Catalysing change: central banks and digital innovation

Speech by Mr Benoît Cœuré, Head of the Bank for International Settlements Innovation Hub, at the Latvijas Banka Annual Economic Conference 2020, 25 September 2020.

Introduction

Mr. Governor, distinguished guests, ladies and gentlemen, 

It is a pleasure to join you virtually today at your annual economic conference on this very timely and important topic of money and public security. 

The year 2020 will be remembered as one of the most serious health crises and global economic contractions in almost a century. Along with many other regions, the shock to the euro area has been particularly severe. In just two quarters, the euro area is estimated to have lost as much output as it has gained over the last 15 years.¹

The swift emergency actions taken by governments and central banks to mitigate the immediate impact on the real economy through extraordinary fiscal, monetary and prudential measures have stabilised what could have been catastrophic for global markets.²

These actions reinforce today's conference theme, that public security and universal livelihoods are inextricably linked to the public provision of money. Here, I refer to the central bank's critical role in ensuring that "money makes the world go round" - that is, safeguarding continued trust in money as a means of payment, a store of value and as a unit of account, a core public good for the economy at large. 

But the pandemic has also shown that while central banks continue to safeguard essential trust in money, it is technology that enables our globally connected world and the provision of money to go round. Technology has been indispensable in helping to mitigate the economic and social impact of the Covid-19 crisis. Technology has enabled economic activity to continue at arm's length and partially overcome social distancing protocols. 

In many respects, the current crisis has therefore been a catalyst for forcing us all to take stock and to rethink the rules of the game. New ways of working that were previously thought of as a fallback option are now seen by many of us as the new norm. The ensuing accelerated changes in work and consumption patterns are likely to have a lasting impact on economic relationships. Digitalisation has taken a leap forward. 

These paradigmatic shifts raise important questions that your panel discussions will cover today, and ones that we at the Bank for International Settlements (BIS) have been considering in depth for the last few years. In my remarks today, I would like to emphasise the critical importance of international collaboration in delivering the financial architecture of the future and highlight the role the BIS will play.

Rethinking the catalyst for change

While the economic ramifications of the Covid-19 pandemic are still unfolding, the pandemic has accelerated trends in digital innovation that were already well under way. Consumers in many countries have stepped up their use of contactless payments, and as physical stores temporarily closed, e-commerce activity surged.³ 

Yet, the pandemic has highlighted both progress and shortcomings in payments. 

While access to payment services has increased over time, it is still far from universal. Low-income and vulnerable groups face the greatest difficulty in paying or receiving funds. Costs are relatively high in the retail segment and those costs are not always transparent to end-users. To reach the unbanked, some government-to-person ("G2P") payments have relied on paper cheques, which take longer to process and may pose higher risks of fraud than bank transfers. Payments across borders are still typically slow, opaque and costly, which is particularly the case for lower-value payments such as remittances.⁴ 

There is much scope to improve the quality of payment services in terms of convenience, transparency and speed. However, differences in consumer habits across markets and varying degrees of maturity in banking systems and payments markets may impede localised solutions for greater interoperability or integration. Disparate levels of technological advancement and adoption can also create challenges for cross-border payments and the ability of public authorities to coordinate across jurisdictions.⁵

One key challenge therefore is how authorities and central banks can use their roles as catalysts and facilitators to spur digital innovation and increase interoperability or integration in cross-border payment services. 

There is certainly no silver bullet, but what is clear is that international collaboration is essential - to support technological capacity, ensure interoperability between national systems, enhance cross-border payments and remittances, support financial inclusion, and to avoid spatial and social fragmentation. 

Now more than ever, central banks must serve as a basis for sound innovation in the digital era to maintain the safety, integrity and stability of money and payments. All these developments make central bank public goods more critical,⁶ and central banks need to be at the cutting edge of technology to serve society.

It is for these reasons that the BIS established its Innovation Hub to spearhead central banks' responses to digital innovation. Digital innovation knows no borders. It is therefore the Hub's mission to foster international collaboration and build on the efforts of central banks that have made significant advances in digital innovation. Partnerships with other stakeholders, such as bank and market supervisors and international organisations are critical for this task. 

We are building a portfolio of projects in areas relevant to central bank activities across the three Innovation Hub Centres that have already been established - in Hong Kong SAR, Singapore and Switzerland, each in collaboration with the local central bank. These projects are designed to develop in-depth insights into critical trends in financial technology of relevance to central banks, and to develop new technological applications - typically as proofs of concept to be delivered to central banks - to enhance the functioning of the global financial system. 

The BIS decided in June to expand the Innovation Hub over the next two years to include four new centres in Europe and North America.⁷ 

I welcome the opportunity to strengthen our links with Latvijas Banka through the new Eurosystem centre based in Frankfurt and Paris. The opening of the Stockholm centre, with a group of Nordic central banks, will be another opportunity to tap the technological potential of your region. Centres will also open in London and Toronto, alongside a Strategic Partnership with the Federal Reserve in New York. With an expanded footprint, the BIS Innovation Hub becomes a global force for innovation in central banking.

Finding solutions to complex problems

Finding solutions to complex problems over the coming years is an imperative for not only the successful functioning of central banks but also for strengthening financial sectors.

This imperative resonates particularly strongly in Europe given the twin objectives of creating a Capital Markets Union and advancing the digital agenda. There is clearly a strategic complementarity between these two objectives, and an opportunity to improve both the resilience and efficiency of the European economy. The Next Generation EU instrument can further contribute to this digital push, as emphasised last week by President Von Der Leyen in her state of the union speech. 

Latvia's journey towards digital innovation serves as an excellent model for how central banks are taking the lead in making advances in the provision of innovative financial technology solutions.⁸ Today, every sixth payment made in the Electronic Clearing System of Latvijas Banka (EKS) is an instant payment, and information from the Credit Register is now available also via smart devices. Latvijas Banka's own ZibLab, a virtual platform for promoting the creation and development of innovative and user-friendly payment solutions, helps market participants to jointly tackle practical and technological questions and coordinate development of interoperable, secure, user-friendly and innovative payment solutions in the Baltic region.

The BIS Innovation Hub is also embracing new innovative ways to find solutions to solve many complex cross-border problems arising from unnecessary fragmentation or efforts being undertaken in silos.

Digital payments and central bank digital currency (CBDC) are an important part of our agenda. As of mid-July 2020, at least 36 central banks had published research into retail or wholesale CBDC.⁹ While no major jurisdiction has as of yet decided to issue a retail CBDC, several projects have reached a pilot phase.

Going forward, enhancing coordination and taking steps to prevent or reduce fragmentation in cross-border payment systems are public sector priorities, as embodied in the request by the G20 Finance Ministers and Central Bank Governors to the Financial Stability Board, together with the BIS's Committee on Payments and Market Infrastructures, other international organisations, and standard-setting bodies, to develop a roadmap to enhance cross-border payments.¹⁰

Exploring the potential of "next generation" multilateral cross-border payment platforms will be a key focus for the BIS Innovation Hub Centres. One such project underway at our Singapore Centre examines how digital identity and payment rails could be interlinked to create a "global stack".

 But the digital transition beyond payments - particularly the development and application of regulatory technology (regtech) and supervisory technology (suptech) - is also a key area of interest.

Over recent years, there has been growing interest from financial institutions and the official sector in the use of technology to support new business models and to solve regulatory and compliance requirements more effectively and efficiently. The potential collective benefits for regulated entities and supervisory authorities to improve efficiency, reduce manual processes and make effective use of data, are enormous.

To this end, the BIS Innovation Hub, through its centre in Singapore and together with the Saudi G20 Presidency, this year co-hosted the first global virtual TechSprint initiative. Fintech firms were invited to develop innovative technological - and deployable - solutions to address real-life challenges identified by supervisory authorities. This was undertaken using the API Exchange (APIX): the world's first cross-border, open architecture API marketplace and sandbox platform in which participants can integrate and test solutions with each other via a cloud-based architecture.

Other Innovation Hub projects contribute to the regtech and suptech agenda. Our Swiss Centre is developing a prototype of a central bank-specific, real-time capable market-monitoring tool. The cloud-based stream processing platform will process real-time financial data feeds and compute relevant liquidity and market risk measures. This will provide central banks with overviews of market conditions via customised dashboards and real-time alerts.¹¹ 

And we have many projects that go beyond regtech and suptech. In August, the Hub centre in Hong Kong SAR and the Hong Kong Monetary Authority launched the TechChallenge - Digitising Trade Finance initiative to highlight the potential for new technologies to enhance trade finance mechanisms ("tradetech"). Private firms were invited to submit innovative solutions focusing on connecting tradetech platforms, tech-driven trade finance inclusion for SMEs, and tradetech infrastructure for emerging markets. 

In the coming months and years, as the world deals with the fallout from the pandemic, and the shift towards digital finance evolves and accelerates, the Innovation Hub will work on finding real solutions based on practical projects to address ever more complex problems across an expanding range of areas, including cyber resilience, sustainable finance, and the application of artificial intelligence and machine learning to central banking and financial supervision. Collaboration with stakeholders such as Latvijas Banka, will be critical for this mission.

Concluding remarks

To conclude, actions taken by public authorities and central banks have been essential in helping reduce the intensity of the COVID-19 shock and its damage to the global economy and financial system, and ultimately restoring public security.

Multilateral collaboration and proactive actions taken by central banks will also be essential for building a financial architecture that is future-proofed and resilient to withstand a large range of shocks. Technology and innovation will be front and centre as we move forward into this new world.

I thank you for your attention and I wish you a very fruitful conference.