Bitcoin / Virtual Currency Regulation: The State (by State) of Affairs
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The Future of Finance and Capital Markets? New technology and innovative businesses increasingly federal banking laws bitcoins our daily financial lives. Mobile devices, high-speed data communication, and online commerce are creating expectations that convenient, secure, real-time payment and banking capabilities should be available whenever and wherever they are needed. At the same time, disruptive new technologies suggest that traditional financial service providers must innovate and adapt or be left behind.
Against this backdrop of technological change and heightened expectations, it is worth remembering our broad public policy objectives, which are driven by the fundamental importance of the payments system in our society.
Today, I will lay out those objectives as we see them at the Federal Reserve, and focus in particular on their application in three specific areas where technological innovation is driving change: Public Policy Objectives for the Payments System We trust financial intermediaries to hold and transfer funds in a safe and secure manner to meet the needs of commerce.
The payments system provides financial institutions and their customers a variety of ways to transfer funds, but the goal is essentially the same in all cases: The Federal Reserve and other central banks have adopted broad public policy objectives to guide the development and oversight of the payments system. At the Fed, we have identified efficiency and safety as our most fundamental objectives, as set forth in our Policy on Payment System Risk. An efficient payments system provides the infrastructure needed to transfer money in low-cost and convenient ways.
Efficient systems are innovative in improving the quality of services in response to changing technology and changing demand. Efficient systems are also broadly accessible through means that are convenient for consumers, businesses, and financial institutions around the country. Safe payment systems are built from proven technology and operate reliably and with integrity.
Safe systems address a range of well-known risks, including legal, operational, security, and financial risks. Information security and privacy have become particularly important in recent years. Overall, the payments system must be innovative, while also addressing risks, supporting financial stability, and maintaining public confidence. Faster and More Secure Retail Payment Systems The development of real-time retail payments has been gaining momentum globally.
The UK has had a system in place since Australia federal banking laws bitcoins actively developing a new nationwide system. The European Central Bank, the Bank of Japan, and several other central banks have also been acting as catalysts to promote real-time federal banking laws bitcoins initiatives. The federal banking laws bitcoins emergence of real-time systems throughout the world federal banking laws bitcoins the growing demand for such systems, and the need for the payments system to keep up with evolving technology.
In the United States, our traditional bank-centric payments system, sometimes operating on decades-old infrastructure, has adjusted slowly to the evolving demands for greater speed and safety. Innovators have built new systems and services that ride on top of the old rails but with mixed results, and over time, our system has grown more fragmented. Our payments system is large federal banking laws bitcoins diverse, with a wide array of financial institutions, systems, and service providers; it will take coordinated action to make fundamental and successful nationwide improvements.
The Federal Reserve has often helped address problems of this nature by convening stakeholders in the payments system and encouraging them to identify key issues and to work together to make fundamental improvements. With this in mind, the Federal Reserve has in recent years been working with a wide range of stakeholders to improve the speed, efficiency, and safety of the U. Significant dialogue and public responses to a consultation paper in indicated that stakeholders would welcome a broad initiative to work for federal banking laws bitcoins.
I spoke about the payments security initiative on another occasion. You can expect to see the results of these efforts later this year. In forming the task force, we committed to an inclusive and transparent federal banking laws bitcoins that would ensure representation of diverse stakeholder interests. The group is comprised of over representatives from financial institutions, technology companies, consumer advocates, and others.
To support that mission, the task force developed a framework, called the "Faster Payments Effectiveness Criteria," to provide guidance to the wider payments community on the desired attributes of a future payments system.
The framework identified 36 "effectiveness criteria" that a faster payments system should meet, covering six broad areas: Task force members and others have widely embraced the effectiveness criteria. Our federal banking laws bitcoins is that the criteria will serve as a lasting blueprint for payments service providers in designing innovative future products.
The task force also established a process through which its members could submit proposals for faster payments capabilities and have them assessed against the effectiveness criteria by a qualified independent assessment team.
The task force encouraged members to submit proposals reflecting both products under development and conceptual federal banking laws bitcoins.
There was overwhelming enthusiasm around the process, federal banking laws bitcoins the task force ultimately completed reviews of 19 faster payments proposals. Collectively, the proposals represent a broad range of creative and innovative ways to deliver real-time payments.
Some are based on current designs and established technology. Others leverage the latest innovative ideas and technologies. Inthe task force has been working on a final report. Part 1 of the report--the background and motivation for pursuing faster payments--was published in January. Part 2 will be released around federal banking laws bitcoins middle of this year. Until then, the proposals remain confidential to the task force. The role of the task force is not to select one or more proposals for implementation, but rather to assess the proposals against the task force criteria.
It will be the job of the financial industry to take these proposals forward as they see fit. I strongly encourage the industry and other stakeholders to continue the work of bringing ubiquitous real-time payments systems and services to the U.
It will be important that we keep end users in mind as the new real-time environment evolves, emphasizing inclusion, safety and trust, and consumer education and protections. End users will ultimately determine the success of new payment services and the future direction of faster payments in federal banking laws bitcoins country. Distributed Ledger Technologies Let's turn to another type of new technology that may have important implications for the payments and financial systems: Bitcoin helped bring this technology to public attention.
Using blockchain technology--which employs a form of DLT--and an open architecture, Bitcoin federal banking laws bitcoins for the transfer of value bitcoins between participants connected to its ecosystem without reliance on banks or other trusted intermediaries. This feature has led some to predict that DLT will in the long run render parts of the banking and payments system obsolete, as the intermediation of funds through the banking system will become unnecessary.
Faced with these dramatic predictions, we have seen banks and market infrastructures collaborate with technology firms to explore the use and further development of DLT. Inthere was widespread federal banking laws bitcoins. Efforts by financial institutions often focused on evaluating the technology, identifying potential uses, and conducting proofs of concept.
Prominent examples included the use of distributed ledgers to store transactional data and records in tamper-proof ways, as well as the use of the technology as a primary means to hold and transfer money or assets. By the end ofa few major U. As we have followed developments over the past year, a few lessons have come into better focus.
In the near term, this approach seems more likely than fully open systems to provide the needed governance and management to address operational, security, and financial risks. Indeed, access is typically permissioned in situations that require the protection of systems and information in the financial and other industries. Even in permissioned systems, some key issues will remain, including whether finality of settlement is to be determined federal banking laws bitcoins a central trusted party or by a majority of participants, and whether federal banking laws bitcoins are able to view information on other parties' transactions.
Some argue that movement away from open systems undermines the potential efficiency and the spirit of DLT. At least for now, in payment, clearing, and settlement, safety and confidence must also weigh in the balance. Second, firms are still grappling with the business case for upgrading and streamlining payment, clearing, settlement, and related functions with DLT. Promoters of DLT offer a vision of streamlined processes that lead to faster processing, reduced reconciliation, and lower long-run operating costs.
Some argue that in certain markets, faster and more predictable processing will also reduce the capital and liquidity costs of operations. But upgrades are often costly, lengthy, and risky, particularly if the technology is still being proven, as is the case for DLT. Network effects can also affect adoption, since multiple firms may all need to adopt a particular implementation of DLT in order to justify its use in a specific market. Third, technical issues remain. Practical issues federal banking laws bitcoins as whether a particular version of DLT will work for the intended purpose are still being explored.
Issues of reliability, scalability, and security remain very important. Beyond these issues, standardization and interoperability across different versions of DLT will need to be addressed to allow technology integration and avoid market fragmentation. In general, industry members and technology providers recognize these important issues and have taken federal banking laws bitcoins steps to address problems.
It will be important to keep these challenges firmly in mind as we move beyond experimentation and into the development and deployment of new products and processes. Fourth, governance and risk management will be critical. For individual firms or clearing houses that adopt DLT as an internal technology upgrade, the governance and risk-management processes are likely to be internalized within existing organizations and be akin to other technology upgrades.
However, federal banking laws bitcoins new networks of bilateral payment, clearing, and settlement are established, the new technology may involve tightly coupled protocols and operations. The safety of the overall design will depend on a highly interdependent framework. If automated risk management, smart contracts, and similar tools are deployed across a network, cascades of rapid and hard-to-control obligations and liquidity flows could propagate across a network and the financial system in response to events.
This interdependence will likely call for creative organizational thinking to address the need for governance and strong risk management. Finally, the legal foundations supporting DLT will need attention. Deployments of DLT will involve firms, perhaps in different jurisdictions, with systems that record and transfer information and assets under existing legal frameworks. Which bodies of law apply to the particular firms, assets, and activities will determine the associated rights and responsibilities when transfers are made, cleared, and settled.
For example, whether and how banking, payments, securities, or commodities laws apply in a given context are likely to be important in designing systems and services and understanding their properties. And, as with any new technology, things may go wrong.
We will need a thorough analysis of how DLT fits into current legal frameworks and what gaps need to be filled by contractual agreements or new laws and regulations. A robust legal basis that provides certainty across relevant jurisdictions is essential for building strong governance, risk management, and operations. Digital Currencies Issued by Federal banking laws bitcoins Banks to the General Public My last topic is federal banking laws bitcoins potential use of DLT or other technologies by central banks to federal banking laws bitcoins a digital currency to the general public.
In a sense, the idea of a digital currency is merely a 21st century analog of paper currency. While this is a fascinating idea, there are significant policy issues that need to be analyzed. First, there are meaningful technical challenges. We should federal banking laws bitcoins serious reservations about our ability to keep a generally circulating digital currency safe and secure over the long run.
A digital currency issued by a central bank would be a global target for cyber attacks, cyber counterfeiting, and cyber theft. The threats could significantly exceed historical experience with paper currency. A digital currency would also be a prime target federal banking laws bitcoins a potential vehicle for global criminal activities, including money laundering. Central banks could face difficult trade-offs between strengthening security and enabling illegal activity.
