Moving fast and not breaking things - central banks and innovation

Speech by Mr Benoît Cœuré, Head of the BIS Innovation Hub, at the World FinTech Festival, Switzerland, 7 December 2020.

I am very pleased to be speaking at this global event, straddling Singapore and Switzerland. What makes it special for me is that the Innovation Hub is local in both leading financial centres. We established offices late last year, together with another office in Hong Kong.

Yet, just like any good fintech startup, we are expanding! By this time next year, we plan to have centres in Toronto, London, Stockholm, Paris and Frankfurt as well as a strategic partnership with the Federal Reserve Bank of New York.

So, although we haven't been around for very long, we have been busy. And this session will showcase one of our first reports – the result of a collaboration with our partners, the Swiss National Bank (SNB) and SIX. The report details not one, but two proofs of concept – Project Helvetia.

But before we get onto Project Helvetia, I want to talk for five minutes about central banks and innovation. In many minds, they are still somewhat at odds. That is not unreasonable. But if that describes your mind, I want to convince you otherwise.

First, central banks have mandates to anchor stability (monetary and financial). With that comes a natural inclination towards conservatism and caution. That is true.

Yet, when central banks intervene to steady the economic ship in rough seas, they can be brave and resourceful. As the saying goes: life's roughest storms prove the strength of our anchors. And from the maelstroms of the financial crisis 10 years ago to fighting the waves of a global pandemic today – there have been few days of calm for the financial system.

It was maybe easy to miss, yet central banks' responses to both crises were extraordinarily innovative. New ways were found to get liquidity to all corners of the financial system. Swap lines were organised to smooth cross-border funding issues. New monetary policies were launched on a massive scale. Novel market operations were implemented almost overnight. How quickly those cautious central banks moved to steady the ship!

It wasn't easy. I know first-hand the difficulties of taking new and untested approaches during a crisis. Sometimes you do not have to change much: the Outright Monetary Transaction programme at the ECB (OMT) was called the most efficient monetary policy instrument ever – because it never had to be used!

Nonetheless, the intuitive view of innovation is different. Innovation is all about change. I am talking about Schumpeter's "creative destruction"; or (early) Zuckerberg's "moving fast and breaking things".

And while the dramas of the last decade raged, this change has reshaped our world. And fast. That widespread digitalisation is altering our lives is indisputable. To say that it is happening ever faster is a cliché. But it is nevertheless true. While Covid-19 presents an immediate economic challenge, it has also shown how quickly longer-running digitalisation trends can accelerate.

This calls for a different response from central banks. This is not a crisis, it is evolution. Yet speed is still of the essence. The world, and the financial system, are changing. Central banks need to understand these changes and have enough flexibility to respond to them.

We can see this in our work on central bank digital currency (CBDC). The BIS and a group of central banks, including the SNB, published a report in October setting out principles for retail CBDC. The first principle was the preservation of monetary and financial stability. Disruptive innovation – the kind that breaks things – is contrary to central banks' public policy objectives. Central banks abide by the monetary equivalent of the Hippocratic oath: first, they "do no harm".

But the challenge remains. Central banks must move fast if they are to have the flexibility to evolve in this new system. To evolve so that they can continue to provide trusted money – a common public good. Yet how can speed be combined with safety? The answer is always: through cooperation.

That brings me to the BIS. At the Bank for International Settlements, we are celebrating our 90th birthday this year. Our history is a history of cooperation, where central banks meet to coordinate and promote global monetary and financial stability. In this context, it is natural, and arguably necessary, for the BIS to set up its own innovation hub to gain a deep understanding of new technologies, to share and pool knowledge internationally, and to explore how we can develop tangible public goods for our community.

As I said at the start, we are global but also local. I am speaking at the Singapore Fintech Festival from Europe, to an audience from all corners of the globe. That mirrors one of the greatest opportunities and challenges of new technologies: they do not recognise borders.

The strategic themes of the Innovation Hub are global and matter to everyone: effective financial supervision, modern payments and banking, data platforms, cyber resilience and, of course, CBDCs. By pooling our knowledge, we can all benefit and move faster together. By cooperating, we can do so safely together. By bringing together public authorities, we can harness innovation that benefits the many and not the few.

When it comes to CBDCs, Project Helvetia is the first deliverable under the Innovation Hub CBDC workplan. The second phase will explore cross-border issues for CBDC – in accord with the G20 roadmap for improving cross border payments. Our centres in Hong Kong and Singapore are also looking at these issues.

While no one (really) knows if distributed ledger technology (DLT) is the future, the technology is now mature enough that the private sector is looking to put it into production. Examples include SDX but also the recently renamed Diem. At the Innovation Hub, we are building our own capabilities to conduct experimentation.

It is easy to move fast and break things. Not breaking things is more difficult. To do the latter, we need to move together. This is what central banks are doing. Project Helvetia is an excellent example of this and marks just the beginning of the further evolution of central banking.

Central banks are pragmatic innovators. We are innovating because we have to deliver on our mandates and because it is our job to maintain trust in our currencies. It was John Kenneth Galbraith who said: "The enemy of the conventional wisdom is not ideas but the march of events". Central banks are open to new ideas – and they are not planning on being overtaken by events.