Good morning.
All right. Well, thank you, Susan, and good morning to everyone. It's my pleasure to welcome you to the Federal Reserve Board for our first payments innovation conference. My objective in creating this conference is twofold. First, I wanted to have a conference that focused on the new technologies that had come from the DeFi and crypto worlds and how they are entering into the mainstream payments ecosystem. My goal is to have a vibrant discussion about payments between traditional payment incumbents and the new entrants from the DeFi world. Second, I wanted to send a message that this is a new era for the Federal Reserve in payments. The DeFi industry is not viewed with suspicion or scorn. Rather, today you are welcome to the conversation on the future of payments in the United States and on our home field. Something that would have been unimaginable a few years ago. My view for the Fed from now on is embrace the disruption. Don't avoid it. As you know, we are well into a technology-driven revolution in payments, and I'm here to say that the Federal Reserve intends to be an active part of that revolution.
A number of technological advances are transforming the payment system. Stablecoins and tokenized assets making use of distributed ledger technology, the rapid adoption of artificial intelligence, AI, and increasingly the convergence between these innovations and the traditional financial ecosystem. This includes the institutions and infrastructure that our economy has long depended on to operate a safe and efficient payment system. And yes, this also includes the Federal Reserve. The revolution in transforming payments is demanding change everywhere. And I will say more in a moment about some new ideas that the Federal Reserve is studying to support those innovations.
I have spoken before of what I see as the two broad models of payments innovation in our market economy. The first is private sector driven innovation. Most innovation comes from the private sector which is motivated and best positioned to allocate resources and take risk with new technologies. The second model is when public sector entities such as the Fed build platforms and provide services that enable the private sector to more readily and rapidly expand new services to its customers. This should be done rarely and in limited circumstances where it addresses a specific market need. The posture of public institutions, including the Federal Reserve, should be to acknowledge and embrace private sector innovation that can improve the payment system while preserving its safety and stability, which are as essential to the new generation of innovators as they are to legacy institutions.
Now, let me pull back a moment and remind everyone how we got here. Since nearly its founding, the Federal Reserve system has worked to facilitate payment and settlement system efficiency alongside the private sector. From the beginning, the clearing services provided by the reserve banks obviated the need for daily movements of cash in armored cars with heavily armed guards. Long before we started speaking of the payment rails that are facilitating the kind of innovation we'll be discussing today, the Fed was running trains on steel rails to deliver and clear paper checks traveling across the country. Fedwire began conducting interbank transfers through telegraph wires in the early 20th century. Fast forward today where we have multiple infrastructures that settle interbank transfers in real time.
Today's conference will focus on private sector-driven innovation. We have assembled 100 private sector innovators who are leveraging cutting edge technology to create new possibilities in the payments landscape. Our panelists are engaging in integrating traditional financial payment rails with distributed ledgers, developing new products and services in the digital asset ecosystem, and leveraging AI in the payment system. It's worth noting that the firms engaged in these activities include banks, asset managers, retail payment firms, technology companies, as well as crypto-native fintechs. This is an acknowledgement that distributed ledgers and crypto assets are no longer on the fringes but are increasingly woven into the fabric of the payment and financial system.
Now, before we hear from these innovators, I would like to touch on roles that the Federal Reserve plays to support the private sector. These include serving as a convener to solve coordination problems and operating core payment and settlement infrastructure. We are also looking ahead, conducting hands-on research on tokenization, using smart contracts, and the intersection of AI and payments for use in our own payment systems. We do this to understand the innovation happening within the payment system as well as to evaluate whether these technologies could provide opportunities to upgrade our own payment infrastructures and to enable us to have deeper conversations with the industry on these new technologies.
While this is a good start, I believe we can and should do more to support those actively transforming the payment system. To that end, I have asked Federal Reserve staff to explore the idea of what I'm calling a payment account. Today, Federal Reserve banks provide access to master accounts and financial services to legally eligible entities following our guidelines for evaluating account and services requests. The payment account would be available to all institutions that are legally eligible for an account and would be beneficial for those focused primarily on payment innovations. This payment account concept would be targeted to provide basic Federal Reserve payment services to legally eligible institutions that right now conduct payment services primarily through a third-party bank that has a full-fledged master account. There are many eligible firms engaged in substantial payments activities that may not want or need all the bells and whistles of a full-fledged master account or access to the full suite of Federal Reserve financial services to successfully innovate and provide services to their customers. The idea tailors the services of these new accounts to the needs of these firms and the risk they present to the Federal Reserve banks and the payment system accordingly. And importantly, these lower risk payment accounts would have a streamlined timeline for review.
Payment innovation moves fast and the Federal Reserve needs to keep up. To be more concrete, let me describe a possible prototype that I've been considering for this type of payment account, or as I sometimes call it a skinny master account. The account would provide access to the Federal Reserve payment rails while controlling for various risks the Federal Reserve and the payment system. To control the size of the accounts and associated impacts on the Fed's balance sheet, the reserve banks would not pay interest on balances in a payment account and a balance cap may be imposed. These accounts would not have daylight overdraft privileges. If the balance in the account hits zero, payments will be rejected. They would not be eligible for discount window borrowing or have access to all Federal Reserve payment services for which the reserve banks cannot control the risk of daylight overdrafts. Now, I want to be clear that this is just a prototype idea to provide some clarity on how things could change. The upshot is that in my view the payments landscape as well as the types of providers has evolved dramatically in recent years and accordingly a new payments account would better reflect this new reality.
As Federal Reserve staff examine this idea, we will engage with all interested stakeholders to hear their perspectives on the benefits and drawbacks to this approach. So you will be hearing more about this shortly. So, let me wrap up here so we can get to the really exciting part of the conference, not me blabbering, which is about innovation and the future of payments. So, thank you to the panelists who took the time to participate, those in the audience who agreed to be here, and the many others watching online. And a special thanks to the Fed's staff who moved incredibly fast to pull this event together and fit it into a very busy fall schedule for the Fed. So on with the conference and thank you for being here.
