Walk the Talk: reflections from a public sector innovator

Keynote speech by Ms Cecilia Skingsley, Head of the BIS Innovation Hub, at the Bank of England's Annual Research Conference, 27–28 February 2023.

BIS, Innovation Hub speech  | 
28 February 2023

Thank you for inviting me. The theme of this conference, "New digital technologies and the future financial landscape", could not be more appropriate. We live at a time when two coincident forces are poised to transform the global financial system as never before:

  • First, a quickfire succession of technological breakthroughs is challenging the status quo in the financial system.
  • Second, big tech firms are lining up to disrupt the financial sector.

Central banks have a key role to play to drive innovation that meets evolving needs and position themselves to lead them. Their mandate is to maintain monetary and financial stability. And, as experts in money and payments, they are also responsible for supporting public policy objectives such as trust, efficiency and inclusion. Certainly, the Bank of England is a shining example in this respect.

As the BIS General Manager, Agustín Carstens, said in a speech last week and I quote, "Central banks must embrace innovation. They have a powerful and important mandate, to provide safe and stable money, and in the most efficient and useful way. To embrace its evolution and potential, they should build on the strong foundations that exist, but not be limited by them." 1.

Today, I would like to discuss how central banks can embrace technological change and exploit its many possibilities while pursuing the public policy objectives to which are all committed. I will offer some reflections from a few years of experience as a public sector innovator. For the public sector and innovation should not be thought of as incompatible. So, I will elaborate on the following three questions:

  • What kind of world do we live in?
  • What do we need to bring this about?
  • And how do we make it all work?

What kind of world do we live in?

Let's start with a quick overview of where we are now, and where we are heading.

Rapid technological change is affecting every aspect of our lives, including how we use financial services. Most of us have moved away from a world where financial services were provided at a bank branch over a counter during business hours; in which most transactions took days to complete; and where the financial infrastructure served only domestic needs. I would bet that most of you here haven't visited a bank branch for a while, and some of you may hold an account with a bank that has no branches at all.

With new technology and new players, we are moving towards 24/7 services, faster payments and many more financial transactions taking place across national borders. Businesses and households want more of that.

A vibrant industry has come up with innovative services to meet these additional demands. In particular, a lively crypto industry is vying to establish itself and become the next big provider of financial services. But they aim to do so by offering a view of how the financial system should be organised that is fundamentally different to today's version.

I could also mention artificial intelligence, machine learning, decentralised finance, data harvesting, cyber vulnerability, and what these imply for the future of the financial system. In short, there is a lot that authorities, and especially central banks, need to consider.

What do we need to do?

So, given all this new complexity, what do we need?

Taking lessons from history, I would argue that we need two things: trust and collaboration between the public and private sector.

Trust sits at the core of central bank mandates and of a smoothly functioning monetary system too.

Let's take the example of money. Throughout history, many things have served as money, from seashells to gold coins to 100-pound notes. But these things have only worked as money when people trusted their value. When people moved on from gold to banknotes, trust started to depend on the issuer's credibility. After a long process, central banks have emerged as the institutions best placed to provide that trust. The digital world will not change this. As I just mentioned, trust cannot come from the technology itself. As Agustín Carstens put it last week: "What sustains fiat money is not the application of novel technologies but all the institutional arrangements and social conventions behind it."

Second, we need collaboration. Both the public and private sectors are needed in the provision of financial services, and that will not change just because new technologies are emerging. Both sectors are part of the same ecosystem.

The public sector is usually not very competitive in delivering innovative services to customers – although there are important exceptions, such as the fast payments services developed by many central banks.

Meanwhile, history has shown that the private sector is less qualified to create the key element of the financial system: money itself. Recent experience has underlined that conclusion. So, the ideal combination is for private sector innovation to take place around the core of the trust provided by the central bank.2

I would add another role for the public sector. This is to keep the financial system open, accessible and agile enough to foster competition while fostering safety and soundness of the system, in the public interest. It has been set up so that key protections are in place, from deposit and investor protection schemes to disclosure and requiring client money requirements and providing liquidity and lender of last resort function.

As for the private sector, it doesn't need much stimulus to innovate. But a risk is that it does have the tendency to create network effects and consolidate market share in order to maximise profits. We know that big techs are great at encouraging peer-based platforms, amassing great data, and cross-marketing based on your data, but this means they are also rather good at stifling competition and creating so-called walled gardens. This is not in the public interest.

BIS Innovation Hub: Trying things out

So, we know what we have and also what we need. So, what are we doing about it?

This is what the BIS Innovation Hub was set up for – to bring central banks together to develop a deeper understanding of what technology can bring to the future financial landscape, and to develop public goods that improve the functioning of the global financial system.

We aim to help in three different ways, by

  • developing new pieces of financial market infrastructure, to meet public policy objectives;
  • exploring new tech-enabled financial services, and using technology to help supervisors and regulators; and
  • contributing to broader global policy goals, such as greening the financial system, and broadening financial inclusion.

At the Hub, we run projects. We try things out, hands-on, by building and testing proofs-of-concept and prototypes, to catalyse new ideas in the world of central banking.

Our projects focus on six areas: the use of technology for financial supervision and regulation (or suptech/regtech); next-generation financial market infrastructures; central bank digital currencies or CBDCs; open finance; green finance; and cyber security.

Some experiments are rooted in economic theory to identify areas where technology can help. For example, we have built a proof-of-concept for a liquidity-saving mechanism that was first scoped out in a research paper.3

Other projects emerge from the trends and challenges shaping the financial ecosystem. One question is how the public sector leverage technology to better identify cases of money laundering, sanctions evasion and fraud? This was a theme that emerged from Hub's ideation process interviews – which is itself a new angle on how central banks typically approach problems.

I mentioned earlier how important it is for the public and private sectors to collaborate, and at the Hub we walk our talk. On average, a third of the team members working on our cross-border CBDC projects come from the private sector, whether from banks, consultancy firms, technology providers or law firms.

Improve existing infrastructure while inventing new ones

Some of our projects focus on experimenting with novel technologies and exploring their usefulness. Others aim to improve existing infrastructure.4

CBDCs are an example of something new. I think of them as having two aspects. On the one hand, they uphold our public service mission of providing safe and efficient payment methods in a contemporary format. And on the other, they enable private sector innovation.

Many countries are researching them: there are four live retail CBDCs around the world, plus pilots in 34 jurisdictions, both wholesale and retail.5

We have a rich portfolio of CBDC projects. As for retail, we are testing different architectures and looking at how to improve cyber security, resilience, scalability and privacy.6

On wholesale CBDCs,7 we have already completed several projects. Aiming to improve cross-border payments, we have run different multi-CBDC experiments,8 showing that common platforms exchanging various digital currencies are technically feasible and can deliver faster, cheaper and more transparent payments.

Flexible and adaptable solutions to current and emerging needs

As we build new things and tweak existing ones, we cannot forget that control mechanisms need to be updated as well. Regulation and supervision solutions must be flexible and adaptable to new conditions.

Market developments and instances of dysfunction are occurring at an ever-greater speed. Traditionally, trading and central bank market monitoring involved calling market players on the telephone.9 But today transactions are done in milliseconds. And trading is from machine to machine. And when machines are trading with each other, there is nobody to call. Since market monitoring remains crucial for implementing monetary policy, central banks also face a technological challenge in assuring appropriate market functioning and managing foreign exchange (FX) reserves.10

The Innovation Hub's answer to that challenge is to monitor at the same pace as trading. Thus, we have built a cloud-based FX monitoring tool for central banks that processes financial data feeds in real time and computes relevant liquidity and market risk measures in milliseconds.11

Technology is not only about improving existing markets; it creates new ones as well. Decentralised finance, or DeFi, applications are a prominent example. As this sector matures and possibly attracts more investment, central banks and supervisors will need to understand it better. Particularly in terms of market monitoring, central banks will need to understand DeFi's potential impact on financial stability, and the implications for monetary sovereignty.

At the hub we are developing two market intelligence platforms, one for monitoring cryptocurrencies and DeFi,12 and another one for monitoring the balance sheets of stablecoins.13

We all know that technology enables a lot more data, structured and unstructured, with better quality and granularity than ever before. Big data can help central banks and financial institutions calibrate their regulatory and supervisory frameworks. And we can even explore the untapped potential in novel data to supplement our traditional economic analysis.

The BIS Innovation Hub's projects aim to create public value in this area too.14 We have developed a data and analytics platform for regulatory purposes.15 And we have looked at technological innovation in establishing corporate digital identities.16

How to make it work?

I have described what we have today, what we need and what we are working on. Let me also say a few words about how we are striving to achieve success in public innovation.

First, central banks need a deep understanding of technological developments in the private sector, which nowadays rarely stops at national boundaries. So, developing a response means that we have to assemble the right combination of experts to work across borders.

This is why the BIS has set up Innovation Centres around the world. These centres are working both with each other and with multiple central banks in their projects.

No less important to achieving solutions is collaboration with stakeholders outside the central banking community. In our projects, we combine practical and technological expertise together with central banks' deep understanding of markets and systems. Perhaps this involves more openness than many central banks are used to. But the iterative process is highly productive for everybody involved.

Another reflection is that it is becoming vital to adopt ways of working that take uncertainty more into account, accepting that nobody necessarily knows the answer to a problem. That recognition, by the way, is another cultural challenge for many central banks. There are many approaches we could use to handle this. At the Innovation Hub projects, we look to methods like "design thinking" and "agile development", both popular among technology firms.

In a nutshell: we set our goals, work closely inside the Hub, then with central banks, and then with the private sector. Is that the recipe for success? Well, it depends on how one defines success.

Building something that works is surely a success. But we might still not arrive at the results we expected, or in the way we expected. Learning that some ideas may ultimately prove not worth pursuing is also a success. Such is the way of innovation.

In order to drive real change, meaning that our projects may actually be used in real life, we can think of the Hub's contributions in the following way.

First, research and market findings set the stage for what could be explored further. Second, experimentation takes place within the hub. And third, regulation and supervision are a necessity if innovations are to be used in real life.

We try to demonstrate "the art of the possible". Or put it another way, we show what can be done; what should be done is up for each country or as group of countries, to decide.

Why not?

People like to say that prediction is difficult, especially if it's about the future. You can think about innovation projects in the public sector as out-of-sample data – something you don't have but want to be able to forecast. I also think about our work as horizon-scanning: we run ahead and scout out what the future might hold and report back with suggestions on what to do with it.

Or as Robert Kennedy said: "Some see things as they are and ask why. I dream of things that never were and ask why not."

Maybe it's a good way to define what we do at the Innovation Hub: we are constantly asking "Why not?"

Thank you very much for your attention.

1      A Carstens, "See Innovation and the future of the monetary system (bis.org).", speech at the Monetary Authority of Singapore, 22 February 2023. 

2      See Cecilia Skingsley: Building payment systems for our grandchildren (bis.org) and  Money in the digital age: what role for central banks? (bis.org).

3          For the concept underlying Project Titus, see R Garratt, "An application of Shapley value cost allocation to liquidity savings mechanisms", Bank of Canada, Staff Working Papers, no 2019-26, July 2021.

4       For example, in the area of next-generation financial market infrastructures, with Project Nexus we are connecting fast payment systems to enable instant cross-border payments. Project Aurora uses a data-driven approach to fighting money laundering, and Project Meridian explores a new type of settlement in payment systems.

5       See R Auer, G Cornelli and J Frost, "Rise of the central bank digital currencies: drivers, approaches and technologies", BIS Working Papers, no 880, August 2020.

6       See BIS Innovation Hub reports on Project Aurum: a prototype for two-tier central bank digital currency, Project Rosalind: developing prototypes for an application programming interface to distribute retail CBDC, Project Polaris: secure and resilient CBDC systems, offline and online, Project Sela to test a cyber-secure retail CBDC architecture that reduces the financial exposure of intermediaries, Project Tourbillon explores cyber resiliency, scalability and privacy in a prototype CBDC.

7          See BIS Innovation Hub report on Project Helvetia: A multi-phase investigation on the settlement of tokenised assets in central bank money.

8       See BIS Innovation Hub reports on Project Jura: cross-border settlement using wholesale CBDC, Project Dunbar: international settlements using multi-CBDCs, Project mBridge: Connecting economies through CBDC, Project Icebreaker: Central banks of Israel, Norway and Sweden team up with the BIS to explore retail CBDC for international payments.

9       M Bech, "Hanging up the phone – electronic trading in fixed income markets and its implications", BIS Quarterly Review, March 2016.

10      Markets Committee, "Monitoring of fast-paced electronic markets", Markets Committee Papers, no 10, September 2018.

11      See BIS Innovation Hub report on Project Rio: monitoring of fast-paced electronic markets.

12      Project Atlas (report forthcoming).

13      Project Pyxtrial (report forthcoming).

14        The BIS Innovation Hub project portfolio also encompasses projects on greening the financial system (Projects Genesis, Gaia, Viridis) and securing it (Projects Sela and Polaris, Secure Coding Competition, Leap).

15      See BIS Innovation Hub report on Ellipse.

16      See D Leung, B Nolens, D Arner and J Frost, "Corporate digital identity: no silver bullet, but a silver lining", BIS Papers, no 126, June 2022, and Project Dynamo: financing small and medium enterprises in the digital age.

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