The BIS Innovation Hub and central bank innovation

Remarks by Agustín Carstens, General Manager of the BIS, at the BIS Innovation Hub London Centre launch, 11 June 2021.

BIS, Innovation Hub speech  | 
11 June 2021

It is a great pleasure for me to join you today for the official opening of the BIS Innovation Hub London Centre. Many thanks to Andrew Bailey and to the staff of the Bank of England for organising such a wonderful ceremony. And let me also thank Andrew and his team for their excellent collaboration with BIS management and staff over many months in making the London Centre a reality. Together we have built a very solid foundation for great things to come.

This is an important milestone for the BIS Innovation Hub and the BIS. We are very proud to be opening the London Centre as part of the expansion of the Hub. It will enable us to benefit from the Bank of England's significant expertise in innovation and from the vibrant fintech ecosystem that exists in the City of London. We are delighted to welcome the Bank of England to the Innovation Hub's growing family of host central banks alongside the Hong Kong Monetary Authority, the Monetary Authority of Singapore, and the Swiss National Bank.

Today's ceremony marks an important step in the expansion of the Hub. We look forward to similar openings of three more centres in Europe and North America in the near future: the Nordic Centre in Stockholm with the Sveriges Riksbank and the central banks of Denmark, Iceland and Norway; the Toronto Centre with the Bank of Canada; and the Eurosystem Centre with the entire Eurosystem, with physical locations in Paris and Frankfurt. We have also established a strategic partnership with the Federal Reserve System through the New York Center of the Federal Reserve Bank of New York.

As we celebrate the opening of the London Centre, I cannot help but note how quickly the Innovation Hub has grown.  It is exactly two years ago this month at the Annual General Meeting of the BIS that we made the decision to launch the BIS Innovation Hub. We started with the first three centres. But as they began to open, it became very clear that there was enormous interest amongst many of our members in becoming a part of the Hub. We therefore invited applications from member central banks in a competitive process to host new Hub centres. That process demonstrated how committed central banks are to innovation and how much cutting-edge work on innovation is going on in central banks around the world.

If you were to ask me to give you two words which most completely capture the essence of the BIS Innovation Hub, I would answer "innovation" and "collaboration."  Why do I choose these two?

The word "innovation" is not only in the Hub's name. It has become a rallying cry for central banks around the world.

  • Central banks recognise that the financial world is changing very quickly and is changing because of technology. Central banks have always been faced with new challenges and conditions. But what is new today is the pace of change, and the fact that it is touching on issues that lie at the very heart of a central bank's reason for being – in particular, to ensure that the issuance and use of safe, stable and trusted money. It is this duty that is fundamental to the central's role in the economy and in society. It relates not only to the issuance of money and the operation of the payments system but also to other core issues such as the regulation of markets and the maintenance of the highest standards of cyber security.
  • Central banks therefore have to remain in a leadership position in the development and operation of the monetary and payments system, both nationally and internationally. We can only fulfil this role if we act as leaders in monitoring and responding to technological change, and in developing and using technological solutions in our own right to enable us to perform our core functions. As Andrew rightly noted in his remarks at our inaugural BIS Innovation Summit this past March, "for central banks to be in step with the changing world we need to learn from those around us and apply those insights to our mission". I agree with Andrew that we need to learn. But I am sure he will agree: we need to do much more.

We cannot do this without collaboration – collaboration between central banks themselves and with regulatory agencies, international financial institutions, academia, and, of course, the private sector. The BIS Innovation Hub was designed as a platform for collaboration amongst central banks. It recognises that central banks can accomplish so much more working together than they can individually. It is a catalyst for the tech work central banks are already doing and will do in future. Bringing this work onto a global platform, it applies new technologies to solve real-world problems in the financial system.

Some of you might be surprised by all the talk about central bank innovation. Some might think central banking and innovation are a contradiction in terms. And certainly, few people see us as a hotbed of innovation. Rather, we are seen as a bastion of conservatism. This is no bad thing! Being seen as conservative is a price well worth paying for the public's trust. But the truth is that central banks have been innovating for centuries.1

For instance, harnessing technological progress, central banks around the world have instituted real-time gross settlement (RTGS) systems over the past decades. Operating hours for these systems have continued to lengthen around the globe and, in several countries, are already operating almost 24/7. On the retail side, innovation is thriving, and a growing number of economies now have fast retail payment systems, which allow 24/7 instant settlement of payments between households and businesses.

It is a central bank's mandate to foster stability. That requires action when the events around us are anything but stable. But just responding to events is not enough. Central banks dislike surprises. And, to avoid surprises, you need to know what the future will hold and you need to be ready to help shape the future. That is exactly the purpose of the Innovation Hub.

A key part of the BIS Innovation Hub mandate is to "explore the development of central bank public goods to enhance the functioning of the global financial system." The Hub delivers on this mandate primarily by developing innovation projects in our Hub centres that seek to address particular problems in the financial sector of importance to central banks. The Hub does not aim to generate commercially-viable products but rather proofs of concept and prototypes that demonstrate particular solutions. The Hub also makes use of hackathons (or techsprints) to reach out to the fintech community, scout technologies, and source ideas for projects as well as vendors.

This leads me to an important question: if central banks must innovate, how should they innovate? How do they harness the creative processes that underlie innovation in a public sector environment? The projects we produce have to serve a public purpose and serve as public goods. And they have to serve the needs of central banks and the financial system more broadly.

The innovation process in the Hub consists of two phases: (i) identifying central bank problems and ideating potential solutions; and (ii) designing and delivering outputs to address the problem.

Starting with the problem and potential solutions. The Hub's innovation process uses Design Thinking that aims to understand customers and their real needs through solution-based approaches to solving complex problems in an iterative process. We begin by identifying problems in the financial sector (that is, "problem statements") that are of importance to the central banking community. We do so through close consultation within the Hub itself, and with the BIS and its membership, our host central banks, and the committees and associations that are hosted within the BIS. We also do so through regular discussions with other international financial institutions, academia and the private sector.

In identifying problem statements and potential projects to address them, a key sounding board for the Innovation Hub is the Hub's Advisory Committee of key stakeholders within the BIS community. It is composed of key Governors, including from host central banks of BIS Innovation Centres, and chairs of BIS committees, and is chaired by Jerome Powell, Chair of the Federal Reserve Board. In a short period of time, it has proven to be an invaluable source of guidance for the Hub in its work. As the Hub develops its work programme, the Advisory Committee has been instrumental in reviewing it and in helping us keep our finger on the pulse of our membership to ensure that the projects we work on meet their needs. Andrew, we look forward to formally welcoming you into the committee.

Once the innovation idea has been sharpened and the public good elements clearly identified, our projects move to the second phase in which we design and deliver an output in one or several Hub centres. In practice, projects are carried through: a "learn" stage, which focuses on shaping the hypothesis, and scoping out the project; and a "build" phase in which a proof of concept or prototype is developed using agile methodologies. Once this process is completed, there is a decision as to whether what has been produced can and should be released to the central bank community and beyond. Thinking and reviewing the plans for the handover process are embedded in all steps of the innovation process.

New methodologies and tools require new skills to be developed and new teams to be formed. Staff within the Hub consist of flat, multi-disciplinary teams composed of blockchain engineers, FX quants, research economists, data scientists, programmers and analysts. Beyond this, BIS economists are working with lawyers, anthropologists, geographers and computer scientists in their research on digitalisation.

This cross-collaboration in multi-disciplinary teams will be the new normal for working in central banks. New financial systems bring new challenges to understand incentives and risks. But working together, we can bring fresh insights. By broadening our perspective, the effects of novel technologies can be better understood.

With the opening of the London Centre, we will engage with a wide community of stakeholders from the financial and technology worlds and from both the public and private sectors. We look forward to tapping the deep expertise of the Bank of England and the United Kingdom's fintech ecosystem, learning from those interactions to apply the insights to our mission.

I look forward to partnering with the Bank of England on the London Centre and to working with all of you going forward.

 

1 See Carstens, A (2020): "Central bankers of the future", speech at the Deutsche Bundesbank's internal discussion series on Digitalisation and central banking – Is there a fundamental change under way, 14 December.