Fed Seeks Tech-Driven Payment Revolution: AI, Stablecoins, and Smart Contracts Take Center Stage

The Federal Reserve is actively studying the integration of tokenization, smart contracts, and artificial intelligence (AI) into the payments sector, as highlighted by Governor Christopher J. Waller in a recent speech. Waller emphasized that the payment system is undergoing a “technology-driven revolution” driven by advancements in computing, data processing, and decentralized networks. These innovations are enabling faster, more efficient, and user-friendly payment methods such as 24/7 instant payments, digital wallets, and stablecoins. Crucially, the technologies supporting these services—such as AI, smart contracts, and distributed ledgers—have the potential to further enhance the precision and efficiency of payment systems [1].

Waller noted that while these technologies are relatively new, they are not fundamentally different from the technological progress that has historically driven payment system evolution. For instance, in traditional finance, a purchase involves exchanging objects, using a technology to conduct the transaction, and recording the transaction’s history. In the digital or crypto space, this process mirrors the use of stablecoins, smart contracts, and distributed ledgers. He argued that there is no inherent risk in these innovations and that their adoption in everyday transactions is a natural extension of payment system evolution [1].

The role of the Federal Reserve in fostering innovation is twofold. First, the private sector, Waller argued, is best positioned to drive innovation due to its ability to efficiently allocate resources and explore new technologies. Examples include the development of payment cards, which have evolved from metal plates to chip-based systems and now digital payments. Second, the Fed has historically supported innovation by providing core infrastructure—such as interbank payment systems—to ensure the safety and efficiency of the broader payments ecosystem. This collaborative model between the private and public sectors has been instrumental in shaping a secure and efficient U.S. payment system [1].

A key focus of the Fed’s current research is the potential of stablecoins and AI in payments. Stablecoins, originally used to facilitate crypto trading, are now being explored for broader applications such as retail and cross-border payments. Their properties—including 24/7 availability, fast transferability, and ease of use—could enhance the accessibility of U.S. dollars in high-inflation countries or areas with limited banking infrastructure. The Fed is also studying how AI can be leveraged to improve fraud detection, compliance, and reconciliation processes. Waller highlighted that the payments industry has long been at the forefront of AI adoption, with machine learning tools already being used for fraud detection and payment flow prediction since the early 1990s [1].

Beyond private sector innovation, the Federal Reserve is also examining how public infrastructure can evolve to support new technologies. The Fed has consistently upgraded its clearing and settlement systems, from early telegraph-based interbank transfers to real-time gross settlement systems. These infrastructure upgrades enable private sector firms to develop services that meet customer demand while ensuring system-wide safety and efficiency. The Fed is now engaging with innovators in both traditional finance and digital asset ecosystems to understand how emerging technologies could further improve existing payment platforms [1].

Complementing the Fed’s efforts, Vice Chair for Supervision Michelle Bowman highlighted the need for a more open and informed regulatory approach to blockchain and digital assets. In her speech at the Wyoming Blockchain Symposium, Bowman emphasized that regulators must embrace innovation to avoid diminishing the banking system’s relevance. She called for closer collaboration between industry and regulators to better understand the benefits and risks of new technologies. Notably, Bowman suggested that allowing Fed staff to hold small amounts of crypto assets could improve their understanding of these products and inform more effective oversight [3]. She also reiterated the Fed’s commitment to eliminating reputational risk as a supervisory concern, which she argued had previously hindered innovation by imposing unnecessary restrictions on banks.

The regulatory landscape is further evolving with the enactment of the GENIUS Act, which provides a comprehensive framework for stablecoin regulation. The Act mandates that stablecoin issuers maintain fully backed reserves, submit to regular examinations, and publish redemption policies. It also establishes a dual oversight system, allowing both insured depositories and nonbank entities to issue stablecoins under federal or state certification. This legislative clarity, along with ongoing regulatory developments, is expected to facilitate broader adoption of stablecoins while ensuring financial stability and consumer protection [5].

As the Federal Reserve and other regulators continue to adapt to technological change, the emphasis remains on balancing innovation with safety and soundness. The integration of emerging technologies into the payments sector holds the promise of a more efficient, inclusive, and resilient financial system. However, this transition requires continued collaboration between the public and private sectors, as well as a regulatory environment that supports responsible innovation [1].

Source: [1] Speech by Governor Waller on payments (https://www.federalreserve.gov/newsevents/speech/waller20250820a.htm) [2] Speech by Vice Chair for Supervision Bowman (https://www.federalreserve.gov/newsevents/speech/bowman20250819a.htm) [3] Bowman Says 'Change Is Coming' to How Fed Views AI and Crypto (https://www.bloomberg.com/news/articles/2025-08-19/bowman-says-change-is-coming-to-how-fed-views-ai-and-crypto) [4] Fed's Bowman suggests allowing central bank staff to own small amounts of crypto (https://www.reuters.com/sustainability/boards-policy-regulation/feds-bowman-suggests-allowing-central-bank-staff-own-small-amounts-crypto-2025-08-19/) [5] Stablecoins gain clarity under GENIUS Act as legal questions linger for banks and fintechs (https://www.dailyjournal.com/mcle/1720-stablecoins-gain-clarity-under-genius-act-as-legal-questions-linger-for-banks-and-fintechs) [6] Treasury Issues Request for Comment Related to the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act (https://home.treasury.gov/news/press-releases/sb0228)