Lessons on innovation

Speech by Mr Agustín Carstens, General Manager of the BIS, at the DC Fintech Week, 18 October 2021.

BIS speech  | 
18 October 2021


Let me start by welcoming you all to DC Fintech Week. It is a great pleasure for me to join you and for the BIS to be co-hosting this conference with Georgetown University Law Center.

The themes of the conference – innovation, inclusion and integrity – resonate with all of us at the BIS. Why? Because they reflect the BIS's own values. We are committed to continuous improvement and innovation. We act with integrity. And we foster a culture of diversity, inclusion, sustainability and social responsibility.

There are powerful reasons why so much innovation is bubbling up in the public and private sectors. Bold steps are being taken and important lessons are being learned. Some of these lessons relate to the feasibility of the technological products that are being developed. Others relate to the innovation process itself.

The same is true for the BIS. Through our new Innovation Hub, the BIS is serving as a platform for central bank innovation. We are developing new technological solutions to problems in the financial sector, and learning a lot in the process. And, on top of that, we're getting an intensive course on the process of innovation itself.

Today, I would like to share with you a bit more about this process, and what we're learning from it. I will start by giving you some background on the BIS, and what it's for. I will then outline the Innovation Hub's main projects and the products we are developing to smooth the cross-border interoperability of digital currencies. Last, I'll say a bit about the lessons learned.

The BIS and innovation today

Let me start with some background on the BIS. We're an international organisation based in Basel, Switzerland. The Bank is owned by 63 central banks from around the world, including the US Federal Reserve. For more than nine decades, the BIS has been the principal forum for collaboration amongst central banks globally. We collaborate on many activities that contribute to monetary and financial stability, which is essential for sustained economic growth.

As the world's oldest international financial organisation, innovation has always been part of the our DNA. In a world of change, from the Great Depression through Bretton Woods to the Basel accords on bank regulation, central banking has always been inextricably linked to innovation.

New technologies are changing the financial system right now – just look at today's conference agenda! So that central banks can collaborate better in this space, we've set up the BIS Innovation Hub as a platform for sound innovation. We work together with central banks and other stakeholders to explore practical problems in the financial sector and address them by using new technologies. This is not a think tank. We build things.

In the past two years, we've done a great deal through our regional centres in Switzerland, Hong Kong SAR and Singapore.1 New centres and offices have opened or are opening soon in London, Stockholm, Toronto, Frankfurt and Paris. The Hub's work programme2 touches on all the issues of importance to central banks. We have 12 active projects in areas such as suptech and regtech, next-generation financial market infrastructures, central bank digital currencies (CBDCs) and green finance. Two of our projects will be showcased today.

It is no surprise that the most popular topic these days is CBDCs, with half of our projects focusing on them. Let me focus on how our projects are shaping the cross-border aspects of CBDC.

Shaping cross-border interoperability

Multi-CBDC arrangements are of interest because they could improve cross-border payments.3 They offer a worthy alternative to privately issued stablecoins or cryptocurrencies. CBDCs are designed with the public interest in mind to deliver the unique advantages of central bank money – that is, settlement finality, liquidity and integrity.4

What are multi-CBDC arrangements? While they encompass different technological and governance models, they provide mechanisms through which different CBDCs can interoperate. In this manner, they can facilitate cross-border settlements.  

The BIS Innovation Hub is devoting a great deal of attention to multi-CBDC arrangements. They are the focus of projects mBridge, Dunbar and Jura. We are collaborating in these projects with 10 central banks around the world. They let central banks explore new ways of making cross-currency settlements safer, more efficient and more accessible. To do so, we are establishing prototypes and proofs-of-concept to explore different uses of CBDC in a cross-border context. While the projects all focus on the same basic concept, they follow different technological approaches and use cases. 

With Project mBridge in our Hong Kong Centre, we are testing interoperability between CBDC systems of four different jurisdictions on the same DLT platform, as well as the interlinking between retail and wholesale CBDC.5 In the most recent phase, a proof-of-concept platform for multiple CBDC settlement was developed.

In this manner, the CBDCs can be traded between central banks and large financial institutions to settle cross-border payments without using the correspondent banking system. And it works! The prototype completes international transfers and foreign exchange operations in seconds, as opposed to up to five days using correspondent banking. And it can operate 24/7. Moreover, the cost of such operations to users can be reduced by up to half, using algorithms and smart contracts to improve liquidity management along the transaction chain. 

In Singapore, we are working on Project Dunbar,6 which also uses multiple CBDCs for cross-border payments. Here, we are exploring how central banks can share a common settlement platform, on which they can issue multiple wholesale CBDCs for international settlements. Further phases will explore how to enable interoperability and link together several shared platforms in different regions.

Our Swiss Centre is working with the Bank of France, the Swiss National Bank and a private-sector consortium on Project Jura.7 This project explores the potential for multi-CBDC arrangements in settling cross-border payments and transactions with digital financial instruments. It examines cross-border settlement involving two wholesale CBDCs and a French financial instrument on a DLT platform. We are also learning how to ensure the necessary central bank controls on such a platform.

We are very excited by the progress we are making with these projects. But there is a lot more to be done. In particular, the systems within which CBDCs will exist and their governance arrangements are in relative infancy. Systems with multiple CBDCs will need to incorporate the governance requirements of multiple central banks.8 These issues are also being addressed in our projects.

It is not all about CBDCs, though. Enhancements in other areas of the cross-border payments programme9 will be critical for cross-border CBDC use.

We also need to compare what can be achieved by using multi-CBDC arrangements and by linking fast payment systems – which the BIS Innovation Hub is also investigating with Project Nexus.10 Nexus standardises the way that fast payment systems connect to each other. Its software, known as Nexus Gateways, manages the differences in data, functionality and processes between different systems. Payment systems can connect using Nexus and then offer instant cross-border payments to their member banks and payment service providers.

Lessons on innovation

This overview reflects what we are learning from the products we are building. But let me share with you what they are teaching us about the innovation process itself. I will lay out five important lessons.

Number one: be prepared to fail.

Innovation is characterised by uncertainty and complexity. To achieve excellence, you have to be willing to fail. Failure teaches you lessons that lead to better products.

Some of you might be surprised to hear this from a central banker like me. This idea is encompassed in the concept of "fail forward." This means that you embrace failure as a stepping-stone to central bank innovation, as to any other form of innovation, and learn by doing.

This represents a cultural change for any central banker – the kind of person who typically aims to behave prudently, and strives always to make the right decision informed by a lot of data. This is no simple task and it's a whole new paradigm. But we are certainly learning to behave like this in the Innovation Hub.

Our team has had to foster a sense of openness and a touch of humility in order to learn from experimentation. As we experiment, we start to understand trade-offs that were initially not anticipated. For example, how to balance scale, and speed with security in DLT networks? I know these issues of scalability in DLT will be addressed in a session later today. It is only by acknowledging these trade-offs that we could scope out the route to take in some projects – which now differ considerably from the initial thinking around them.

Lesson two: innovation means evolution, not revolution.

The products of the future are often built on the lessons of the past. Many of today's technological solutions are building on infrastructure that already forms part of the financial sector.

Think about payments. This is an area where we are seeing very rapid change. The improvements started in wholesale payments, with the introduction of real-time gross settlement systems in almost every country in the 1990s. Then innovations in retail payments emerged in the 2000s. They have made payment systems increasingly convenient, instantaneous and available 24/7.11 And, of course, more recently, central banks are looking into central bank digital currencies. There are 26 pilots around the world, and two live CBDCs, according to the BIS's most recent data.12

In our case, the projects evolve following a sequential approach with initial, deepening, and broadening phases. Also, some of them have started from scratch, but a few are building on previous regional initiatives, such as project Inthanon-Lionrock between Hong Kong SAR and Thailand, and Ubin in Singapore.

This brings me to Lesson 3: Innovation is all about collaboration.

The raison d'être of the BIS Innovation Hub is international collaboration. The Hub is a global platform where central banks can collaborate with each other and with other stakeholders: regulatory agencies, international financial institutions, academia and various private sector players.  

The Hub model recognises that partnerships are critical. We can accomplish so much more working together than individually. In our three cross-border CBDC projects – mBridge, Dunbar and Jura – we are working with central banks in Asia, Europe, the Middle East and Africa plus 15 private sector companies.

Collaboration within multidisciplinary teams is equally essential to create a culture that embraces initiative and broadens perspective, allowing for things to be done differently.  

Lesson 4: to successfully innovate, use innovation management methodologies.

Our projects are developed using the Design Thinking and Agile Management methodologies that are widely used by technology firms.13 Our innovation process has two steps. First, to identity problem statements – problems in the financial sector that need to be addressed. Second, to develop prototypes and proofs-of-concept in response to the problem statements. We have tools that help us shape these two phases. For example, Design Thinking methodologies help us understand customers and their real needs. One method we use involves developing "personas" to represent the eventual users. For example, in Project Rio, which will be showcased later today, a key member of our project team is "Mark", an FX analyst – except that he does not actually exist.

Once the idea has been sharpened, the building phase begins. Here a proof of concept or prototype is developed. For this purpose, we use the Agile working processes. A continuous re-thinking and reviewing of plans is embedded in all steps of the process.

The fifth and final lesson that I would like to share with you today is that there are different ways of achieving the same end. Comparing different approaches and solutions is key to making progress and discovering what works best. You have just heard how we are applying this approach in our experiments related to the cross-border use dimension of CBDCs.

Concluding remarks

Let me close by saying that innovation is a fascinating journey. It cuts across time, geography, subjects, and partnerships. We need new tools, processes and ways of collaborating to ensure that innovation is a force for good in the financial sector. Whether in the area of digital currencies, green finance or regulation, we have a duty to make the financial system work better. This is very much a global collaborative journey and BIS is proud to help map out the path.

DC Fintech Week lets us explore technological innovation, including central bank innovation, in many important areas of the financial sector. We at the BIS are delighted to be co-hosting this event and look forward to the many insightful sessions that will follow. Excellent speakers from around the world will offer insights into how fintech applications can best support financial inclusion; competition and privacy issues raised by digital platforms; and how to price risks and opportunities. We will hear from central bank governors, academics, senior policymakers, private sector CEOs and members of the public. The agenda and the list of speakers for the conference underscore DC Fintech Week's mission to "democratise" the debate about fintech.

We hope that this conference will foster a productive dialogue between private innovators and public officials. I wish you all a wonderful DC Fintech week!

Thank you.

1       See BIS Innovation Hub Centres.

2       See BIS Innovation Hub themes.

3       See Joint report to the G20 by Committee on Payments and Market Infrastructures, the BIS Innovation Hub, the International Monetary Fund and the World Bank, Central bank digital currencies for cross-border payments, July 2021.

4       See BIS, Annual Economic Report, Chapter III, "CBDCs: an opportunity for the monetary system", June 2021.

5       See Multiple CBDC (mCBDC) Bridge.

6       See Project Dunbar: international settlements using multi-CBDCs.

7       See Press release: Bank for International Settlements Innovation Hub, Swiss National Bank and Bank of France collaborate for experiment in cross-border wCBDC.

8       See R Auer, P Haene and H Holden, "Multi-CBDC arrangements and the future of cross-border payments", BIS Papers, no 115, March 2021.

9       See Financial Stability Board, Enhancing Cross-border Payments: Stage 3 roadmap, October 2020.

10      See BIS, Nexus: a blueprint for instant cross-border payments.

11      See M Bech and J Hancock, "Innovations in payments", BIS Quarterly Review, March 2020, pp 21–36.

12      See BIS, Rise of the central bank digital currencies: drivers, approaches and technologies.

13      See A Carstens, "The BIS Innovation Hub and central bank innovation", remarks at the BIS Innovation Hub London Centre launch, 11 June 2021.