Innovation at the Speed of Markets: How Regulators Keep Pace with Technology

The Subcommittee on Digital Assets, Financial Technology, and Artificial Intelligence will come to order. Without objection, the chair is authorized to declare a 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 four minutes for an opening statement. We 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. The 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. That 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. If we fail to create an environment where financial institutions and entrepreneurs can reasonably innovate, that innovation will simply move elsewhere. 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. Regulators 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 protect consumers. Our 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 four minutes for his opening statement.

Thank 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 expertise and your perspective. Mr. Chairman, also as ranking member of this subcommittee, I've had the opportunity to participate in multiple hearings on fintech innovation and new products and new technologies. I want to be clear that I wholly embrace the idea that innovation in financial services can be a tremendous good. New tools and new products can actually expand access to credit and capital, lower cost for consumers, and help families build financial security. But that promise, I believe, depends on whether new products serve those goals and whether adequate consumer protections are in place to ensure that they do. I'm concerned that recent regulatory developments suggest we might be moving in the opposite direction at the direction of this White House. Under the Trump administration, agencies are doing the opposite. The SEC has dismantled several of the teams that are responsible for managing the incidents of scams and frauds. The White House has dismantled FinHub, which is the dedicated office that built the agency's technical expertise on digital assets and fintech. And 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 charged with misconduct. And at the Consumer Financial Protection Bureau, whose very mission is to ensure industry compliance with federal consumer protections, the Trump administration has gutted the agency by sending layoff notices to over 1,500 employees. Even at this hearing, and I appreciate, you know, you can only have a panel of 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 consumers and investors. With that, Mr. Chairman, I appreciate your willingness to bring this is an important issue. I'm grateful that we're bringing this up, and I will yield my remaining time to the full committee ranking member, Ms. Waters of California.

Thank you very much. Mr. Chair, I'm deeply disappointed in committee Republicans' decision to exclude the Consumer Financial Protection Bureau's testimony at today's hearing and how the federal financial regulators are approaching innovative technologies. While the chairman has said he would invite Acting Director Vogt to testify, we're still waiting for his long overdue testimony and the chance to hold them accountable. Last Congress, we heard from agencies on how they're engaging with newer technology, 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. While 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? I yield back.

The gentlewoman yields back. The gentleman yields back. I now recognize the chairman of the full committee, Mr. Hill, for one minute for an opening statement.

Thank you, Chairman Steil. 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 effectively, and we must ensure that our regulators evolve alongside the markets, the very markets that they oversee. That 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 U.S. I 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.

The gentleman yields back. Today we welcome the testimony of four witnesses. First we have Mr. Randall Gwynn, 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. Amanda 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. Each of you will be recognized for five minutes to give an oral presentation of your testimony, and without objection, your written statements will be made part of the record. We'll now start with you, Mr. Gwynn, and you're recognized for five minutes for your opening remarks.

Thank you very much. Chairman Steil, 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 U.S. financial stability. Innovation can improve the customer experience, expand product offerings, lower costs, increase credit availability, enhance efficiencies for banks, businesses, and customers, and support economic growth. 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 U.S. financial stability. Banks are generally free to choose their own business models and risk profiles, but when their activities threaten safety and soundness or financial stabilities, examiners act like a referee 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. One 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 comment. But most of our supervision is hidden from public view. To 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. We demonstrated that commitment by releasing to the public in November our statement of supervisory operating principles. 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. My written testimony focuses on three areas: artificial intelligence, digital assets, and bank fintech partnerships. AI can improve operational efficiencies and enhance risk management capabilities. To facilitate the deployment of AI tools, 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. Digital 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. Looking ahead, we are considering how to provide additional clarity for banks that want to engage in digital asset activities. 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 technology. Thank you again, and I look forward to any questions you may have.

Thank you very much. Mr. Gallagher, you're now recognized for five minutes for your opening remarks.

Chairman 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 Vogt'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. Today, the OCC supervises more than 1,000 institutions that hold $17.9 trillion in assets, two-thirds of all U.S. 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. In this role, I lead the Chief's Office in efforts to develop risk analysis, policy, and data and systems management that support bank supervision. 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 technologies. The 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 U.S. economy. Specifically, 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. As 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 denied. The decision should be made based on whether an applicant meets the applicable standards and can comply with the OCC's high supervisory expectations. With respect to digital assets, the 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. As 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 an opportunity 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. In addition to implementing a federal framework for permitted payment stablecoin issuers, the OCC is facilitating the adoption of artificial intelligence by interested banks to improve business functions. The use of AI among banks is not new. However, recent developments, particularly generative and agentic AI, offer banks opportunities to automate and improve core operational, customer service, and other activities in novel ways. As 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 institution-specific risk management, and position the OCC to support community banks that utilize these relationships. The 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. 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.

Thank you very much, Mr. Gallagher. Mr. Billingsley, you are now recognized for five minutes.

Chairman Steil, Ranking Member Lynch, members of the subcommittee, I am 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. As 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. Supervision reform has been a significant area of focus for the FDIC over the past year, and as part of that effort, we are 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 customer interactions. Banks are increasingly using AI and machine learning in several areas, including fraud detection, AML processes, 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 information. Banks are providing banking services to crypto-asset entities, and we expect additional use cases to continue to emerge in all of these areas. A critical component of a bank's adoption of technology pertains to their ability to engage and partner with third parties. 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. Under Chairman Hill's leadership, the FDIC has taken a more open-minded approach to banks seeking to engage in digital asset activities while maintaining our supervisory expectation that these activities, 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. The 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 stablecoins. Consistent with the act, we expect to propose prudential requirements for FDIC-supervised payment stablecoin issuers 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 is critical that the FDIC's own technology adoption keeps pace. The 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. In 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 am happy to answer any questions.

Thank you very much, Mr. Billingsley. Ms. Parkhill, you are now recognized for five minutes.

Chairman Steil, 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 over-regulation can stifle innovation and growth. Last 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 among regulators, serving as both a regulator and insurer. There 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 unions. 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. Credit unions understand the connection between financial technology and inclusion. 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. To 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 institutions. These insights 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. Beyond supervising how credit unions adopt technology, NCUA is also exploring how technology can enhance our own operations. 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. NCUA is also evaluating opportunities through the General Services Administration's U.S. AI Shared Services, which provides federal agencies with access to multiple AI models in a FedRAMP-secure environment. An internal working group is assessing the 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. Under 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 controls. NCUA has moved promptly alongside our fellow regulators to implement this law. On February 11, we published a notice of proposed rulemaking establishing the application requirements for credit unions and their subsidiary seeking approval to become permitted payment stablecoin issuers. The public comment period closes on April 13, and stakeholder input is welcome as we develop this framework. A 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 institutions. Thank you, Mr. Chairman. I look forward to the committee's questions.

Thank you very much, Ms. Parkhill. We'll now turn to member questions. I'll recognize myself for five minutes. This subcommittee's been exploring new developments, technology in our financial system from digital assets and tokenization to AI. New capabilities bring great opportunities for our markets, but also present new risk profiles which the regulatory frameworks must contend. I want to go right down the line, two questions, 30 seconds or less from each of you, just to stage set if I can. We'll start with you, Mr. Gwynn, and work our way down. Can you give one concrete example of an action your agency's taken to keep pace with the technological change?

Yeah, so late last year, the Federal Reserve Board issued a new policy statement on innovation where it stated that it would facilitate innovation as opposed to inhibit it, provided that it's consistent with safety and soundness. And that animates what we're doing.

Thank you.

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 and modern technologies and ensuring that information flows to our field staff as timely and readily as they can.

Thank you.

I'll just add to what my colleagues said, that we recently together with them early this month issued an FAQs on tokenized securities, which I think is informative to capital requirements for those types of instruments. Basically, they amount to saying that the capital rules are generally technology-neutral, which I think is useful in this context.

In addition to guidance we've issued over the last several years, earlier this month our chairman held multiple roundtables on AI and digital assets to get information both from credit unions and industry about challenges and information that and resources that would be helpful, and we're taking that information back and including it in any future guidance.

Thank 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 successful in their endeavors to, in particular, scam consumers across the country. Same pattern here, we'll start with you, Mr. Gwynn. What's the most effective way your respective agencies using technology like AI to fight fraud?

So 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.

Thank 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 industry. 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 forward.

The FDIC is piloting AI right now. I think the issue you raised, Mr. Chairman, around fraud is a good one. I think there's some promise there with things like alert monitoring, transaction testing, those types of things. So there's some promise there for sure.

We're using it internally in our cyber operations, found it particularly useful in helping to block threats related to phishing and malicious attachments.

Thank you very much. I think there's like any new technology, there's risk and opportunity, and it's about leveraging the opportunity and working to downside risk. I think we've seen a real change from where we are today from where we were in the Biden administration where it was hindering innovation, development, and growth in the private sector through punitive regulations for emerging technologies. And I think now under the Trump administration, the area of stifling innovation is over. I 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. You're non-political, but have you seen a shift in tone at the OCC as it relates to embracing technology for the benefits that it can bring?

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 preventing downside risk, particularly in areas like digital assets, often at the expense of innovation. Under 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 manner.

So 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.

Thank you very much. I yield back. I now recognize the ranking member of the subcommittee, the gentleman from Massachusetts, Mr. Lynch, for five minutes.

Thank you, Mr. Chairman. Mr. Gwynn and Mr. Billingsley, you're both responsible for supervision. Let me ask you, prediction markets here in the U.S. have grown from a niche financial product into a major player in our financial system. Just back in August, there was it was a market of about $2 billion, now it's $18 billion in the prediction markets. And that's just Kalshi and Polymarket. The CFTC currently treats prediction markets contracts as financial derivatives and not gambling, which I believe it should be. But 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 in Iran by June 30. Just that specific question has about $48 million in total bets right now as we sit here. And this to me allows for 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, classified, or top secret information. As the United States and Israel prepared for and later launched strikes against Iran, there were traders in these prediction markets online and they wagered over a billion dollars on every single aspect of that conflict. There was a single trader who made nearly a million dollars from dozens of well-timed bets correctly predicting U.S. and Israeli military operations against Iran, winning about 93 percent of their five-figure wagers on unannounced classified military operations. Many of these bets were placed just hours before the strikes occurred. Six newly created accounts made approximately $1 million by correctly betting that the U.S. would strike Iran before February 28. 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 it's not just insider trading. If insider traders can front run our military decisions, so can our adversaries using AI, 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. When 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. Gwynn, the Federal Reserve has a mandate to identify and address risks to financial stability. In 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 risk that is a concern for the Federal Reserve?

Thank you very much. So I'm not sure that it does now. Certainly we monitor anything that could be a serious risk to Thank you very much. So I'm not sure that it does now. Certainly we monitor anything that could be a serious risk to financial stability. As far as I'm aware, banks, at least the institutions that we regulate, are not allowed to to trade in these contracts. So I think perhaps they lend to institutions that are involved in this business.

Do you think it should be perhaps regulated as gambling if this is the way it's going to be used?

I don't I don't know that the Federal Reserve would have a view on that.

Okay. All right. Mr. Billingsley?

I think I'd agree with my colleague. I don't know if the FDIC has a role to play here, but I would agree that with my colleague as well that I'm not aware of any FDIC supervision.

Mr. Gallagher or Ms. Parkhill, any any thoughts on this?

Nothing additional.

Okay. Nothing? Mr. Gwynn, are the existing legal and regulatory frameworks sufficient to address the risk? Do you think would you suggest what Congress might do next to just address this risk of insider trading?

Well, certainly it's I think looking at the SEC, the SEC I think is the organization that generally regulates insider trading. So I think that's probably the place for Congress to look or maybe the CFTC.

Ideally, that would be a great question for the SEC or CFPB. Maybe we'll do that at a future hearing. Thank you, Mr. Chairman. I yield back.

Chairman yields back. The chairman of the full committee, the gentleman from Arkansas, who's got a big basketball game to watch tonight, Mr. Hill, is recognized for five minutes.

I thank the sensitivity of the chair. Appreciate that. Go Hogs. 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 think back about my service at the Treasury, I spent a lot of hours in the FFIEC persuading them to do things in a harmonious way and to try to streamline the compliance process. And then as a bank CEO, certainly watched technology flow through both bank expertise and examiner in the field examiner expertise. And I want to thank 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 your examiner force new tricks and bring them along. And over the decades, I've seen that transition from the people who survived the 80s in Texas and the 90s 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. When it comes to this technology arena, I'm interested in particularly 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 with you, Mr. Gwynn, tell me a little bit about how you work with state bank commissioners on this technology adaptation issue.

Sure. 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 them 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.

Do you sense that when you meet with your examiner force that they're in a in a capacity 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, the state examiners were better trained than some of the federal ones and vice versa. That's a long time ago now obviously, but do you sense that we really have a parallel training level of expertise in both forces, state and federal?

So 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 St. Louis, and I know that in the meetings in the last couple of days this week, there was discussion about sharing training resources to help train people on all the emerging technologies.

Good. Thank you for that. Mr. Billingsley, you want to comment on that?

Certainly. I do have very regular recurring conversations with both CSBS and a number of the commissioners. Their partnership not only on innovation but just more broadly about supervision is incredibly important. So I value that very much. On the topic of skill sets across the state regulatory environment, it's my sense that we do work together, we do train together, we learn from one another. So that partnership is very, very important.

Good. Well, I hope that also takes it through the FFIEC process to coordinate it and 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 page and we don't have a lot of differences there. In the last minute, I want to talk about one of the most interesting emerging technologies which is converting certain financial services functions to the use of a blockchain as opposed to a traditional computer system. And I view something like a dollar-backed stablecoin as a transitional product of not you know that is I say transitional on purpose because I think the future is going to be financial institutions actually tokenizing their deposits. Could ask each of you to say are you working on the oversight necessary to allow a bank to actually debit cash and tokenize a deposit on a blockchain? Let'll start with you, Mr. Gwynn.

So in my prior life I wrote various opinions on whether it was permissible to tokenize deposits and mostly they were positive. What's interesting is that the and maybe Mr. Billingsley can talk about this more but the FDIC chair gave a speech a week or two ago suggesting that the FDIC's going to clarify that tokenized deposits can be FDIC insured just like any non-tokenized deposit.

I'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, and I yield back, Mr. Chairman.

Gentleman yields back. The gentlewoman from California, the ranking member of the full committee, Ms. Waters, is recognized for five minutes.

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 Trump administration decisions. We already saw this before when public officials with close ties to the administration made trades prior to major tariff announcements. I'm also worried that by weakening enforcement, there is no true oversight of potential wrongdoers and regulators potentially profiting from the use of material non-public information. Mr. Gallagher, what agency policies are violated if OCC employees engage in any prediction markets?

Thank you, Congresswoman. So 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.

I think Mr. Lynch asked you a question that you had no answer to. Do you recall what he asked you?

Which question was that?

I'll yield to you, Mr. Lynch, for that question. Yes, you asked Mr. Gallagher a question that he had no answer to.

Yeah, right. Sorry for the crossfire. It was a question regarding the prediction markets and probably a better question for the SEC or CFPB, who are not here today.

Mr. Gallagher, are you at all concerned that agency policies are being violated? Do you, are you really concerned? What are you going to do about it?

Congresswoman, I assume you're talking about Congressman Lynch's questions on prediction markets. So again, the OCC doesn't have rules on those, and it's not our place to make rules. To the extent exposures or risks 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.

Continuing, since the explosion of prediction markets in the fall of 2024, especially betting on political events, how is the agency responding?

Thank you, Congresswoman. So the agency is not responding. That is not our, unless it's in the banking system or within the context of your question, our staff, again, it would come under the rules and expectations of our ethics officials and our legal department.

Are you telling us your agency is not increasing its oversight of agency employees profiting from the use of material non-public information?

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.

Mr. Gwynn, yes or no answer, please. Is your agency increasing its oversight of agency employees profiting from the use of material non-public information?

I 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 information.

Mr. Billingsley, what about you?

Likewise, I agree with my colleague from the Fed.

Ms. Parkhill, what about you? Or Ms. Parkhill.

I think this would be a question for our ethics office of any training that would be provided on top of current expectation.

Mr. Gwynn, on October 21, 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 services that banks typically get. This 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 Kraken, a crypto company, for access to Fed master account. Mr. Gwynn, how are you responding to these concerns?

Well, we have 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...

The gentlewoman's time is expired. The gentleman can complete...

Thank you, I yield back. I wish we had more time. You guys are not...

The gentlewoman yields back. The gentleman from Tennessee, Mr. Rose, is recognized for five minutes.

Thank you, Chairman Steil and Ranking Member Lynch, for holding this important hearing, and thanks to our witnesses for your time today. Mr. Billingsley, you noted that small banks in particular rely on third-party relationships to access innovative technologies and that the FDIC is reevaluating guidance and updating examination practices around those relationships. How 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 U.S.?

Thank you. Two things come to mind. First, we are considering updating outstanding guidance on third-party risk management standards more generally to see if we can better tailor that, particularly for our community banks. I think second, we've taken a more open-minded approach over the last 12 to 18 months with respect to banks' engagement with third parties, which I believe has helped to remove any barrier that might have been there for banks that have wanted to adopt that sort of partnership or that sort of engagement with a third party.

And 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?

We are in the process.

Okay, very good. And Ms. Parkhill, I recently read a 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. What is NCUA doing to ensure that the adoption of promising anti-fraud and financial crime-fighting AI tools isn't slowed down by unnecessary regulatory red tape?

The first thing is we 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. 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.

Thank you. And is it your sense that in reviews or audits that your examiners are, are they encouraged to be, kind of have an open mindset about what the institutions are doing?

That'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 is pretty mature, so we've seen it and examiners are aware of it.

Good. Mr. Gallagher, 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?

Thank you, Congressman. So 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. 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.

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?

I certainly do. And we've seen, I mean, 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 career.

Thank you. Mr. Gwynn, 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?

Yeah, so just yesterday I saw some new technology to get a lot of data gathered from reports otherwise hard to get. And the team actually had 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 the AI was able to do it in a matter of days. And the difference between the old table of information and the new was quite extraordinary. And I was asking them, can you add this, can you add that, and they were quite positive that we'd be able to get more and more useful data to supervise with.

Thank you, Mr. Chairman. I yield back.

Thank you. The gentleman yields back. The gentleman from California, Mr. Sherman, the ranking member of the subcommittee on capital markets, is now recognized for five minutes.

We see often that people, particularly in the tech world, want to do something that we're already doing, 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 bank regulators, and 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. I heard the chairman of the full committee talk about tokenization of bank deposits. Well, we kind of have that now. There's money in my account, I can ACH it to your account. Calling that tokenization rather than the 20th-century term of a wire transfer, 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. But I'm particularly concerned about non-banks getting into this area and escaping all the regulation that's necessary. Banks are highly regulated, they're supervised for compliance with consumer protection as well as safety and soundness requirements. However, many non-banks and technology companies offer financial products and services and they say they're innovative and therefore are not subject to the same degree of oversight. Mr. Gwynn, should financial activities that are the basically the same be subject to the same regulation whether they're done by a bank or a non-bank?

So that's certainly a principle that the Board adheres to, which is same risk, same activity, same regulation. Part of the problem though is we don't have jurisdiction over some of the non-bank institutions that are engaged in this activity, so our ability to look at that or oversee it is limited.

Thank you. We've seen a study by Meta saying that 10 percent of its annual revenue, approximately $16 billion, is derived from advertisements for scams and banned goods. Internal documents suggest that there may be as many as 15 billion high-risk scam ads every day. Many of our telecom carriers continue to facilitate pig butchering and spoofing schemes. Ms. Parkhill, have you been in contact with your counterparts at other agencies as the best way to tackle this kind of fraud, particularly as it relates to our financial institutions?

We're also concerned about fraud and financial crimes and we work closely through either FFIEC or other avenues. In the last few years, we've issued joint releases, statements on elder abuse fraud, so it's definitely something that we work together on when appropriate.

AI is pattern recognition and predicting the future by looking at the patterns of the past. But often the past and the patterns you recognize there are just a reflection of the racism of our country. You might do pattern recognition and say people born in certain zip codes, people who went to high schools with certain percentages of non-white students are more likely to be unsuccessful financially and I'm sure last century that was true. I hope this century it is not. I know a study that was done as to success in finance saying you're more likely to be successful if your name is Jared rather than Jesus. What are we doing, and I'll ask this of Mr. Gallagher, 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 particularly the lending decisions of the future?

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 in their business model of they are in an effort to book compliant...

But is there a system to say, okay, you found a pattern, you want to use it in decisions, is that just a reflection of racism?

Yes, 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 management before they install.

The gentleman's time has expired. I now recognize myself for five minutes. As this 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. So 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? We'll start with you, ma'am.

We see the benefit AI has in reviewing large sets of data, both structured and unstructured, and also quickly analyzing that data. So there's a lot of use cases we're looking at for efficiencies in risk oversight, examination scoping, and building models for identifying risk.

I would agree with everything my colleague just said. I would only add to that, there's some promise there too with respect to ongoing off-site analytics, large sets of data that we could analyze more quickly off-site would be super helpful.

Similar, we also 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 system.

So 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, material risks to the financial to financial institutions and the system as much earlier than we can now and to try to have AI help us decide what sort of action to take as early as possible so it can be more proportionate and less reactive.

Great, thank you. During the Biden administration, the Fed established the Novel Activities Supervision Program through supervision and regulation 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 institutions. This 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 structure 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. Gwynn, 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?

Okay, so first of all, I think our experience with the novel banking program was that it didn't it wasn't it wasn't consistent with the policy that we announced a few months ago of facilitating innovation consistent with safety and soundness. So we decided, after watching it in practice for a while, that it was that we would change that practice. And so now innovation is encouraged or facilitated like any other activity. 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 what they think is in their interest and the interest of their customers.

Following up on that, how will the integration of digital asset and fintech activities into the supervisory process improve U.S. competitiveness and enhance innovation?

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 U.S. will be a leader in innovation in a way that that the public feels comfortable with and will actually be viewed as beneficial. And so it does make us more competitive relative to other countries.

Okay, 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?

We've 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 around AI, digital assets, and fintech. Going forward, a large focus will be on stablecoins and digital assets and the new authorities granted to credit unions under the Genius Act.

All right, great. Thank you, great timing too. The gentleman from Illinois, Mr. Foster, who is the ranking member of the Subcommittee on Financial Institutions is now recognized for five minutes.

Thank you, Mr. Chair, and to our witnesses. 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. And 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, and other verifiable digital credentials in the KYC process for customer identification. As you all know, setting up KYC is one of the biggest barriers to entry for fintechs and de novo banks, 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. 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 line.

So I don't know the answer to that question, but I'm going to find out and I'll get back to you, Congressman.

Thank you.

Thank you, Congressman. So we are not yet, but we will certainly engage as the Treasury Department moves forward on that initiative.

I'm not aware of any engagement, but I'd be happy to follow up.

I'm also not aware, but know that we do coordinate closely with Treasury and FinCEN and will do so if asked.

Yeah, 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 validate their existence as a legally traceable 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. And so I urge you to, you know, take that Treasury recommendation seriously and move as fast as you can. Now, I'm also very concerned that in the emerging world of 24/7 payments and agentic finance, that bank runs are going to become faster and more frequent. The Silicon Valley Bank saw more than 40 billion flee the institution in about two days, driven in pretty much at the speed of internet gossip. And 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. To manage 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. And so that they're ready to step in on a moment's notice in the in Sunday in the middle of the night. And so this is this is a big change in the way you operate right now. I think you may also need to have the equivalent of pre-pledged collateral and so on understood, so if if the regulator has to step in to save 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.

We're definitely aware of that concern and have several liquidity options to provide credit unions if needed, either through our share insurance fund or borrowing through Treasury or the CLF. So we have options and playbooks ready in case of liquidity stress in the system or runs either in the credit union industry or with banks. So we are looking at this closely and prepared.

So you think prepared. So that if, you know, this Sunday night at 2:00 in the morning, everyone's AI personal agent says, oh, I've just learned on Moatbook of a rumor that this bank is in trouble, that you think you're ready for it.

I think as soon as the credit union recognizes that they are in need, we have the resources to help them.

And are they monitoring this so that they will know in 20 minutes in the middle of the night? I mean, 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 software.

Absolutely.

Thank you, my time's up and yield back.

Thank you. I now recognize myself for five minutes. I want to thank by 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. Nowhere 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 U.S., risking that innovation and investment move overseas. I want to start with how your agencies are approaching innovation more broadly. Mr. Gwynn, 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?

So, I think the way we do that is we let the banks drive that. So, you know, we wait in some ways we wait for the banks to say this is what we'd like to do, this is where we'd like the direction we'd like to go, and 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 try to facilitate that consistent with safety and soundness.

Thank you for that. Along those 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?

Yeah. 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 and not just sort of artificially discourage innovation because of a fear of of the new.

Thank you for that. 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. In many cases, that education and onboarding burden falls directly on them, which can slow adoption and create additional strain on already limited resources. Ms. Parkhill, credit unions in particular face unique hurdles in this 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 developments?

Sure. 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 information on those technologies as they become used in the industry more and more.

Thank 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 today?

Yeah, we're seeing a lot of interest in lending use cases, either underwriting, appraisals. The biggest challenges we hear are legacy systems that may not be compatible with fintechs or long-term inflexible contracts with core service providers that prevent working with certain vendors.

Thank you for that. Thank you to 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 gentlewoman from Texas, Ms. Garcia, is now recognized for five minutes.

I'm sorry, did you say the gentleman?

Gentlewoman.

Oh, thank you. Just wanting to be clear. Thank you, Mr. Chair, and thanks for to all the witnesses for being here. There is no debating that 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. I see that we have four regulators, and while I'm happy to hear from y'all, I want to take a moment to say how unfortunate and and it is that there is no witness here from the Consumer Financial Protection Bureau, CFPB, 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. They 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 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. Billingsley, what is FDIC doing right now to ensure that the agency is using the most up-to-date technology for internal operations, especially for supervision and enforcement?

Thank you. As I mentioned in my testimony, we are in the middle of a multi-year IT modernization project to convert legacy systems to more cloud-based systems to help us be more effective, be more efficient, ensure that our institutions are doing things in a safe and...

So what have you accomplished so far? You're saying it's multi-year. What have you gotten done this year?

So what what we're implementing is an agile system, so we've accomplished a lot of things with respect to how banks can apply to the FDIC, we've accomplished a lot of things with respect to audit filings, things of that nature, but we're we're bolting on additional use cases by the month. So it's an ongoing project.

When you say multi-year, when will you complete the this review?

I believe we'll have most of it completed in a couple years. Some of it will linger past that, but a lot of the bulk work...

Because things are moving rather rapidly, so I would urge you to expedite and fast-track what you can. Mr. Gwynn, 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 bank expand their use of AI?

So, 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 it actively and we're working with the other agencies so that we do it on a coordinated basis.

And how are you coordinating that with all the with all the system with all the different Federal Reserve banks around the country?

You mean the Federal Reserve banks or I'm not sure I understand.

Well, you're you're the main player here, but you've got Federal Reserve systems like are you working together with the Dallas Reserve, with the Denver Reserve, with the New York Reserve?

Yeah, 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 all the different banks and bank holding companies and other banking organizations.

Beyond 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 Risks to the Economy, Financial Systems from Third Parties." In it, the authors argue that the involvement of outside providers who many follow different standards and regulations can lead to unique risk management challenges. Ms. 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?

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 unions.

So you're not looking at reviewing what third-party vendors are doing as it relates to to your credit unions?

We work through the credit unions to review the due diligence that they are doing on the providers that they're using.

So you're not providing guidance or best practices?

We do have third-party risk management practice best practices guidance, and we do have resources specific to the use of AI that link to authoritative sources from NIST and CISA 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.

The gentlewoman's time has expired.

Thank you, Mr. Chairman. I ask for unanimous consent to introduce for the record the the article I quoted, "Workshop Reviews Risks to the Economy, Financial Systems from Third Parties."

Without objection.

Thank you.

The gentleman from Ohio, Mr. Davidson, who is the chair of the National Security, Illicit Finance, and International Financial Institutions Subcommittee, is now recognized for five minutes.

Thank you, Chairman. Witnesses, thank you for your preparation for this hearing and for your presence here today, and frankly for the work you do to make sure the safety and soundness of our financial system stays strong and frankly gets stronger. Mr. Gwynn, the Federal Reserve is now exploring so-called skinny master accounts to provide payment innovators more direct access to the Fed's infrastructure. That raises a question that's been broached for a while. You had guidance on when master accounts would be issued, Custodia Bank in particular 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 clear shall if you do this, then it shall happen versus somebody selectively picking winners and losers?

So, 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 guidance 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.

Yeah, so 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 doesn't yet comply with what the Federal Reserve would like to see, if I do X, Y, Z, 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?

Yeah. So, so we we haven't yet started but we will be reviewing later this year the um guidance for granting master accounts. Um it may well be that Yeah, so we haven't yet started, but we will be reviewing later this year the guidance for granting master accounts. It may well be that Congress may want to think about something if they want it to be more mandatory as opposed to discretionary, but for right now, it's mostly discretionary.

Well, 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 group of people that are very passionate about that. But for a lot of people, the number one thing they think about is central bank digital currency. And President Trump issued an executive order saying that there shall be no central bank digital currency, no work on a central bank digital currency. But prior to President Trump taking office this term, there was a lot of work at the Federal Reserve on developing a central bank digital currency. Has that work ceased or is it ongoing?

Yes, I think Chair Powell has spoken to that, and he said that it is not ongoing and that the chair does not believe that we have the legal authority to issue central bank digital currency without some action by Congress.

Well, unfortunately, he always has this qualifier, a retail central bank digital currency. And for a lot of people, what they see being built is like Hydra. There'll be many heads, sometimes in the form of stablecoins, sometimes in the form of other payment instruments, but they'll all come together on the back end with the body of the beast, and it'll be a wholesale CBDC. So is the work on the wholesale CBDC ongoing or did that too cease?

To my knowledge, it has not, it is not ongoing.

All right, thank you. You know, Mr. Gallagher, one of the, well, maybe I go to Gallagher, Billingsley, you guys both oversee banks. And one of the things with bank-fintech partnerships that we try to get right was the open banking 1033 provision. CFPB has active process to try to define a strike zone there, what is and is not, you know, the bank customer's property and what, you know, 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 and what's the role of existing bank regulators in helping provide clarity to that market?

Thank you, Congressman. So we are well aware of the privacy issues and challenges, the operational issues and challenges, and will support the law as it's implemented and continue to go through that.

Likewise, I don't think I have anything to add to what my colleague said.

So you guys are just waiting for CFPB to finish their final rulemaking and then you'll just apply it.

I think it's CFPB, I'm not sure.

CFPB, sorry, not CFTC. CFPB, Consumer Financial Protection Bureau. My apologies. I know what I meant.

Yeah, no, I'm not super familiar with how the process is going, but we would certainly follow our responsibility, absolutely.

Same, Congressman.

Yeah, so the idea there is clarity around 1033. I hope we get there and I yield back.

Thank you. The gentleman from California, Mr. Liccardo, is now recognized for five minutes.

Thank you, Mr. Chair. Mr. Gwynn, I appreciate that the Fed has been evaluating whether and under what circumstances a skinny charter might enable a fintech to get access to federal rails for payments. I know Governor Waller and others have been quite public about their interest. And as you can imagine, there's a lot of interest in Silicon Valley, which I represent in Congress along with other parts of the region. And we're hearing some concerns about initial drafts of the proposal, in particular the exclusion of automated clearinghouse payments, ACH. And as you can imagine, my concern is that excluding the very payment modality that consumers and small businesses use most frequently would sort of defeat the purpose. Last year, 35 billion ACH payments amounting to $93 trillion. Ninety-four percent of W-2 employees are getting their paychecks via ACH, including me, thank you. And we know that FedNow is very promising, but many of the 1,400 banks that have access to FedNow, in fact, only provide receive-only capabilities. And so it's limited, obviously, and it's a fraction of what the transaction volume is currently through ACH. And so I'm concerned that providing fintechs 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.

So 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 a legitimate question to raise and I've heard it many times from other people at the Fed who are more involved in this, 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. I don't think there's any sort of desire to exclude otherwise eligible institutions from ACH. It's just the question of whether it would work subject to the conditions that are in the skinny master account proposal.

I appreciate that. And what we've seen, at least publicly in print, is that concern is focused on the fact that ACH doesn't currently have an automated solution that can reject transactions that would cause daylight overdrafts. And we certainly appreciate the importance of mitigating risk. That's a big role, obviously, for the Fed. But many very established, respected financial companies in the technology space, ranging from Intuit to Visa, have both expressed objections to this exclusion as well as offered some, I think, very promising alternatives. For example, requiring pre-funding of ACH transactions. We heard that from Intuit and from Ripple. 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. Visa suggested that the Fed consider allowing payment account holders to solely access the Fed ACH credit because that would naturally control and mitigate overdraft risk, but would at least facilitate the objectives of payments. Do 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?

So 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 letters. Eagerly. And I know that we will be, I know that my colleagues at the board, this is handled by a different division, but they will be looking at those comment letters. And I think if there are ideas that will actually solve the problem, I'm sure they'll be open to considering it.

Thank you. I look forward to working with your team to make that happen.

The gentleman from Montana, Mr. Downing, is now recognized for five minutes.

Thank you, Mr. Chairman, and thank you all to the witnesses for being here. One of the primary reasons that I wanted to serve 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. And my questions, I'm going to be going down the line, so if you could please respond briefly, it'd be very helpful so we can get through some of these. And so I'm going to start with the first one 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 Mr. Gwynn.

So I think we have the resources and personnel now that we need, but we are always reviewing that and we will implement, we've been thinking about what else do we need to know as these things evolve and make sure that we stay fresh and that we increase the knowledge that our workforce has.

Thank you. Mr. Gallagher.

Yes, I believe we have the expertise and we will complement that with additional expertise or training as warranted and as we have done throughout our history.

Thank you. Mr. Billingsley.

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 that we continue to do that.

Thank you. Ms. Parkhill.

We do have the expertise. We have been training examiners on innovations for decades. It's just moving at a faster pace now, but we have processes in place to incorporate it into our development.

Thank you. Something that we explored when I was the commissioner, I was the commissioner of securities and insurance, sorry, for the state of Montana. But one of the things that we explored were regulatory sandboxes and had some success there trying to, you know, find a way to try innovative projects that didn't quite fit within the regulatory framework and give them some runway to figure that out. So I'd just love to hear your thoughts on whether regulatory sandboxes allow time for incremental adaptation necessary to enabling long-term frameworks for innovation. And on that one, I'll start with Mr. Gallagher.

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 the banks, fintech firms, and other stakeholders to understand their goal and identify a path forward, regardless of whether that's a sandbox.

Appreciate it. Mr. Billingsley.

I certainly agree with the spirit of your question. We see our institutions very frequently and very successfully pilot or test new technology before they roll it out more broadly and that does work quite well.

Thank you. Ms. Parkhill.

We've definitely seen successful programs. As with any program, the success depends on the details and implementation, but that is a tool that we've heard from the industry that there's interest in.

Thank you. And finally, Mr. Gwynn.

So I think the most important thing you can do in legislation of that sort is to make it clear that things that are a bit uncertain in terms of powers can be done on a limited basis, like engaging with digital assets, developing AI, developing general purpose technology that could be used for delivering financial services.

Thank you. Another way Congress has bolstered the United States' standing as a leader in innovation is by passing comprehensive payment stablecoin legislation, the GENIUS Act, which was signed into law July of last year. So going down the line, I'd love to hear where your agency stands on the implementation of the GENIUS Act, and we'll start with Mr. Billingsley.

Thank you. We published a notice of proposed rulemaking on part of our responsibilities under GENIUS last year. We have another one forthcoming very soon, and we're working very hard to meet the deadline.

Thank you. Ms. Parkhill.

We're in the same. We have an application aspect of the rulemaking that is out for comment now. Comments close April 13, and we're working towards the issuer standards piece of it.

Thank you. Mr. Gwynn.

So we are still working on it. We're working close. We think we'll have something out very soon, and we think it will be very good.

Thank you. And finally, Mr. Gallagher.

Thank you, Congressman. 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.

Outstanding. Well, I appreciate all of your participation here. Obviously, I've been very vocal on the need for innovation to be happening here in the United States and the tools that we have to continue innovating, and the work that you're doing in your agencies is much appreciated. And on that, Mr. Chair, I yield.

The gentleman yields. The gentlewoman from Massachusetts, Ms. Pressley, is recognized for five minutes.

Thank you, Mr. Chair. I'm going to date myself a little bit here. When I was growing up, may she rest in peace, my mother used to sing a song that went like this: Ain't nothing going on but the rent. Bills don't stop. People work hard on their jobs, they earn a paycheck, and they deserve to be able to access it quickly. We know that workers are struggling to make ends meet, especially now, and especially until payday those checks hit. And so consequently, many end up using fintech apps like Klarna or Affirm to pay for their 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. It's how you can retain 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 the 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. FedNow 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?

It 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.

Okay. And making customers aware of the fraud risk compliance services that FedNow provides, 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?

I think providing opportunities for them to, I guess, resources so that they know what tools are available and really listening to their members to be able to provide the services that they're asking for.

All right. Thank you. Mr. Gwynn, 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 the number of financial institutions that are signing up for the FedNow service?

So I think there's a process to sign up for it that I don't think that's the roadblock at all. I'm not sure there's anything to improve it other than to continue inviting institutions to sign up for it.

Okay. Well, you know, I think the bottom line is, is that we need to be able to meet the urgent needs of families while also supporting our smaller community banks and credit unions. Customers deserve and need those 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, and 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 continuing to work together with you, my colleagues across the aisle, to do this essential work and to make sure folks are aware of this tool that's available and leverage it accordingly. I yield back.

The gentlelady yields back. The chair will now recognize himself for five 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. We 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 that 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. We 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 gaps. 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. I'd like you to let me know, do you think this is something the U.S. government's capable of doing? Mr. Gwynn.

I think it clearly is capable, and 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.

Mr. Gallagher.

Yes, I do think we're capable.

Thank you. Mr. Billingsley.

I agree. I think we're capable.

Ms. Parkhill.

I agree. Yes.

Very good. Mr. Gallagher, 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?

Thank 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 regulation, policies that are not statutorily required to enable them the room to explore and test.

I 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 would direction from Congress help you in your effort?

Thank you, Congressman. So yes, we are, 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 direction is necessary. We're well aware of the risks and concerns from the industry.

With 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 be a 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 DeepSeek on this. If 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?

As a general matter, you know, 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. We do conduct exams very frequently, we do off-site monitoring and such, but sometimes it can take a little bit of time.

What 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?

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-of-government approach, the more that we can coordinate, I think the better and share information. I think that would be useful.

I would agree. I think this is an opportunity for us all to be able to working hand in glove on this, as well as with our private sector partners as we move forward. Very quickly, Mr. Gwynn, would clear direction from Congress such as in an AI PLAN Act help close some of the gaps that we've highlighted here today?

I think what it would do is it would just further encourage interagency coordination to, you know, identify the problems and solve them.

I think we've seen risk from foreign AI models like DeepSeek already start to have an impact, and if a bank deployed its ability to protect itself, we would be moving forward. With that, I thank the panel for their time today. 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. Lynch. This hearing is adjourned.