Innovation transforms central banking

Column by Mr Agustín Carstens, General Manager of the BIS, in Reuters Breakingviews, 3 June 2019. 

BIS speech  | 
04 June 2019

The future of central banking is inextricably bound to innovation. The technological sea change that is transforming the financial sector and the wider economy is affecting all aspects of our work, from payments to monetary policy to financial regulation. Our mandate to preserve monetary and financial stability, now and in the future, comes with a responsibility to lead an intensifying debate about the nature of money in a digital world and how new players will reshape the provision of financial services, and to show the way by upgrading our own tools and instruments.

As guardians of monetary stability, central banks have more at stake than most in the future of money, be it in its traditional or digital form. Today's cryptocurrencies, for example, do not fulfil money's basic premise: to serve as a unit of account, a means of payment and a store of value. Central banks have called out the false promises made by the creators of cryptocurrencies and will remain alert to potential threats to monetary stability. At the same time, they are actively exploring the possibilities that the underlying distributed ledger technology opens up for payments, clearing and settlement systems as well as digital currencies.

And as guardians of financial stability, central banks are directly affected by innovation in the financial sector and in the infrastructure underpinning financial markets. Financial stability matters because it reassures consumers that their savings will not evaporate overnight. At the same time, it ensures that credit provision will continue to support economic activity. Hence the importance of getting the balance right between innovation and stability.

The new waters that central banks are navigating are perhaps most evident in banking, where incumbents are under pressure from both below, from fintech start-ups, and above, from technology giants. As supervisors and regulators of a rapidly changing sector, central banks and other financial authorities need to be as creative, nimble and tech-savvy as any new kid on the banking block. Our daily vocabulary now includes suptech and regtech - as the intersection between technology and supervision or regulation respectively is known. Authorities are harnessing advances in artificial intelligence and its practical applications to help shape new supervisory tools. And they are creating innovation hubs to bring entrepreneurs and incumbents together, as well as "regulatory sandboxes" that allow innovators to test new technologies and products in a safe environment. 

Central banks are carefully charting the activities of fintech businesses in their jurisdictions. I am a strong believer in the principle of "same risk, same regulation": generally, if an institution acts like a bank, it should be regulated like a bank. This activity-based regulation can complement the traditional approach. But Big Tech firms pose particular challenges for regulators - for example, in safeguarding data usage and privacy and in the need for international coordination. 

Central banks are also upgrading their payment systems, which are crucial to the functioning of the global economy, to be ready for the future. They are opening their doors to new players, such as fintechs and mobile payment schemes, with a view to increasing competition and ensuring a level playing field. For retail payment systems, used for processing everyday consumer transactions, new "fast payment" systems allow transfers within seconds, anytime and anywhere. Some companies are testing cashless systems - no cashiers, no lines, no cash, no physical payment devices.

Central banks are also working hard to make existing financial infrastructures more resilient and secure. Complying with existing rules does not guarantee security against cyberattacks. Criminals are mastering the art of international cooperation, with "hacktivists", cyber criminals and others who may be coordinating targeted attacks. The best defence lies in cooperation and coordination. Cybersecurity is a priority for the Basel-based standard-setting bodies, who are working with the industry to improve their defences as well as our own. The Bank for International Settlements recently hosted a seminar for central banks on cybersecurity, including a simulated attack on a payment system, and more work will be done in this area.

Some argue that a central bank digital currency would be the ultimate new central bank tool in this digital age, replacing cash altogether. Many monetary policymakers are indeed studying this possibility. But very few see a chance of turning theory into practice any time soon. Central bank digital currencies could bring profound changes to the financial system, potentially crowding out commercial banks. They could also change the way monetary policy operates. The implications for monetary and financial stability need careful consideration.

So far, there is little need or demand for such digital currencies: despite increased use of electronic payments, appetite for cash remains strong. Central banks will be ready if this situation changes, and always with the goal of preserving monetary and financial stability. Navigating new waters may require recalibrating the compass, but central banks will always have their pole star.

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