUS Act establishes a comprehensive framework for payment stablecoins.
▶ 0:28:08Under the framework, federally insured credit unions may issue payment stablecoins through a subsidiary, subject to NCUA licensing, governance standards, reserve requirements, and anti-money laundering NCUA has moved promptly alongside our fellow regulators to implement this law. On February 11th, we published a notice of proposed rulemaking establishing the application requirements for credit unions and their subsidiaries seeking approval to become permitted payment stablecoin issuers. The public comment period closes on April 13th, and stakeholder input is welcome as we develop this framework.
▶ 0:28:39A forthcoming rulemaking will address issuer standards, including reserves, capital, liquidity, and risk management requirements, and we are working towards meeting Congress's deadline, ensuring that credit unions are not disadvantaged compared to other financial Thank you, Mr. Chairman. I look forward to the committee's questions.
▶ 0:28:54Thank you very much, uh Ms. Parkhill. We'll now turn to member questions. I'll recognize myself for 5 minutes. This subcommittee has been exploring new developments, technology in our financial system, from digital assets and tokenization to AI. Uh new capabilities bring great opportunities for our markets, but also uh present uh new risk profiles which the regulatory uh frameworks must contend.
▶ 0:29:18Uh I want to go right down the line, two questions, 30 seconds or less uh from each of you, just to stage-set, if I can. We'll start with you, Mr. Gwyn, and come work our way down. Can you give uh one concrete example of an action your agency's taken to keep pace uh with the technological
▶ 0:29:36Yeah, so uh late last year, the Federal Reserve Board issued a new policy statement on innovation, where it stated that it would facilitate uh innovation as opposed to inhibit it, provided that it's consistent with safety and soundness. And that that animates what we're doing.
▶ 0:29:55Uh thank you, Chair. So, at the OCC, we created an office of innovation in 2016. That's now the Office of Financial Technology, and that is a unit that continues to serve in that role on advancing in modern technologies and ensuring that information flows to our field staff as timely and readily as they can.
▶ 0:30:13Thank you.
▶ 0:30:15Um I'll just add to what my colleague said, that we recently, together with them, earlier this month, issued an FAQs on tokenized securities, which I think is informative to capital requirements for those types of instruments. Um basically, they they amount to saying that the capital rules are generally technology-neutral, which I think is useful in this context.
▶ 0:30:34Um in addition to guidance we should we've issued over the last several years, um earlier this month, our chairman held multiple roundtables on AI and digital assets um to get information both from credit unions and industry about challenges and information that resources that would be helpful and we're taking that information back and including it in any future guidance.
▶ 0:30:55Thank you very much. I think it's all about making sure that we're leveraging this technology and staying a step ahead of it. The human capital is absolutely essential. Second question that I want to bring to the table. I want to dive in a little bit more on AI. Obviously we know AI can be used by bad actors, but AI can also be used to prevent bad actors from being in their endeavors to in particular scam consumers across the country. Same same pattern here. We'll start with you Mr. Gwen.
▶ 0:31:22What's the most effective way your respective agencies using technology like AI to fight fraud?
▶ 0:31:29So it's interesting. We've actually put together a group that focuses on AI. We've actually started using it. So for instance, one of our one of the things we want to do is to look at the 500 or so SR letters that have been issued and AI has been incredibly helpful to identify those that might need to be repealed that go back to the 1990s, to summarize them, to provide something that really it would have taken staff a couple of months to put together and AI put it together in a few hours.
▶ 0:31:58Thank you Mr. Chair. So the OCC has a similar project internally where we're testing and utilizing new technologies including AI as it relates to evaluating where we can improve our guidance to the We are not currently using artificial intelligence directly in supervision, but we are exploring use cases as a way to enhance and inform us as we go
▶ 0:32:21The FDIC is piloting AI right now. I mean I think I think the issue you raised Mr. Chairman around fraud is a good one. I think there is some promise there with things like alert monitoring, transaction testing, those sorts of things. So there's some promise there for sure.
▶ 0:32:36We're using it internally in our cyber operations. Um it found it particularly useful in helping to block threats related to phishing and malicious
▶ 0:32:45Thank you very much. I think there's there's huge like any new technology, there's risk and opportunity. It's about leveraging uh the opportunity and working to downsize risk. Um I think we've seen a real change uh from uh where we are today from where we were in the Biden administration where it was hindering innovation, uh development, and growth in the private sector through punitive regulations uh for emerging technology. I think now uh under the Trump administration, the era of stifling uh innovation is over.
▶ 0:33:13I think we have a real opportunity to embrace technology to the benefit of consumers and maintain the United States as the dominant financial markets. I want to come to you, Mr. Gallagher. Um you're you're non-political, but have you seen a shift in tone uh at the OCC as it relates to embracing technology for the benefits uh that it can bring?
▶ 0:33:32Uh thank you, Mr. Chair. As Comptroller Gould has stated before and continues to reiterate, a failure to innovate is in itself a significant risk to the banking system. Consistent with that view, the Comptroller has publicly noted the last administration focused heavily on prevent preventing downside risk, particularly in areas like digital often at the expense of innovation.
▶ 0:33:53Under the Comptroller's leadership, our agency is focused on partnering with banks to ensure legally permissible banking activities, including digital asset-related activities, have a place in the financial system if they are conducted in a safe and sound
▶ 0:34:06So, suffice it to say you've seen a shift in tone. We are clearly embracing the opportunity to see that the industry can do what they can.
▶ 0:34:14Thank you very much. I yield back. I now recognize uh the ranking member of the committee of the subcommittee, uh the gentleman from gentleman from Massachusetts, Mr. Lynch, uh for 5
▶ 0:34:24Thank you, Mr. Chairman. Mr. Nguyen and and Mr. Billingsley, uh you're both uh responsible for supervision. Let me ask you uh prediction markets here in the US have have grown from a niche financial product into a major player in our financial system. Just back in August, it was it was a market of about $2 billion. Now, it's uh $18 billion in the prediction markets. And that's just uh Kalshi and and Polymarket.
▶ 0:34:53The the CFTC currently uh treats prediction markets contracts as financial derivatives uh and not gambling, which I I believe it should be. Um but uh recent reversals by the agency now allow prediction market services to offer contracts on items like congressional elections and different geopolitical events, leading to tens of million dollars being placed on events such as whether there will be a ceasefire uh in Iran by June 30th.
▶ 0:35:22Just that specific question uh has uh about $48 million in total bets right now as as we sit here. And this to me allows for uh these platforms to open the door to insider trading at a scale where key individuals can make a lifetime of earnings on a single bet using material non-public uh classified or or top secret information.
▶ 0:35:52As the United States and Israel prepared for and later launched strikes against Iran, there were traders in these prediction markets online and uh they wagered over a billion dollars on every single aspect of that conflict.
▶ 0:36:06There was a single trader who made nearly a million dollars from dozens of well-timed bets correctly predicting US and military Israeli military operations against Iran, winning about 93% of their five-figure wages on unannounced uh classified military operations. Many of these bets were placed just hours before the strikes occurred.
▶ 0:36:30Six newly created accounts made approximately $1 million by correctly betting that the US would strike Iran before February 28th. They bought up cheap contracts just days before the attack and investigators in Israel have already indicted two individuals including a military reservist for allegedly using classified materials to place bets on these platforms. The danger here is is it's not just inside of trading.
▶ 0:36:58If insider traders can can front run our military decisions, so can our adversaries using AI at eventually putting our sons and daughters in uniform at grave risk. So this is not simply a consumer protection problem, it's a national security problem.
▶ 0:37:16When financial incentives can be created around the timing of classified military operations, the existence of these markets may itself create a pressure to leak or worse to shape the decisions of war and peace around trading positions. Mr. Mr. Gwen, the Federal Reserve has a mandate to identify and and address risks to financial stability.
▶ 0:37:38In your view, does this rapid escalation of scaling of prediction markets and the documented pattern of what appears to be insider trading rise to the level of systemic that is a concern for the Federal
▶ 0:37:54Thank you very much. Um so I'm not sure that it does now. Certainly we monitor anything that could be uh a serious risk to financial stability. As far as I'm aware, banks, at least the institutions that we regulate are not allowed to in to trade in these contracts. so I think you know perhaps they lend to institutions that are involved in this
▶ 0:38:18Do you do you think it should be perhaps regulated as gambling if this is the way it's going to be used.
▶ 0:38:24I don't I don't know that the Federal Reserve would have a view on that.
▶ 0:38:29All right. Mr. Billingsley.
▶ 0:38:32I think I would agree with my colleague. I don't know if the FDIC has a role to play here, but I would agree that um you know, with my colleague as well that I'm not aware of any FDIC
▶ 0:38:40Mr. Gallagher or Ms. Parkhill, any any thoughts on this?
▶ 0:38:46Nothing additional.
▶ 0:38:49Nothing to Mr. Gwynn, are the existing legal and regulatory frameworks sufficient to address the risk? Do you Do you think Do you Would you suggest what Congress might do next to just address this risk of insider trading?
▶ 0:39:05Well, um certainly it's I think, you know, looking at the SEC, the SEC I think is the organization that generally regulates insider trading. So, I think, you know, that's probably the place for Congress to look at, maybe the CFTC.
▶ 0:39:18Ideally, uh that'll be a great question for the SEC or for CFPB. Uh maybe we'll do that at a future hearing. Uh thank you, Mr. Chairman. I yield back.
▶ 0:39:27Chairman yields back. Uh the chairman of the full committee, the gentleman from Arkansas, has got a big basketball game to watch tonight. Uh Mr. Hill is recognized for 5 minutes.
▶ 0:39:36I thank the sensitivity of the chair. Appreciate that. Go Hogs.
▶ 0:39:39One down. this is a great panel. Thank you for being here. Thanks for bringing your expertise. Thanks for your decades of service to a safe and sound banking and credit union system. Big deal. You've devoted your careers to it, so thank you. you know, when I uh think back about my service at the Treasury, I spent a lot of hours in the persuading them to do things in a harmonious way and to try to streamline the compliance process.
▶ 0:40:10And then as a bank CEO, certainly watched technology flow through both try to bank expertise and examiner in the field examiner expertise and I want to thank uh all your agencies for the dollars you spend on training and collaboration in that space because it is rapidly changing and you do have to teach um uh you know, your examiner force new tricks, you know, and and bring them along um and over the the decades
▶ 0:40:40I've seen that transition from the people who survived the '80s in Texas and the '90s uh uh in the S&L crisis and resolution to today's modern post-global financial crisis examining force. So, thank you for the work you've done.
▶ 0:41:00when it comes to this technology arena, I'm interested in uh particularly uh in the FDIC and the Fed, your point of view of working with state bank supervisors since you've got Fed member banks and Fed non-member banks. So, if I could start uh uh with um uh you um Mr. Nguyen, tell me a little bit about how you work with state bank commissioners on this technology adaptation issue.
▶ 0:41:27Sure, yeah. We we just had a conference with the CSBS where we talked about a variety of things including regulating banks. I think that we have a good relationship. I think we are trying to work together constructively with him in terms of promoting innovation in a safe and sound manner and making sure that we address the financial stability issues that they may raise as well.
▶ 0:41:52Do you sense that when you meet with your examiner force that um they're uh in a in a capacity they they really I don't want to say they're on the leading edge of it, but I remember when we went to the cloud and we tried to do internal and external penetration testing, in some instances that the state examiners were better trained than some of the federal ones and vice versa. That's a bit long time ago now, obviously, but do you sense that we really have a parallel training level of expertise in both forces, state and
▶ 0:42:23So, I I know that we sort of share resources on training. You know, we at the Federal Reserve, we do training through the Federal Reserve Bank of uh St. Louis. And I know that in the uh meetings in the last couple of days this week, there was discussion about sharing trading training resources to help train people in all the emergence emerging
▶ 0:42:43Good. Thank you for that. Mr. Billingsley, do you want to comment on
▶ 0:42:46Uh certainly. Um I do have very regular recurring uh conversations with both CSBS and a a number of the Their partnership uh not only on innovation, but just more broadly about supervision is is incredibly important. So, I value that very much. On the topic of um uh skill sets across the state regulatory environment, um it's my sense that we do work together, we do train together, we learn from one another. Um so, that partnership is very, very
▶ 0:43:12Good. Well, I hope that also takes it through the FFIEC process to uh coordinate it when leading with the OCC as well and NCUA on the exam standards in this process. I hope you guys all and ladies can stay on the same and we don't have a lot of differences In the last minute, I want to talk about one of the, you know, most interesting emerging technologies, which is converting cer- certain financial services functions to uh the use of a blockchain as opposed
▶ 0:43:42to a traditional uh computer system. Uh and I view something like a dollar back stable coin as a transitional product of not si- you know, that that is I I say transitional on purpose cuz I think the future is going to be financial institutions actually tokenizing their Could you ask each of you to say, are you working on uh oversight necessary to allow a bank to actually uh debit
▶ 0:44:12cash and tokenize a deposit on a blockchain? I'll start with you, Mr.
▶ 0:44:17So, in my prior life, I wrote various opinions on whether it was permissible to tokenize deposits, and mostly they were uh positive. What was What's interesting is that the and maybe uh Mr. Billingsley can talk about this more, but the FDIC chair gave a speech uh a week or two ago suggesting that the FDIC is going to clarify that tokenized deposits can be FDIC insured just like any non-tokenized deposit.
▶ 0:44:43I'll stop there. I'd like if each of you would respond to that question in writing, it'd be helpful to me. Thank you. Now, I yield back, Mr. Chairman.
▶ 0:44:49The gentleman yields back. The gentlewoman from California, the ranking member of the full committee, Ms. Waters, is recognized for 5
▶ 0:44:54Uh thank you very much, Mr. Gallagher. Following the Trump administration's military strike in Venezuela this year, Trump disclosed that it held conversations with all the oil companies before and after the raid. This raises an extremely serious and familiar pattern of insiders appearing to profit ahead of market-moving um Trump administration decisions.
▶ 0:45:22We already saw this before when public officials with close ties to the administration made prior to major tariff announcements. Uh I'm also worried that by weakening enforcement, there's no true oversight of potential wrongdoings and regulators potentially profiting from the use of material non-public information. Mr.
▶ 0:45:49what agency policies are violated if OCC employees engage in any prediction
▶ 0:45:59Uh thank you, Congresswoman. So, as as a federal agency, all of our staff are subject to the Office of Government Ethics rules as well as our internal policies. So, we will follow them accordingly and anybody that needs assistance with them, we have legal support to go through that.
▶ 0:46:16Uh I think Mr. Lynch asked you a question uh that you had no answer to. Do you recall what he asked you?
▶ 0:46:24Which question was that?
▶ 0:46:26Uh you to you, Mr. Lynch, for that Yes, you asked Mr. Gallagher a question that he had no answer to.
▶ 0:46:38Sorry for the crossfire. Uh it was a question regarding the prediction markets and uh probably a better question uh for the SEC or or uh CFPB who are not here today.
▶ 0:46:50Mr. Gallagher, are you at all concerned uh that agency policies are being violated? Do you Are you really concerned? What are you going to do about it? Congresswoman, I I assume you're talking Congressman Lynch's questions on prediction markets. So, again, the OCC doesn't have rules on those and it's not place to make rules.
▶ 0:47:13To the extent exposures or risk would come into the banking system, we certainly would, as we would with any safety and soundness issue, take appropriate efforts to ensure we understand it and make sure the banks are complying with applicable law.
▶ 0:47:26Continuing, since the explosion of prediction markets in the fall of 2024, especially betting on political events, how is the agency responding?
▶ 0:47:41Uh thank you, Congresswoman. So, the agency is not responding. That is not our unless it's in the banking system or within the the context of your question, our staff. Again, it would come under rules and expectations of our ethics officials and our legal department.
▶ 0:47:59Um are you telling us your agency is not increasing its oversight of agency employees profiting from the use of material non-public information?
▶ 0:48:12I thank you, Congresswoman. I am not particularly aware, but I believe that's probably best directed at our chief counsel's office and I'd be happy to get you a response.
▶ 0:48:23Mr. Nguyen, yes or no answer. Please, is your agency increasing its oversight of agency employees profiting from the use of material non-public information?
▶ 0:48:37I think we have always and continue to oversee and have rules so that they don't engage in insider trading and trade on material non-public
▶ 0:48:47Mr. Barronsin? What about you?
▶ 0:48:51Likewise, I agree with my colleague from the Fed.
▶ 0:48:54Mr. Parkhill? What about you?
▶ 0:48:57Or Ms. Parkhill.
▶ 0:49:00I think this would be a question for our ethics office of any training that would be provided on top of current
▶ 0:49:07Um Mr. Nguyen, on October 21st, 2025, Fed Governor Christopher Waller announced that the Fed is looking at providing so-called skinny Fed master account to potentially allow eligible firms to have direct access to Fed payment rails, though without the full suite of uh services that banks typically get.
▶ 0:49:32This has resulted in opposition from banking trade groups, including the Bank Policy Institute, American Bankers Association, and Independent Community Bankers of America who argue that standards should be consistently applied across Reserve Banks. Additionally, the Federal Reserve Bank of Kansas City recently approved a crypto company, for access to Fed master account. Mr. Nguyen, how are you responding to these concerns?
▶ 0:50:00Well, we have a a request for information out on the proposed skinny master account. So, everyone will have an opportunity and be very visible to see what the public comments are on that. And uh
▶ 0:50:11The general woman's time has expired. The gentleman can can
▶ 0:50:14Thank you. I yield back. I wish we had more time. Uh you guys are not
▶ 0:50:18The general woman yields back to the gentleman from Tennessee, Mr. Rose, is recognized for 5 minutes.
▶ 0:50:24Thank you, Chairman Stahle and Ranking Member Lynch for holding this important hearing, and thanks to our witnesses for your time today. Um Mr. Billingsley, you noted that small banks in particular rely on third-party relationships to access innovative technologies, uh and that the FDIC is reevaluating guidance and updating examination practices around those relationships.
▶ 0:50:47How do you see reducing unnecessary regulatory friction in bank third-party partnerships helping small banks adopt new tools, and what is the FDIC doing to ensure that this kind of innovation can flourish in the US?
▶ 0:51:04Uh thank you. Two things come to mind. um we are considering updating um uh outstanding guidance on third-party risk management standards more generally to see if we can better tailor that, uh particularly for our community banks. I think second, um we've taken a more open-minded approach over the last 12 to 18 months with respect to banks' engagement with third parties, um which which I believe has helped to re- remove any barrier that might have been there for banks uh that have wanted to adopt that sort of partnership or that sort of engagement with a third
▶ 0:51:34And when you say considering updating guidance, do you mean you're in the process of updating guidance, or are you evaluating whether or not you should update guidance?
▶ 0:51:42We are in the process.
▶ 0:51:44Okay, very good. And Ms. Parkhill, I recently read a Kinsey McKinsey article about how emerging agentic AI tools could help financial institutions better detect and prevent financial crimes. I believe these kinds of technologies have tremendous potential to strengthen the safety and soundness of our banking and credit union system.
▶ 0:52:06What is NCUA doing to ensure that the adoption of promising anti-fraud and financial crime-fighting AI tools isn't slowed isn't slowed down by unnecessary regulatory red tape?
▶ 0:52:21Um, the first thing is we're have a consistent message that we encourage credit unions to use innovative technologies in a safe and sound manner to be more efficient and effective in their operations. Um, and we are looking at all of our regulations right now through our deregulation project to ensure that there aren't any prohibitions or requirements that would prohibit credit unions from using technology in that way.
▶ 0:52:47Thank you. And and is it your sense that in in reviews or audits that uh your examiners are are they encouraged to be kind of have an open mindset about what the institutions are doing?
▶ 0:53:02That's the message that we are giving to both credit unions and our examiners and specific to anti-money laundering and fraud. That's been a use case that has been in place for quite some time and I think it's pretty mature. So we've seen it and examiners are aware of it.
▶ 0:53:15Good. Mr. Gallagher, I'd I'd like to ask you a similar question. How is the OCC supporting the adoption of promising artificial intelligence tools that can help banks detect and prevent financial crime while still maintaining strong supervisory standards?
▶ 0:53:32Uh thank you, Congressman. So we the OCC regularly meets with banks, firms, other stakeholders to understand how the industry is approaching these. We have for years expressed a willingness and an appetite to encourage the banks to look for ways to improve their systems using technologies that can help them do so.
▶ 0:53:52Uh we also went out last year with a request for information for feedback on banks' challenges with third-party significant third parties. We're evaluating that. We're also evaluating and in the process of determining if we need to update our guidance on third-party risk management as well.
▶ 0:54:12And And again, as a follow-up, do you feel like your examiners in the field have the proper leeway or encouragement to have an open mindset when they see things that are new?
▶ 0:54:23I certainly do. And we've seen I mean it the current pace of innovation is obviously much faster, but this is nothing new. We've seen banks innovate throughout our history as an organization and certainly throughout my
▶ 0:54:35Thank you, Mr. Nguyen. Your testimony highlights how AI can enhance examiner training and help process the vast amount of data regulators rely on. Can you speak more about how these kinds of tools could modernize supervision and help regulators keep pace with rapid technological change?
▶ 0:54:53Yes, so just yesterday I saw some new technology to get a lot of data gathered from uh reports otherwise hard to get. And And the team actually used artificial intelligence to enhance it in a way where they said it would have taken months to actually have the team do it. And And the AI was able to do it in a matter of days. And the difference between the old uh table of information and the new was spec was quite extraordinary. And I was asking him, "Can you add this?
▶ 0:55:22Can you add that?" And they were quite positive that we'd be able to get more and more useful data uh to to supervise with.
▶ 0:55:29Thank you, Mr. Chairman. I yield back.
▶ 0:55:31Thank you. The gentleman yields back. gentleman from California, Mr. Sherman, the ranking member of the Subcommittee on capital markets is now recognized for 5 minutes.
▶ 0:55:40We see often people, particularly in the tech world, want to do something that we're already But they put a high-tech name on it, and then they say, "Therefore, there shouldn't be any regulation." and I know that there's a bill before us to create a special technology unit in the uh bank regulators.
▶ 0:56:05And uh I sure hope that that isn't a system for saying, "Well, you just claim to be technological, you go to the special unit, and they liberate you from all the consumer protection and prudential protection laws that we need so much." Uh I heard the chairman of the full committee talk about tokenization of bank deposits. Well, we kind of have that now. You There's money in my account, I can ACH it to your account.
▶ 0:56:34Uh calling that tokenization rather than 20th century term of a wire transfer. Um I'm sure we can do it better, but we shouldn't be liberating it from all of the oversight just because we're doing it in a slightly different manner. Um but I'm particularly concerned about non-banks getting into this area and escaping all the regulation that's necessary. Banks are highly regulated.
▶ 0:57:01They're supervised for compliance with consumer protection as well as safety and soundness misrequirements. Uh however, many non-banks and technology companies offer financial products and services, and they say they're innovative, uh and therefore are not subject to the same degree of oversight. Uh Mr.
▶ 0:57:20Gian- uh Gian, should financial activities that are the basically the same be subject to the regulation whether they're done by a bank or a non-bank.
▶ 0:57:33So, that's certainly a principle that the board adheres to, which is same risk, same reg- same activity, same Uh part of the problem is we don't have jurisdiction over some of the non-bank institutions that engage in this activity. So, our our ability to look at that or or oversee it is limited.
▶ 0:57:53Thank you. we've seen a study by Meta saying that 10% of its annual revenue, approximately $16 billion, is derived from advertisements for scanned scams and banned goods. Internal documents suggest that there may be as many as 15 [snorts] billion high-risk scam ads every day.
▶ 0:58:15Uh many of our telecom cop uh carriers continue to facilitate pig butch- butchering and spoofing schemes. Uh Mr. Parkhill, have you been in contact with your counterparts at other agencies as to the best way to tackle this kind of uh fraud, uh particularly as it uh relates to our financial institutions?
▶ 0:58:38We're also concerned about fraud and financial crimes, and we work closely through either FFIC or other avenues. Um in the last few years, we've issued joint uh releases, statements on elder abuse fraud. Um so, it's definitely something that we work together on when AI is pattern recognition and predicting the future by looking at the patterns of the past.
▶ 0:59:08But often, the past and the patterns you recognize there are just reflections of the racism of our country. You might do pattern recognition and say born in certain zip codes, people who went to high schools with certain percentages of non-white students uh uh, are more likely to be unsuccessful financially, and I'm sure last century that was true. I hope this century it is not.
▶ 0:59:35I know a study that was done as to success in finance saying, "You're more likely to be successful as your name is Jared rather than Esus." What are we doing, uh, uh, and I'll ask this, uh, Mr.
▶ 0:59:51Gallagher, uh, what are we doing to regulate banks so that they're not just using AI to look at the patterns of financial success of the past that are in effect, tokens for racism and applying those to the, uh, particularly the lending decisions of the future.
▶ 1:00:13Uh, thank you, Congressman, and I will start with my observation is the financial institutions we regulate are also very sensitive to make sure the tools they implement are also compliant with the law, but uh, in their business model of they're they're in an effort to book compliant
▶ 1:00:33But is there a system to say, "Okay, you found a pattern. You want to use it in decisions." Is that just a reflection of
▶ 1:00:41Yes, there there are systems and we evaluate not only the safety and soundness, but the compliance with law as they go through that and expect they have that embedded in their risk
▶ 1:00:52time has expired. The gentleman's time has expired. I now recognize myself for 5 minutes. As the subcommittee has explored new technologies such as artificial intelligence, we have heard about the benefits that the private sector and consumers will see from adoption. We must ensure that the same technology revolutionizing our financial sector can also bring benefits to regulation and supervision itself.
▶ 1:01:18So, I'd like to ask all of you, if you could in about 30 seconds to 45 seconds, how are your agencies thinking about the adoption of AI and what benefits can AI bring to supervising the entities under your jurisdiction? Start with you, ma'am.
▶ 1:01:33We see the benefit AI has in reviewing large sets of data, both structured and unstructured, and also um quickly analyzing that data. So, there's a lot of use cases we're looking at for um efficiencies in risk oversight, examination scoping, and um building models for identifying risk.
▶ 1:01:53Thank you.
▶ 1:01:55I would agree with everything my colleague just said. I would only add to that um there's some promise there too with respect to ongoing offsite large sets of data that we could analyze more quickly offsite would be super
▶ 1:02:06Okay, thank you.
▶ 1:02:08Similar, we we also I I I would characterize AI as it's been around a long time. So, we are very focused on not only how we leverage machine learning, etc., data scientists to study the risks in the system, but now looking at use cases with respect to generative AI or agentic AI and how we can improve our risk management or oversight of the
▶ 1:02:31Very good.
▶ 1:02:33So, all the same except an additional thing is that we're trying to take the technology we've developed in stress testing combined with AI to try to identify risks uh material risks to the financial to financial institutions in the system is you much earlier than we can now and to try to have AI help us uh decide what sort of action to take as early as possible so it can be more proportionate and less reactive.
▶ 1:02:59All right, thank you. Um during the Biden administration, the Fed established the novel activity supervision program through supervision and regulation uh letter 23-7. This program was a part of the Biden administration's Operation Choke Point 2.0 and stifled digital asset innovation through burdensome requirements imposed on financial institution.
▶ 1:03:23This committee has helped President Trump reverse the Biden administration's anti-innovation agenda, including Operation Choke Point 2.0 through stablecoin and digital asset market structured legislation. In addition, in August, the Fed rescinded SR 23-7, stating that the board had integrated these activities into its standard supervisory process. Mr.
▶ 1:03:47Gwen, how has the Federal Reserve integrated supervision of fintech and crypto activities by member banks into the supervisory process? And what has gone into making sure supervisors and examiners understand these innovations and how has the process improved?
▶ 1:04:06Okay, so first of all, I think our experience with the novel banking program was that it didn't it didn't it wasn't consistent with the policy that we announced a few months ago of of facilitating innovation consistent with safety and soundness. So, we decided, you know, after watching it in practice for a while that it was that we would change that practice.
▶ 1:04:28And so, now innovation is encouraged or facilitated like any other activity, you know, in many ways we let the banks drive what it is they want to innovate to do. And our job is to, as I said in my opening testimony, if we see something that's unsafe or unsound, then we will raise a yellow card or a red card, but otherwise we let the banks choose what they what they think is in their interest and the interest of their
▶ 1:04:51Following up on that, how how will the integration of digital asset and fintech activities into the supervisory process improve US competitiveness and enhance well, I think I think the more we integrate into our supervisory process, the more we'll understand it and we'll be able to facilitate safely. and I think if we can do that, then the US will be a leader in innovation in a way that that the public feels comfortable with and will actually be viewed as beneficial.
▶ 1:05:22And so, it does make us more competitive relative to other countries.
▶ 1:05:25All right. And just real quick, I want to talk about credit unions, Ms. Parkhill. Could you speak about what you've done since its establishment and what your office hopes to accomplish going forward?
▶ 1:05:38We've um instituted a number of outreach efforts, including office hours and structured meetings with both credit unions and vendors over the last several years. We've also issued guidance and resources um around AI, digital assets, and fintech. Going forward, our large focus will be on stablecoins and digital assets and the new authorities granted to credit unions under the Genius Act.
▶ 1:06:01All right, great. Thank you. Great timing, too. gentleman from Illinois, Mr. Foster, who is the ranking member of the Subcommittee on Financial Institutions, is now recognized for 5 minutes.
▶ 1:06:16Uh thank you, Mr. Chair, and then to our witnesses. Um and this committee's had multiple hearings on ways to counter financial scams and fraud, and I hear from community bankers in my district regularly about the increase in everything from online identity fraud to check fraud to more complicated AI deepfake scams. Almost all of these involve, at their heart, identity fraud. And in the Genius Act, Treasury was mandated to provide recommendations to Congress on ways to reduce illicit transactions in digital finance.
▶ 1:06:46And in the report that they issued this month, Treasury stated that it would issue new guidance to firms on how they can utilize mobile driver's license, digital ID that lives on your cell phone, um and other verifiable digital credentials in the KYC process for customer identification. You know, as you all setting up KYC is one of the biggest barriers to entry for fintechs and de novo banks.
▶ 1:07:12Um, and as well as an ongoing cost for small community banks and large banks as well. And being able to use a real ID compliant digital driver's license, so you smile at your cell phone, do your biometric login, present your government-issued real ID credential, and then being able to use that in conjunction with some API check to FinCEN to satisfy KYC requirements would really be a game changer, especially for online enrollment of new customers.
▶ 1:07:40Um, so are any of your agencies working with Treasury now to issue that guidance or otherwise taking steps to make it clear to financial institutions that they can and should be looking into making use of mobile driver's licenses for that purpose. I guess we'll just go down the
▶ 1:07:58So, I don't know the answer to that question, but I'm going to find out and I'll get back to you, uh, Congressman.
▶ 1:08:04Thank you.
▶ 1:08:05you, Congressman. So, we are not yet, but we will certainly engage as the Treasury Department moves forward on that initiative.
▶ 1:08:13I'm not aware of any engagement, but I'd be happy to follow up.
▶ 1:08:16I'm also not aware, but know that we do coordinate closely with Treasury and FinCEN and we'll do so if asked.
▶ 1:08:21Yeah, that's an area where the United States may be falling behind because I think by the end of this year, every EU citizen is going to have the ability to present a citizenship app and and validate their existence as a legally traceable uh, EU citizen. The UK as well has also on a similar time scale. And so that that'll be a huge competitive advantage for for those countries that adopt these.
▶ 1:08:46Um, and so I I urge you to, you know, take that Treasury recommendation seriously and and move as fast as you Now, I'm also very concerned that in the emergency emerging world of 24/7 payments and digital finance that bank runs are going to become faster and more frequent. As the Silicon Valley Bank saw more than 40 billion flee the institution in about 2 days, driven and pretty much at the speed of internet gossip.
▶ 1:09:10And soon we're going to be facing bank runs at the speed of agentic AI, where everyone's going to tell their their personal AI advisor and agent to keep an eye on the bank and if you even hear a rumor that the bank is in trouble, just get my money out. And so in a situation like that, situations like Silicon Valley Bank could then take place, you know, in a matter of minutes. And I'm not sure we're ready for that.
▶ 1:09:33uh to manage it that it seems that first of all, that the regulators are going to need real-time insight into the financial conditions of institutes of really of all sizes. Uh and so that they're ready to step in on a moment's notice in the, you know, Sunday in the middle of the night. And so this is a it's a big change in the way you operate right now. Um I think you me also need to have the equivalent of pre-pledged collateral and so on understood.
▶ 1:10:01So if if the regulator has to step in to to save a a bank that's under threat from either a real financial disclosure or simply a rumor that it's got to know in real-time what the solvency situation of that institution is. So I was wondering, you know, first off, you know, are we preparing for this are we ready for it today? Are we preparing for it? And I guess we'll go down the line starting on the right.
▶ 1:10:23Um we're definitely aware of that concern and have several liquidity options to provide credit unions if needed either through our share insurance fund, borrowing through treasury or the CLF. So we have options um playbooks ready in case of liquidity stress in the system or runs either in the credit union industry or or with banks. So we we are um looking at this closely and prepared.
▶ 1:10:47So you think prepared so that if, you know, this Sunday night at 2:00 in the morning, um everyone's, you know, AI personal agent says, "Oh, I've just learned on on uh Moldbug of a rumor that this bank is in trouble. That that that you think you're ready for it.
▶ 1:11:01I think as soon as the credit union recognizes that they are in need, we have the resources to to to help them.
▶ 1:11:08And and are they monitoring this so that they will know in 20 minutes in the middle of the night? I mean, the the thing I'm getting to is that to do that properly, you're going to need very involved software. And I think that one of the things that this committee can do is make it more affordable for small institutions to have access to that high-quality
▶ 1:11:26Thank you. My time's up and Neil bank.
▶ 1:11:28Thank you. I now recognize myself for 5 minutes. I want to thank my I want to begin begin by thanking the witnesses for joining us today. I often emphasize the need to bring stability and consistency to the agencies under this committee's jurisdiction. Sharp swings in policy between administrations can create uncertainty, discourage investment, and make it harder for American firms to plan and grow. Providing clear direction oversight is one of Congress's most important responsibilities, especially in fast-moving sectors.
▶ 1:11:56Nowhere is that more important than in digital assets and emerging technologies. Rather than offering clear rules, the Biden administration often relied on regulation by enforcement, leaving firms to navigate policy through enforcement actions instead of guidance. Coupled with concerns about so-called Operation Choke Point 2.0, this approach has made it harder for fintech and blockchain innovators to operate in the US, risking that innovation and investment more overseas. I want to start with how your agencies are approaching innovation more broadly. Mr.
▶ 1:12:26Gwen. Unlike some of the other regulators here today, the Federal Reserve has not established a formal office of innovation. Could you walk us through how the division of supervision and regulation is working to foster an environment where banks can responsibly pursue financial innovation, including digital assets?
▶ 1:12:44So, um I think the way we do that is we let the banks drive that. So, you know, we wait we in some ways we wait for the banks to say this is what we'd like to do. This is where we'd like to the direction we'd like to go. We try to be responsive. So, for instance, if if banks said we we have limits in our power, we'd like to have more authority to be able to engage for instance as agent or principal with respect to digital assets, we would consider that and and try to facilitate that consistent with safety and soundness.
▶ 1:13:11Thank you for that. Along the same lines, as these activities are integrated into the supervisory process, how have examinations evolved and what steps has the Fed taken to ensure examiners have the expertise needed to evaluate these emerging risks without discouraging innovation?
▶ 1:13:26Yeah. So, so we are enhancing our training of technology. We also are trying to change the cultural sort of view of this to be facilitating. So, the job the job of an examiner is not to sort of micromanage the bank, but rather to let the bank choose its business model and its risk profile and then only raise yellow or red cards when there's a safety and soundness issue. Um and and not just sort of artificially discourage innovation because of a fear of of the of the new.
▶ 1:13:56Thank you for that. Uh when I'm back in my district, I regularly hear from small community banks and credit unions about the real-world challenges of integrating new and rapidly advancing technologies into their operations, particularly as they work to serve very small, often rural communities. These institutions are not only managing the cost and complexity of adopting new systems, but they're also on the front lines of helping their customers understand and trust these tools.
▶ 1:14:20In many cases, that education and onboarding burden falls directly on them, which can slow adoption and create additional strain on already limited resources. Uh Ms. Parkhill, credit unions in particular face unique hurdles in the space. Could you speak to how the NCUA, especially through the Office of Financial Technology and Access, is working to support responsible innovation while also ensuring that examiners are properly equipped to oversee these
▶ 1:14:45Um sure. Um part of that is through guidance we provide both to credit unions and to our examiners. While our examiners are well experienced in identifying and assessing risk, as we are training examiners as new technologies are being used by credit unions, we're incorporating that into the training or providing specific um information on those technologies as they become uh used in the industry more and more.
▶ 1:15:12Thank you for that. As you work with credit unions, can you give an example of how smaller institutions are thinking about partnerships with fintech firms and what barriers, either regulatory or operational, that they are encountering
▶ 1:15:23Yeah, we're seeing a lot of interest in use cases, either underwriting, appraisals. Um the biggest challenges we hear are legacy systems that may not be compatible with fintechs or um long-term inflexible contracts with core service providers that prevent um working with certain vendors.
▶ 1:15:44Thank you for that. Uh thank you to all all our witnesses. Clear, consistent, and transparent supervision will be critical to ensuring that innovation happens here in the United States within the regulated system rather than being pushed overseas. I look forward to continuing this conversation. With that, I yield back and the gentleman from Texas, Ms. Garcia, is now recognized for 5 minutes.
▶ 1:16:06I'm sorry, did you say the gentleman?
▶ 1:16:08Oh, thank you. Just wanted to be clear. Uh thank you, Mr. Chair, and thanks for to all the witnesses for being here. There's no debating that the industry as an industry, the financial system, should continue to innovate and leverage new technology. However, we need to always keep a strong consumer protections in mind.
▶ 1:16:30I see that we have four regulators, and while I'm happy to hear from you all, I want to take a moment to say how unfortunate and and uh it is that there is no witness here from the Consumer Financial Protection Bureau, CFPB, uh with us today. The very agency that is tasked with protecting consumers has been defunded and forced to terminate its employees and contractors with more than 100 million in contracts canceled.
▶ 1:17:00They need to be a part of this conversation, and we need to reinvest in the CFPB immediately to protect consumers in this constantly changing environment. Whether it's seniors or young people or a small business owner, consumers must be protected. Rapid and constant technology innovation leading to new risks and threats are leaving regulators and Congress scrambling to write rules to better protect investors and consumers. Mr.
▶ 1:17:29Bilingsley, Bilingsley, what is the FDIC doing right now to ensure that the agency is using the most up-to-date technology for internal operations, especially for supervision and
▶ 1:17:42Uh thank you. As I mentioned in my testimony, we are uh in the middle of a multi-year um IT modernization project um to convert legacy systems to um more cloud-based systems to help us be more effective, be more efficient, uh ensure that our institutions are doing things in a safe
▶ 1:17:58So, what have you accomplished so far? You're saying it's multi-year. What have you gotten done this year?
▶ 1:18:02Um so, what we're what we're implementing is an agile system, so we've accomplished a lot of things with respect to um how banks can apply to the FDIC. We we um accomplished a lot of things with respect to audit filings, things of that nature, but we're we're bolting on additional um um use cases uh by the month, so it's an ongoing project.
▶ 1:18:21When do you say multi-year, when will you complete the this review?
▶ 1:18:24Um I believe we'll have most of it completed in a couple years. Um some of it will linger past that, but a lot of the bulk work
▶ 1:18:31Cuz things are moving rather rapidly, so I would urge you to expedite and fast-track what you can. Mr. Gruenberg, similarly, how is the Federal Reserve keeping up with new risks as technology continues to innovate? More specifically, what is the Fed doing to address model risk as banks expand their use of AI?
▶ 1:18:53So, we're actually reviewing all of our guidance, including model risk management guidance, and are trying to make sure that it's updated. I think the last time we did model risk guidance, it was about 15 or 18 years ago. So, we're looking at actively, and we're working with the other agencies so that we do it on a coordinated basis.
▶ 1:19:12And how are you um coordinating that with all the with all the system with all the different Federal Reserve banks around the
▶ 1:19:20You mean the Federal Reserve banks or I'm not trying to understand.
▶ 1:19:24Well, you're you're the the main player here, but you've got Federal Reserve um systems uh like are you working together with the Dallas Reserve uh with the Denver Reserve with the New York
▶ 1:19:36Yeah, absolutely. So, the guidance that we have will actually apply system-wide. When I say we're working with the other agencies, we're also working with the OCC and the FDIC so that it works across um all the different banks and bank holding companies and other banking
▶ 1:19:51Beyond AI, we also have seen the growing adoption of banking as a service and third-party providers. In February, the Federal Reserve Bank of Dallas published a research paper titled {quote} workshop reviews risk to the economy financial systems from third Um in it, the authors argue that the involvement of outside providers who who may many follow different standards and regulations can lead to unique risk management challenges.
▶ 1:20:20Miss Miss Parkhill, when it comes to third-party service providers, do the credit unions have a regulatory gap that prevents the agency from overseeing third-party vendors?
▶ 1:20:31Um we think we're best able to minimize risk to the industry and the share insurance fund by focusing on our core function, which is examining credit
▶ 1:20:39So, you're not looking at reviewing what the third-party vendors are doing as it relates to to your credit unions?
▶ 1:20:46We work through the credit unions to review the due diligence that they are doing on the providers that they're
▶ 1:20:52So, you're not providing guidance or best practices?
▶ 1:20:56We do have third-party risk management practice best practices guidance and we do have resources specific to the use of um that link to authoritative sources from NIST and CISA um to make sure that that they're going to the most current information and we don't have a middleman. We're not the middleman updating guidance.
▶ 1:21:14Thank you. Mr. Chairman, I ask for unanimous consent to introduce for the record uh the the the article I quoted, "Workshop Reviews Risks to the Economy Financial System from Third Parties."
▶ 1:21:28Without objection.
▶ 1:21:28Thank you.
▶ 1:21:30The gentleman from Ohio, Mr. Davidson, who is the chair of the National Security Illicit Finance and International Financial Institutions uh Subcommittee is now recognized for 5
▶ 1:21:41Uh thank you, Chairman. Witnesses, thank you for your preparation for this hearing and for your presence here today um and frankly for the work you do to make sure the safety and soundness of our financial system stays strong and frankly gets stronger. Uh Mr. Gwen, the Federal Reserve is now exploring so-called skinny master accounts to provide payment innovators more direct access to the Fed's Um that raises a question that's been broached for a while. You had guidance on when master accounts would be issued.
▶ 1:22:11Custodia Bank in particular uh complied with the shall issue definitions, but they were not issued a master account. So, things have evolved since then. So, how do we make sure that there's a a clear shall, if you do this, then it shall happen versus somebody selectively picking winners and losers.
▶ 1:22:32So, um right now the the process for deciding whether to grant someone a master account is made by the Federal Reserve Bank. So, it is discretionary. There are guide guidelines that we that they're subject to system-wide, but there is a fair amount of discretion and as you know the Kansas City Fed recently decided that they would grant a master account, although it looks a lot like a skinny master account to Kraken but have not yet granted it to Custodia.
▶ 1:22:59Yeah, so how how do we make sure that that's repeatable and reproducible and not just at the whims of whoever happens to be making the decision or whoever happens to be asking. I mean, even if you say somebody who's doesn't yet comply with what the Federal Reserve would like to see if I do XYZ then the answer is yes, how do we get to that so that you have objective rule of law versus the friends and family network?
▶ 1:23:25Yeah, so we we haven't yet started, but we will be reviewing later this year the guidance for granting master accounts. It may well be that there's you know you know, Congress may want to think about something they want it to be more mandatory as opposed to discretionary, but for right now it's mostly discretionary.
▶ 1:23:45Well, thank you for that. You know, one of the things that we think isn't discretionary is whether components of the executive branch comply with executive orders and of course those change from time to time, but you know, anything about digital assets back home in Ohio, there is a select of people that are very passionate about that.
▶ 1:24:04But for a lot of people the number one thing they think about is central bank digital And President Trump issued an executive order saying that that there should be no central bank digital currency, no work on a central bank digital currency. But prior to President uh taking office this term, there was a lot of work at the Federal Reserve on developing a central bank digital currency. Uh has that work ceased or is it ongoing?
▶ 1:24:30Yes, I think Chair Powell has spoken to that and he said that it is not ongoing and that uh the Chair does not believe that we have the legal authority issue central bank digital currency without some action by Congress.
▶ 1:24:40Well, unfortunately, he always has this qualifier, a retail central bank digital currency. And for a lot of people, what they see being built is uh like Hydra. There'll be many heads, sometimes in the form of stable coins, sometimes in the form of other payment instruments, but they'll all come together on the back end uh with the body of the beast and it'll be quote a wholesale CBDC. So, is the work on the wholesale CBDC ongoing or did that too cease?
▶ 1:25:07To my knowledge, it has not it is not
▶ 1:25:10All right, thank you. Um you know, uh Mr. Gallagher, you know, one of the well, maybe I'll go to Gallagher Buildingsly, you guys both oversee banks and one of the things with bank fintech partnerships that we try to get right was the the open banking 1033 provision.
▶ 1:25:27Um you know, CFTC is has active uh process to try to define a strike zone there and what is and is not uh you know, the the bank customer's property and what you know, you you may be you know, have of course access to your own data, but that doesn't mean that you have access to the bank's payment rails. To what point is compensation there? How do you guys see that playing out? What's the role of existing bank regulators in helping provide clarity to that market?
▶ 1:25:59Uh thank you, Congressman. So, we are well aware of the privacy issues and challenges, the operational issues and challenges, and we'll support the the law as it's implemented and continue to go that through that.
▶ 1:26:17Likewise, I don't think I have anything to add to what one of my colleagues
▶ 1:26:20So, what you guys are just waiting for CFTC to finish their final rule making and then you'll just apply it.
▶ 1:26:31I think it's CFPB. I'm I'm
▶ 1:26:32Oh, CFPB. Sorry, not CFTC. CFP Consumer Financial Protection Bureau. My my I know what I meant. No, I I I'm not super familiar with the what how the process is going, but we would certainly follow our responsibility. Absolutely.
▶ 1:26:46Same congressman.
▶ 1:26:47Yeah, so the idea there is clarity around 1033. I hope we get there and I yield back.
▶ 1:26:54Thank you. The gentleman from California, Mr. LaCardo, is now recognized for 5 minutes.
▶ 1:26:58Uh thank you, Mr. Chair. Uh Mr. Glenn, I appreciate that the Fed has been evaluating whether or not or under what a skinny charter enable a fintech to get access to federal rails for payments. Uh I know Governor Waller and others have been quite public about their interest.
▶ 1:27:21And as you can imagine, there's a lot of interest in Silicon which I represent uh in Congress along with other parts of uh of the region. And we're hearing some concerns about drafts uh of the proposal, and particularly the exclusion of automated clearinghouse payments, Um and as you can imagine, my concern is that excluding the very payment modality
▶ 1:27:51that consumers and small businesses use most frequently would sort of defeat the purpose. Uh there last year, 35 billion ACH payments uh amounting to 93 trillion dollars. 94% of W-2 employees are getting their paychecks via ACH, including me.
▶ 1:28:11Thank And And we know that FedNow is very promising, but many of the 1,400 banks that have access to FedNow, in fact, provide receive-only capabilities. And so, it's it's limited, obviously, and it's a fraction of what the transaction volume is currently through ACH.
▶ 1:28:31And so, I'm concerned that providing with payments access via skinny charter that excludes ACH is a little bit like having a global naval strategy that excludes the Pacific Ocean. and I want to understand where the Fed might be about including ACH and whether there's some consideration for doing so.
▶ 1:28:56So, I don't know for sure whether that's actually one of the questions in the RFI that's outstanding now, but I think it's [snorts] it's a legitimate question to raise, and I've heard it many times and other people at the Fed who are more involved in this, you know, Governor Waller, who's directing it. I think there's some technological limitations with ACH compared to say Fedwire that might need to be addressed.
▶ 1:29:18I don't think there's any sort of you know, any sort of desire to exclude uh otherwise eligible institutions from ACH. It's just a question of whether it would work uh cuz subject to the conditions that are in the skinny master account proposal.
▶ 1:29:35I appreciate that. And what we have seen at least publicly in print is that their concern is focused on the fact that ACH doesn't currently have an automated solution that can reject transactions that would cause uh daylight overdrafts. And we certainly appreciate the importance of mitigating risk. That's a big role, obviously, for the Fed.
▶ 1:29:57But many very established, respected financial companies in the technology ranging from Intuit to Visa have both expressed objections to this exclusion as well as offered some I think very promising alternatives. Uh for example, requiring pre-funding of ACH transactions. We heard that from Intuit and from Ripple.
▶ 1:30:20Uh the idea of imposing daily or per transaction limits on ACH activity or requiring collateralization or performance bonds or implementing enhanced monitoring or early warning systems. Uh Visa suggested that the Fed can consider allowing payment account holders uh to solely access the Fed ACH credit because that would naturally control and mitigate overdraft risk. Um but would at least facilitate the objectives of payments.
▶ 1:30:51Do you believe the Fed will be open to I think these very promising ideas that the industry has offered for mitigating risk but enabling this critical access?
▶ 1:31:00So I have not read the pool of comments that have been submitted but I'm taking it from your comment that they've submitted these ideas in comment
▶ 1:31:07And I know that we will be I know that the uh my colleagues at the board this is this is handled by a different division. It's uh but they will be looking at those comments and I think if there are ideas that will actually solve the problem, I'm sure they'll be open to considering
▶ 1:31:22Thank you. I look forward to working with your team to to make that happen.
▶ 1:31:28The gentleman from Montana, Mr. Downing, is now recognized for 5 minutes.
▶ 1:31:31Thank you, Mr. Chairman, and thank you all for the two witnesser witnesses for being here. Uh one of the primary reasons that I wanted to serve on on this committee was to help champion the need for the United States to lead in innovation. This hearing today is a great opportunity to hear directly from regulators on how the administration is going about fostering innovation.
▶ 1:31:53And my questions, I'm going to be going down the line, so uh if you could uh please respond briefly, it'd be very helpful so we can get through through of And so I'm going to start with the first uh on whether you believe that your agency has the necessary expertise in its staffing to adapt to rapidly evolving technologies. And if not, what is your agency doing to address that? And I'll start with uh Mr. Gwyn.
▶ 1:32:19So I think I think we have the resources and personnel now that we need, but we are always reviewing that and we were we we will we will implement we've we've been thinking about what else do we need to know as these things uh evolve and make sure that we stay fresh and that we um increase the knowledge that we have
▶ 1:32:37Thank you. that our workforce has.
▶ 1:32:38Mr. Gallagher.
▶ 1:32:39Yes, I believe we have the expertise and we will complement that with additional expertise or training as warranted as we have done throughout our history.
▶ 1:32:47Thank you. Uh Mr. Billingsley.
▶ 1:32:49Uh I do think we have the resources we need. I do think it's important that we continue to grow and learn in this area. It's going to be very important to continue to do that.
▶ 1:32:56Thank you. Ms. Parkhill.
▶ 1:32:58We do have the expertise. We have been training examiners on innovations um for decades. It's just moving at a faster pace now, um but we have a processes in place to incorporate it into our development.
▶ 1:33:09Thank you. Uh something that we explored when I was the um commissioner I was the commissioner of securities and real estate or and insurance, sorry, uh for the state of Montana. Uh but one of the things that uh we explored were regulatory sandboxes and had some success there trying to, you know, find a way to try innovative uh projects that didn't quite fit within the regulatory framework and give them some runway to figure that out.
▶ 1:33:34Um so I just love to what your thoughts on whether regulatory sandboxes uh allow time for incremental adaptation necessary to enabling long-term frameworks uh for innovation. And on that one I'll start with Mr.
▶ 1:33:50Uh thank you, Congressman. Like any other legally permissible banking activity, activities that promote innovation have a place in the federal banking system if conducted in a safe and sound manner. We're committed to supporting responsible innovation and long-term successes within the banking system working collaboratively with collaboratively with the banks, fintech firms, uh and other stakeholders to understand what the goal their goal and identity and identify a path forward regardless of whether that's a sandbox.
▶ 1:34:18Appreciate it, Mr. Billingsley.
▶ 1:34:20I certainly agree with the spirit of your question. We we see our institutions very frequently and very successfully pilot or test new technology before they roll it out um more broadly and that does work quite
▶ 1:34:31Thank you, Ms. Parkhill.
▶ 1:34:32Uh we've definitely seen successful programs as with any program the success depends on the details and implementation um but that is a tool that we've heard from the industry that there's interest in.
▶ 1:34:42Thank you. Uh and finally, Mr. Nguyen.
▶ 1:34:44So so I think the most thing most important thing you can do in legislation of that sort is to make it clear that things that are a bit uncertain [snorts] in terms of powers can be done on a limited basis like engaging with digital assets, um developing AI, um developing general purpose technology that could be used for delivering financial services.
▶ 1:35:04Thank you. You know, another way Congress has bolstered the United States' standing as leader innovation in innovation is by passing comprehensive payment stablecoin legislation, the the GENIE Act, which was signed into law July of last year. Um so uh going down the line, I'd love to hear where where your agency stands on the implementation of the GENIE Act and and we'll start with Mr.
▶ 1:35:29Uh I thank you. We we uh published a notice of proposed rulemaking on part of our responsibilities under GENIE last year. We have another one forthcoming very soon and we're working very hard to meet the deadline.
▶ 1:35:38Thank you, Ms. Parkhill.
▶ 1:35:39Um we're in the same we have an application um aspect of the rulemaking that is um out for comment now. Comments close April 13th and we're working towards the issuer standards piece of it.
▶ 1:35:50Thank you, Mr. Nguyen.
▶ 1:35:53So we are still working on We're working close. We think we'll have something out very soon. Uh and we think it will be very good.
▶ 1:36:01Thank you. And finally, Mr. Gallagher.
▶ 1:36:03Thank you, Carson. So, our rule was published for comment and we're eagerly awaiting the feedback and we'll take that into consideration as we work to finalize the rules in consistent with Congress's intention.
▶ 1:36:15Outstanding. Well, I I appreciate all of your participation here. Uh obviously, you know, I've been very vocal on the need for innovation to be happening here in the United States and and the tools that we have to continue innovating and the work that you're doing in your agencies is is much appreciated. And on that, Mr. Chair, I
▶ 1:36:33The gentleman yields. The gentleman from Massachusetts, Ms. Pressley, is recognized for 5 minutes.
▶ 1:36:38Thank you, Mr. Chair. I'm going to uh date myself a little bit here. Um when I was growing up, may she rest in peace, my mother used to sing a song um that went like this, "Ain't nothing going on but the rent." bills don't stop. Uh people uh work hard on their jobs. Um they earn a paycheck and they deserve to be able to access it quickly.
▶ 1:37:04We know that workers are struggling to make ends meet, especially now, uh and especially until uh payday uh those checks hit. And so, uh consequently, many end up using fintech apps like Klarna or Affirm uh to pay for their grad, gas, their groceries, and utility bills. It's no doubt that everyday workers and families, they want services that work for them. Technology that helps them get paid faster instead of waiting until payday. Businesses want it, too.
▶ 1:37:33It's how you can uh retain uh your uh your workforce. There is an affordability crisis and there is also a payroll timing issue that can actually be fixed right now. And that is exactly why FedNow payment service is so important. FedNow is an instant payment service offered by the Federal Reserve. And I've really enjoyed working closely with Chairman Hill and Senator Van Hollen in the Senate to get that service created years ago.
▶ 1:38:01FedNow can help households get their money in real time. FedNow can also help small community banks that have fewer resources and technological infrastructure compete with these fintech platforms to offer households their money when they need it while still complying with regulations. Ms. Parkhill, how does something like FedNow help smaller community banks and credit unions compete while still serving their customers safely?
▶ 1:38:28It allows them to offer more products and services to their members that meet the needs of exactly what you had mentioned that the payments and moving money quickly.
▶ 1:38:39Okay. And um making customers aware of the the fraud risk compliance services that FedNow provides. Uh that's one way that we can be helpful. But what else can Congress and regulators be doing to support small community banks and credit unions as they access the benefits from FedNow?
▶ 1:39:02I think providing opportunities for them to I guess resources so that they know what um tools are available. really listening to their members to be able to provide the services that they're asking for.
▶ 1:39:21All right, thank you, Mr. Nguyen. As a director at the Federal Reserve and someone who does have experience in the private sector before coming to the Fed, what steps is the Federal Reserve taking to increase uh the number of financial institutions that are signing up for the FedNow service?
▶ 1:39:38So, I think there's a a process to sign up for it that I don't think that's the roadblock at all. I Um I'm not sure there's anything to improve it other than to um continue inviting uh institutions to sign up for it.
▶ 1:39:54Well, you know, I think the bottom line is is that uh we need to be able to meet the urgent needs of families um while also supporting our smaller community banks and credit unions, uh customers that deserve and need those uh financial systems that work for them. We should be leveraging the tools that are available to us like FedNow to responsibly leverage technology, meet customers where they are.
▶ 1:40:19And um you know, again, it can help these smaller banks and credit unions comply with regulations and still compete with those new financial platforms in order to retain their customers. So, look forward to continue to work together with you, my colleagues across the aisle to do um this essential work and to make sure folks are aware of uh this tool that's available and leverage it I yield back.
▶ 1:40:44The gentlewoman yields back. The chair will now recognize himself for 5 minutes. I want to thank the panel for being here and the ranking member for your leadership on this. Look, artificial intelligence is already driving real benefits by expanding our financial sector, lowering costs and helping institutions serve our customers better. And we all agree this is a good thing. But as adoption accelerates, so do the risks, including fraud, misinformation, and adversaries using these very tools against us.
▶ 1:41:12We have seen clearly a direction from Congress that is working. The administration's artificial intelligence framework points in the same direction. And this is why I've introduced the AI Plan Act. It takes a balanced approach to directing key agencies to build on coordinated national strategies against malicious AI use and not creating duplicative government regulations or worse, guidance that conflicts with each other.
▶ 1:41:38We all have to make sure that we are keeping America first in this technology space and not creating artificial government-enforced barriers. Right now, I believe that agencies are not fully aligned, and that creates We need to stay ahead of the threat while keeping innovation right here in the United States. So, to all witnesses, I'll start with a simple yes or no question for you each. My AI plan would establish a whole-of-government strategy on AI threats to our financial systems.
▶ 1:42:06I'd like you to believe let me know, do you think this is something the US government's capable of Mr. Geller?
▶ 1:42:14I I think it clearly is capable, and and um it seems like your act your bill is focused on defending against economic and national security risks, and it's hard to say that wouldn't be helpful.
▶ 1:42:27Mr. Geller?
▶ 1:42:28Yes, I do think we're capable.
▶ 1:42:30Thank you. Mr. Billings?
▶ 1:42:31I agree. I think we're capable.
▶ 1:42:33Mr. Parker?
▶ 1:42:35Very good. Mr. Geller, I'd like to speak to you directly here. Look, my home state of Iowa alone has more than 270 community banks. What is one concrete tool that the OCC is deploying today to help banks under that $500 million threshold detect AI-generated fraud, the banks that would be the most vulnerable in this case?
▶ 1:42:55Thank you, Congressman. So, as far as what we're doing is we are seeking feedback from the industry on what the greatest challenges are to help provide information and guidance on how to combat it. And we will continue to support through reduction of regulation that is not statutorily required, not regulations, policies that are not statutorily required to enable them the room to explore and test.
▶ 1:43:20I know that our banks appreciate that and your leadership in this space. I'm going to get a little bit more technical here with you. The AI model risk guidance hasn't been updated for nearly a decade, specifically SR 11-7, and that circular was written years before most large language models existed, including what we've seen just in the last 12 months alone. Is the OCC actively updating AI-specific model risk guidance, and what direction from Congress help you in your effort?
▶ 1:43:47Uh thank you, Congressman. So, yes, we SR is the Fed's we have a corresponding version as well, and we are reviewing that in coordination with the Federal Reserve and the FDIC. And I don't know if additional [snorts] direction is necessary. We're well aware of the risks and concerns from the industry.
▶ 1:44:04With a great panel up here, I think this is all the more reason for Congress to make sure that we're doing our job of providing congressional intent here. Making sure that not only are you working together, but that we're not inadvertently creating gaps or again conflicting guidance to places like my hometown banks. I hope the AI plan can help you start for that, and I appreciate your feedback on this. Mr. Billingsley, I'd like to approach you next here. We've seen risk from foreign AI models, think of China's deep seek on this.
▶ 1:44:30If a bank deployed a compromised model today, would we be able to detect it? And if so, how long would something like that take if it was compromised?
▶ 1:44:40Um as a general matter, you know, we we approach all bank activities sort of the same. So, we would hope to detect that in real time. Sometimes that takes a little time. Um we we do conduct exams very frequently. We do off-site monitoring as and such, but sometimes it can take it can take a little bit of time.
▶ 1:44:57What do you think the most important step is that Congress could take in the short term to help you with your timeline for real-time detection of foreign adversary advanced AI large language model learning?
▶ 1:45:09Uh it's it's a fantastic question. The first thing comes to mind, and I think you alluded to this in your opening remarks, is the more whole whole of government approach, more we can coordinate, I think the better. And share information, I think that'll be
▶ 1:45:20I would agree. I think this is an opportunity for us all to be able to work in hand in glove on this, as well as with our private sector partners as we move forward. Um very quickly, this is again a um with clear direction from Congress such as an AI plan act help close some of the gaps that we've highlighted here today.
▶ 1:45:37I think what it would do is it would just uh further um encourage interagency coordination to you know, identify the problems and solve them.
▶ 1:45:48I think we've seen risk from foreign AI models like deep seek already start to have an impact and if a bank deployed uh its ability to protect itself, we would be moving forward. With that, I thank the panel for their time today. Um I would like to also highlight we appreciate all of your witness testimony. Without objection, all members will have five legislative days to submit additional written questions for the witnesses to the chair. The questions will be forwarded to the witnesses for their response. Witnesses will please respond no later than the 30th of April 2026. With that, Mr.
▶ 1:46:17Lynch, this hearing is adjourned.
▶ 1:46:19Thank you.