The changing colour of money - new directions for payment systems, currencies

Op-ed by Mr Agustín Carstens, General Manager of the BIS, published in The Business Times Singapore, 13 November 2019. 

BIS speech  | 
13 November 2019

Game-changing developments are requiring central banks to step up and play a more significant part in improving payment security and efficiency.

Technology continuously shapes monetary and financial structures through its influence on the nature of money and the workings of banking and payment systems. This process of evolution through innovation is now accelerating at an unprecedented pace.

Information technology is permeating every corner of financial services, whether through the entry of so-called "big tech" firms or the use of mobile payment applications, disrupting existing business models and challenging traditional financial infrastructures.

These game-changing developments require central banks to step up and play a more significant part in improving payment security and efficiency. The Bank for International Settlements (BIS) is taking a leading role in driving these efforts, spearheaded by the establishment of the BIS Innovation Hub across three international locations with a mandate to develop insights into critical financial technology trends, to engineer public goods to enhance the global financial system and to act as a focal point on change for central banks.

Singapore is part of the first wave of this project. The Singapore Hub Centre - launched on Tuesday - follows inaugurations in Hong Kong and Switzerland, and completes the initial phase of the rollout of the BIS Innovation Hub. The Singapore Hub Centre will play a key role in the Hub's mission through its focus on regtech and suptech practices. It will also develop foundational public digital infrastructures - the "global stack" - that will bring together people's accounts in different financial institutions onto a single platform, deepen inclusion by making financial services more accessible to all and enable faster and cheaper payments than ever before.

The Innovation Hub will also confront many other challenges. The Swiss Hub Centre will examine the potential benefits from transforming financial assets and currencies into digital tokens to allow securities settlement with central bank money on a single platform. The Hong Kong Hub Centre will explore the use of distributed ledger technology to streamline the complex processes and logistical challenges involved in trade finance.

A key question informing the Hub's work is whether money itself needs to be re-invented for a changing environment, or whether the emphasis should be on improving the way it is provided and used. At the BIS, we believe the latter is the more promising way to serve the public interest. And we believe that the public sector needs to play a leading role in this process given that the monetary system is a public good that serves as a foundation for the entire global financial system.

The most secure basis for a sustainable digital economy is trusted sovereign currency that allows the public and private sectors to focus on their respective strengths. Central banks are at their best when they provide a foundational infrastructure - the "backbone" - for the monetary system. The private sector shines when it can give full expression to its innovative spirit in serving customers. Central banks should leave the last mile for the private sector.

Efficient and seamless

Many central banks already oversee efficient and seamless fast payment systems at the national level, but progress has been uneven across jurisdictions. And, as consumer demand for services such as instant, 24/7 and costless money transfers intensifies amid a growing focus on financial inclusion, there remains considerable scope to upgrade domestic payment systems.

Most of all, there is an urgent need to improve the current system of cross-border payments that has lagged behind the progress in domestic systems. This is not only a matter of technology, but also of coordinating standards and practices across jurisdictions. Central banks and public authorities should respond to users' justified demands for a more efficient financial system.

A guiding star on this road is the notion of digital financial infrastructure as a public good, encouraging innovation by providing open access to this system and creating a level playing field for all potential entrants through the regulatory framework. The private sector could focus on customer-facing services and products using the public sector foundation as a base.

Of course, private firms must follow regulatory standards and supervision, including rules designed to combat money laundering, prevent the financing of terrorism and protect consumers.

Upgrading the payment system along these lines - and covering all types of transactions within and across borders - would enable 24/7 operation with instant settlement in sovereign money within the banking system. It would also serve to promote financial stability.

The question arises though, of whether Big Tech firms should be trusted to manage global cross-border payments, potentially via global stablecoins. While stablecoins have yet to convincingly show how they would improve cross-border payments, they reinforce the need for the public sector to address problems with the existing system.

And, amid the hype around cryptocurrencies and calls for central banks to issue digital currencies aimed at consumers, it is crucial to bear in mind the distinction between the architecture and the technology - that is, between reinventing money and improving its functioning in the financial system. Central bank digital currencies are a technological leap forward and may have a role in improving the operation of the financial system, but they are not a reinvention of money.

These and other questions will be the focus of the Hub's activities. The Hub is a place where the public and private sectors can come together to share ideas and mobilise technology to improve efficiency and promote inclusion, while ensuring the stability of the global financial and monetary system.

A key question informing the BIS Innovation Hub's work is whether money itself needs to be re-invented for a changing environment, or whether the emphasis should be on improving the way it is provided and used.