The request for information, released Thursday, asks for comments on advancements in existing AI tools and on emerging AI technologies that can benefit the financial sector. The RFI has specific callouts for information on the use of AI in financial products and services, risk management, capital markets, internal operations, customer service, marketing and regulatory compliance. 

“Treasury is proud to be playing a key role in spurring responsible innovation, especially in relation to AI and financial institutions. Our ongoing stakeholder engagement allows us to improve our understanding of AI in financial services,” Under Secretary for Domestic Finance Nellie Liang said in a statement. “The Biden administration is committed to fostering innovation in the financial sector while ensuring that we protect consumers, investors, and our financial system from risks that new technologies pose.”

Treasury listed 19 questions, plus numerous follow-ups, for respondents within its RFI, including: asking for feedback on any AI models that financial institutions are currently using; whether AI use cases differ within institutions; what barriers small banks face in AI deployment; how AI has benefited low-to-moderate income consumers and/or underserved individuals and communities; the extent to which AI models are developed in-house, by third parties or via open-source code; and how industry is applying risk management frameworks to AI use.

During remarks Thursday at the Financial Stability Oversight Council Conference on Artificial Intelligence and Financial Stability in Washington, D.C., Treasury Secretary Janet Yellen touted the release of the RFI as a way of “continuing our stakeholder engagement to improve our understanding of AI in financial services.” Yellen also announced a future roundtable discussion, convened by Treasury’s Federal Insurance Office, on the benefits and challenges of AI use for insurers. 

“FSOC will continue its efforts to monitor AI’s impact on financial stability, facilitate the exchange of information, and promote dialogue among financial regulators,” Yellen said. “Given how quickly AI technology is developing, with fast-evolving potential use cases for financial firms and market participants, scenario analysis could help regulators and firms identify potential future vulnerabilities and inform what we can do to enhance resilience.”

Much of Treasury’s RFI is informed by the agency’s previous work on AI, including a March report that sounded the alarm on AI-specific cybersecurity risks to the financial sector. Just last month, the department issued a national strategy for combating terrorism and other illicit financing, which called out the benefits AI might have in winning that fight.

Closer to home, Treasury has experimented with its own AI use cases, while also engaging in public-private partnerships to ensure that smaller financial institutions have the same defensive AI capabilities as the country’s biggest banks. 

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The initiative was first announced as part of Treasury’s Financial Services Sector’s Adoption of Cloud Services report released in February and the new group aims to address difficulties associated with the increasing trend of cloud adoption identified in the report.

“This unprecedented collaboration among financial regulators and the private sector will bring thoughtful and lasting solutions to the cloud-based opportunities and challenges Treasury has identified,” said Deputy Treasury Secretary Wally Adeyemo in a statement. “American consumers and financial institutions will benefit from these cloud adoption efforts for years to come.”

The CESG will report to the Financial Stability Oversight Council (FSOC), Financial and Banking Information Infrastructure Committee (FBIIC), and the Financial Services Sector Coordinating Council (FSSCC).

The Co-Chairs of CESG are: Treasury Assistant Secretary for Financial Institutions, Graham Steele; Acting Comptroller of the Currency, Michael Hsu; Director of Consumer Financial Protection Bureau (CPFB), Rohit Chopra; Chief Executive Officer of PNC Financial Services, Bill Demchak; and Chair of Financial Services Sector Coordinating Council and Chief Security Officer of Mastercard, Ron Green.

The key objectives of the CESG include: documenting effective practices for cloud third-party risk; developing a “best practices” document for institutions considering “all in” or hybrid cloud adoption strategies; improving transparency and monitoring of cloud services for better “Security by Design,” establishing a common set of terms and definitions that can be used by financial institutions and regulators and determining if existing authorities for cloud service provider oversight are sufficient and account for systemic risks.

The Treasury Department will provide regular updates to the FSOC and FBIIC senior leaders in the coming months to ensure alignment in cloud adoption across the financial regulatory community. 

Treasury will also issue public updates on this effort on a rolling basis as updates are available on the multiple projects.

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In a statement the Office of the Comptroller of the Currency (OCC) said it will set up the new department to ensure it has the tools to supervise the fast-changing banking sector, including fintech companies.

Acting Comptroller of the Currency Michael Hsu said: “Financial technology is changing rapidly and bank-fintech partnerships are likely to continue growing in number and complexity. To ensure that the federal banking system is safe, sound, and fair today and well into the future, we need to have a deep understanding of financial technology and the financial technology landscape.”

He added: “The establishment of this office will enable us to be more agile and to promote responsible innovation, consistent with our mission.”

The new office will be led by a chief financial technology officer, who will be a deputy comptroller, reporting to the senior deputy comptroller for bank supervision policy. 

OCC is an independent bureau within the Treasury Department that is tasked with chartering, regulating, and supervising all national banks, foreign banks and savings associations in the United States, which together hold more than $15 trillion in assets.

OCC was established by President Lincoln in 1863 during the American Civil War.

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Visa said it was “inviting a small number of European banks to participate in the project.” (Pixabay)

Financial services giant Visa is the latest to get on the blockchain bandwagon, launching an interbank payments pilot based on the BTL Interbit platform.

“A blockchain-based settlement solution can reduce the friction of domestic and cross border transfers between banks,” wrote Hendrik Kleinsmiede, co-founder of Visa Europe’s innovation hub, Collab, in a blog post Thursday.

Observers say the company is playing catch-up to rival MasterCard.

Blockchain, the technology underlying the digital currency bitcoin is also known as “distributed ledger” technology, because it uses encryption and distributed computing power to create a constantly updated and cryptographically secure ledger, or record of transactions — distributed among all its participants.

Boosters see opportunities to cut red tape and back office operations by introducing a software-based (rather than human-operated) instantaneous and cryptographically guaranteed record of interbank payments and other money movements.

Kleinsmiede said the Visa-BTL pilot would explore “reducing cost, settlement time, credit risk, and leveraging smart contracts to streamline and automate many of the regulation and compliance requirements of domestic and international transfers.”

Visa said it was “inviting a small number of European banks to participate in the project.”

Participating banks will be able send funds to other banks in the network denominated in multiple currencies.

“We’ll work closely together on the development and implementation of the PoC, ensuring that all participants come away with new knowledge and insight into the role that the blockchain could play in interbank settlements in the future,” concludes Kleinsmiede.

[Read more: Big banks join UBS on blockchain plan]

In June, MasterCard’s President of International Markets Ann Cairns said the company was “already building use cases in our laboratories to see how to include it together with our core systems.”

And last month, Deutsche Bank, Santander and BNY Mellon, as well as the broker ICAP, signed on to UBS’ plans for a “Utility Settlement Coin,” another blockchain pilot for international bank settlements.

Don Tapscott, consultant and co-author of “The Blockchain Revolution,” told FedScoop it was “a good thing … that Visa is starting to show a little more interest” in blockchain. “The stakes are very high,” he said, predicting that the technology would upend the financial system.

“It looks like they started to follow the money,” he said, adding that ignoring the issue was no longer an option for the financial sector.

“They can run, but they can’t hide,” he said.

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The new “Utility Settlement Coin,” or USC, uses the blockchain technology that underlies bitcoin, but USC is a digital cash equivalent of each of the major currencies used for interbank settlements like the dollar or euro —  not a new decentralized digital currency.

The Financial Times reported Wednesday that Deutsche Bank, Santander and BNY Mellon, as well as the broker ICAP, have now signed on to UBS’ plans — first hatched last fall with London-based startup Clearmatics.

Blockchain is a technology using encryption and distributed computing power to create a constantly upgraded and cryptographically secure record of transactions — distributed among all its participants.

Boosters see opportunities to cut red tape and back office operations by introducing a software-based (rather than human-operated) instantaneous and cryptographically guaranteed record of interbank payments and other money movements.

International payments are expensive and time-consuming to execute, Rob Morgan, vice president for emerging technologies at the American Bankers Association told FedScoop. “The business case for any new technology is where there’s the greatest potential for a return on investment,” he said. Where there are multiple parties to a transaction, as in any international payments system, “Each party has their own record of the transaction” and it can take “days and days” to reach a final settlement.

With blockchain, all parties are essentially agreeing to a single record of the transaction in near-realtime.

The total cost to the finance industry of clearing and settling trades is estimated at  as much as $80 billion a year, the FT states, citing figures last year compiled by Oliver Wyman.

“The conversation today is about how can we use blockchain to more efficiently complete payments within the existing system,” said Morgan.

“The current settlement machinery is incredibly antiquated, inefficient and balkanized … The longer the settlement process takes, the more risk there is,” said Alex Tapscott, consultant and co-author of the book “Blockchain Revolution.”

Tapscott noted that Santander had been “an early proponent” of the new technology, which he believes will “upend the financial services sector.”

He noted that Wednesday’s news was only the latest in a string of recent announcements about blockchain initiatives from the financial sector.

Most banks and financial institutions, like Santander, “view this [technology] opportunistically … as a way to reduce the costs of moving, storing and managing value.”

“They should be looking at it strategically,” he said.

“It’s all very well to say [blockchain] could save $20 billion from the costs of trading equities,” he said, “But what if banks are no longer involved in those trades” because blockchain has replaced their role altogether? he asked

The four banks will pitch the USC idea to central banks this fall, with a projected commercial launch in 2018, the FT reported.

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The firm already offers advice and services to “almost every part of the bitcoin and blockchain ecosystem,” Steptoe attorney Alan Cohn told FedScoop. Now they will expand those offerings “to serve companies across the economy as a whole … who are looking to make use of this transformative technology.”

The new play is grounded in a belief in the revolutionary consequences of blockchain, or distributed ledger — the technology that underlies the bitcoin crypto-currency. 

“We believe we’re looking at a new layer of technology that could be as powerful as the commercial internet was 20 or more years ago,” said Cohn. “We see blockchain and distributed ledger doing for commerce, for the transmission of value and for other high-trust interactions, exactly what the commercial internet did for content and communication, for the transmission of data.”

“We believe there’ll be the same kind of exponential growth associated with it,” he said.

In October last year, Steptoe was one of the co-founders of the Blockchain Alliance, a coalition of blockchain companies and law enforcement and regulatory agencies aiming to promote the new technology “and protect public safety by educating enforcement agencies about digital currencies and the blockchain, and helping combat criminal activity involving this technology,” according to the company. The coalition now includes more than two dozen companies law enforcement and regulatory entities around the world, including Europol and Interpol.

Cohn, a former Department of Homeland Security assistant secretary who helped set up DHS’ cyber policy office, will lead Steptoe’s renewed blockchain effort alongside former Department of Justice Deputy Assistant Attorney General Jason Weinstein, who headed the DOJ’s cybercrime and organized crime enforcement efforts.

The firm will offer to answer questions like, “How is the regulatory and legal regime which governs my industry applicable to blockchain? How will it evolve in response? How do I need to adapt?” according to Cohn.

As part of the expansion, the firm is launching the Steptoe Blockchain Blog, which will feature opinions and analysis on developments in the new tech’s applications. 

The firm doesn’t currently accept Bitcoin as payment, but plans to soon, according to a statement.

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Members of the Financial and Banking Information Infrastructure Committee (FBIIC), which comprises 18 federal regulators and state-level regulatory associations such as the Conference of State Bank Supervisors, met Tuesday in Washington, according to a brief readout provided by a Treasury official.

“The Hamilton series of exercises are Treasury-led, coordinated with regulators through the FBIIC and with our partner agencies like DHS as well as the private sector,” the official told FedScoop. 

He declined to provide further details, but the readout says the exercise “evaluated the impact of a cyber incident on financial stability.”

The committee also received a briefing from the FBI, although no details were given, and talked through “the development of common risk-based approaches to managing cybersecurity risk, as was described in the latest annual report of the Financial Stability Oversight Council.”

The committee meets “three or four times a year,” the official said. 

“Through these regular meetings,” the readout states, the senior leaders of the nation’s banking and financial services regulators “coordinate inter-agency cybersecurity policy developments, including strengthening information sharing on cyber vulnerabilities, threats and incidents; furthering the adoption of cybersecurity best practices; and enhancing the financial sector’s ability to respond to and recover from cyber incidents.”

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