The BIS Innovation Hub explained

Podcast by Hyun Song Shin, Economic Adviser and Head of Research, 18 December 2019

Transcript

The BIS Innovation Hub is a new project designed to support central bank collaboration on new technology and to pool resources. Two recent milestones were the announcement that Benoit Coeuré will head up the Hub when his term at the European Central Bank finishes, and the launch of the third regional Hub centre in Singapore.

Welcome to the podcast from the Bank for International Settlements, BISness. I'm Krista Hughes, and here with me to discuss the Hub is its interim head, Hyun Song Shin.

Hyun, what does the Hub set out to do?

The Hub will do three things.

The first is to identify and develop in-depth insights into critical trends in technology affecting central banks. This is an extension of what we already do - which is to make sense of what is going on, by applying our expertise and research capacity.

The second mission of the Hub is to serve as a focal point for a network of central bank experts on innovation. This is also very much an extension of our convening role for central bank experts, but with a focus on innovation.

But the third mission is perhaps new, and this is to develop central bank public goods in financial technology that will improve the functioning of the global financial system. This role entails rolling up our sleeves and actually taking part in innovations for the broader benefit of the users who come in contact with the financial system.

When you say "central bank public goods", what do you have in mind?

By public goods, I have in mind the notion used in economics, where public goods are goods that spread their benefit to a wide group of people, not just those involved in a particular transaction.

In the context of the Innovation Hub, they are public goods that are provided by the central bank to do with the core parts of the financial infrastructure that serves the wider population. So, they are public goods, but ones provided by central banks.

What would you say to those who say that central banks are too conservative to be engaged in innovation?

Well, I would disagree with that. Central banks find themselves right at the centre of developments that are transforming the financial sector and the wider economy, from the nature of money, the payment system and financial regulation.

In this respect, we have a responsibility to be at the cutting edge of the debates. In fact, there is really no choice but to do so, as otherwise, events will overtake us.
We need to provide intellectual leadership and to upgrade our own tools and instruments.

What about the private sector? How do you see the ideal division of labour between the public and private sectors?

Of course, the private sector plays a bigger role in innovation, and they also provide public goods that benefit a wide community of users, not just those that are involved in a particular transaction. So, the role of the public sector should be placed in that larger context.

As for the division of labour between the private and public sectors, I don't think we can draw a definitive line. Also, practices differ across countries.

But in general, it would be fair to say that the private sector is at its best at customer-facing activity. This is when it uses its ingenuity and creativity to serve customers better.

But when it comes to setting standards or laying a competitive level playing field, there are good arguments for the public sector to play a role. Once that base is in place, there would be more scope for others to build on that base.

Do you have an example?

Well, in some respects, the evolution of the modern internet is a good example.

The internet has its origin in projects to join up computer networks in the military, but the big boost was the project in the 1980s to connect academic computer networks. In fact, "internet" stands for "interconnected networks".

The modern internet as we know it was made possible by the common adoptions of standards that govern common addressing standards and how computers talk to each other. You might remember things like the TCP/IP protocol, and the convention governing email addresses.

You could think of these as core, or foundational infrastructures that are best set up with the public interest in mind, rather than having closed or segregated systems that are set up for the benefit of private interests.

The analogue for payment systems would be a core infrastructure that provides common addressing standards for individual accounts in the payment system together with messaging standards that allow any account holder in the system to find another one.

Can you give some examples of the types of central bank public goods that Hub Centres are working on?

The Hub Centre in Switzerland will work on so-called tokenisation of assets, which has to do with the digital representation of those assets.

The specific application is to the securities market where the tokenisation will allow trading and settlement of securities by creating a single platform that works on distributed ledger technology, or DLT, that integrates securities trading and settlement in central bank money.

As part of this work, the project involves the tokenisation of cash itself on the same platform in terms of a wholesale central bank digital currency (or wholesale CBDC).

There's a lot of focus on digital currencies, is that something central banks are seriously considering?

I would go back to the point earlier about central banks providing the base layer or the core infrastructures that the private sector participants can build on.

It remains to be seen whether there is a role for central bank digital currencies in this mission. But this is something that needs further study, and several central banks are studying CBDCs.

But on this issue, we should also distinguish to so-called retail CBDCs that are available to general users, from the wholesale kind mentioned earlier, which are used by financial institutions.

There is still a lot of work to be done on this issue.

Are the Hub projects only about digital currencies and payments?

No. The work has many more elements.

The Hong Kong Centre will develop a DLT-based platform to streamline processes for trade finance. It will also examine the opportunities and challenges that Big Tech poses for financial markets.

The Singapore Centre will explore the use of new technologies in big data and machine learning in applications to financial supervision. This field is known as "suptech".

In addition, it will work on developing a comprehensive public infrastructure building on digital identities, which is then used as the foundation upon which other services can be provided.

One of the other Singapore projects is about digital IDs. What is that exactly?

It could be seen as part of building a digital infrastructures for society.

Many countries have national ID numbers, but not all have digitised them for widespread use for the provision of financial services. In many countries, the digitisation of national ID numbers has been provided by private institutions, such as industry associations of commercial banks. This is an instance of the private provision of a public good.

The "Global Stack" project envisages the public provision of digital ID. It is the public provision of the public good.

The term "stack" in the Global Stack project refers to the fact that digital identity is only the base layer of the system. On top of the digital ID is built the consent layer and the payment layer.

Go back to what we discussed earlier - about uniform address format for all users, even when they belong to the networks of different banks or payment service providers or banks. It's like the email address convention which enables email to find its way to its users wherever they are.

Because money also has to be able to find its way to people wherever they are?

Yes, as I also mentioned before there are so-called "open APIs", or open Application Programming Interfaces, which make banking apps talk to each other. In particular, it allows users of one bank's app to send and receive payments on their accounts held by other banks or payment service providers in the system.

The combination of uniform address formats and open APIs eliminates closed or segregated networks where users are trapped within the network of one provider. These closed networks are like "walled gardens" that don't promote wider communication.

Open APIs open up the payment system so that users and providers can all communicate on one platform. So, among other things, it levels the competitive playing field and allows even small players to compete by offering attractive services to users.

How can privacy concerns be handled?

Clearly, safeguarding privacy will be very important. A data permission layer is part of the project. We also need safeguards on how the data are stored and retrieved. Above all, a strong cybersecurity capacity will also be very important.

Now all three Centres in the first phase of the Hub have been announced. Will there be more?

The three Centres are the first phase. We have previously announced that we are planning additional centres to come on line in the Americas and in Europe.

What's next in terms of projects?

The projects so far have been drawn from the existing strengths of our partner central banks. But we are working from the outset to develop a home-grown agenda that will guide the work of the Hub. We will be channelling the feedback from central banks and drawing on their respective strengths. So, the objective is to ensure that the whole is more than the sum of the parts.

Thank you Hyun and thanks everyone for listening. You can read more on this on our website, BIS.org. Do subscribe to BISness on iTunes or Spotify, and follow the BIS on Twitter, LinkedIn and YouTube.