Central bank innovation – Swiss made

Speech by Mr Agustín Carstens, General Manager of the BIS, Kantonalbanken Event 2021 – SIX, Zurich, 3 November 2021. 

Introduction

Grüezi und herzlichen Dank für die Einladung. Heute möchte ich über etwas sprechen, das sowohl Kantonalbanken als auch Zentralbanken betrifft – Innovation.

Technological innovation usually moves only forward. But the history of innovation often repeats itself.

There is a quotation attributed to Bill Gates from 1994: "Banking is necessary, banks are not." Perhaps he was just trying to promote his new Microsoft Money platform. The fact is that, at the time, ATMs were spreading like wildfire and were widely perceived as an existential threat to banks.

Fast-forward 27 years. Banks are still around, but ATMs are in decline, as cash usage shrinks, and most banking services are done online.

Just as in those days, many other technology companies are currently eager to enter the financial industry:

• Big techs are expanding into retail payments, a traditional bank business. Some even want to issue money.
• Fintechs are trying to unbundle all parts of the banking value chain. Sometimes in collaboration with banks – other times in competition.
• On the more extreme side, decentralised finance (DeFi) seeks ultimately to replace the entire financial system with computer code and blockchains.

I am sure many of you look at all this action with both a sense of opportunity and some concern, and rightly so. It's the same with us central bankers. We are thinking all the time about how digital transformation is affecting central banks.

But I am not in the least afraid that central banks will be replaced by a smart contract on a blockchain. On the contrary.

Monetary and financial stability are as relevant as ever. Citizens still want stable prices; a reliable currency; and safe and efficient payments systems. Only central banks, backed by the credibility and trust inherent in well governed public institutions, can deliver on this. To twist the quotation, central banking is necessary, and central banks are even more necessary.

BIS Innovation Hub

Today, I would like to speak to you about how central banks are rolling up their sleeves to be at the front of the innovation process and help shape the digital transformation in the financial system – all while continuing to deliver on their mandates. In other words, they aren't afraid of the algorithms, but are seeking to master the art of designing them.

Let me first give you a quick overview of the BIS, and then how the Innovation Hub is key to this process. We're an international financial organisation, founded in 1930 and owned by 63 central banks, including the Swiss National Bank.

We are usually described as the bank for central banks, but it is much more than that. For more than nine decades, the BIS has been the principal forum for collaboration amongst central banks globally on many issues that contribute to monetary and financial stability, which is essential for sustained economic growth.

So, it is only natural that this would extend into the area of innovation and technology. That is the role of the BIS Innovation Hub, which was established in 2019 to be a focal point for central bank experts on innovation; to work on cutting-edge technological trends relevant to central banks; and to develop financial technology public goods that improve the functioning of the global financial system.

In the past two years, we've done a great deal through our centres in Switzerland, Hong Kong SAR and Singapore. New centres have opened or will open soon in London, Stockholm, Toronto, Frankfurt and Paris. We have also started a strategic partnership with the New York Fed.

The Hub's work touches on all the issues of importance to central banks. We have 11 active projects in suptech and regtech (the use of technology for supervision and regulation), next-generation market infrastructures, central bank digital currencies (CBDCs) and green finance.

Our work model is based on cooperation with the central banks hosting our centres; with other central banks, international organisations and various private sector partners. Our work on CBDCs, for example, is done in partnership with 10 central banks. All of the Hub's projects involve cooperation with over 40 private sector companies.

The Hub is not a policy shop. It is more akin to a laboratory. It aims to build proofs of concept and prototypes that demonstrate the viability of technological solutions. It also makes use of hackathons (or techsprints) to reach out to the fintech community, scout technologies and source ideas for projects.

A glimpse into the Swiss Centre projects

Let me give you a tour of some of our projects with a focus on Switzerland. Our Swiss Centre is currently working on suptech and regtech with Project Rio; and on CBDCs, with Projects Helvetia and Jura.

Project Rio

Project Rio explores how central banks can use cloud-based data streaming technologies to monitor fast-paced electronic markets (FPMs). The current version of Rio focuses on the foreign exchange (FX) spot market. Data hit the platform every 100 milliseconds and, within about a second and a half, Rio synchronises time stamps, reconstructs limit order books for more than 50 currency pairs, computes risk and liquidity measures for each pair, and displays and contextualises the information on dashboards.

Let me give you some perspective on what this means, from my own professional experience. I started at the Bank of Mexico in the 1980s as a foreign exchange trader. At that time, the peso was often under pressure and we had to carefully monitor the FX market and our reserves. Every half an hour, we'd update the exchange rate, the amounts traded with different banks and the remaining FX reserves on a big blackboard in our dealing room. To keep the governor updated, we installed a camera in front of this blackboard and put a TV monitor in his office, so that he could see what we were doing in real time – every half hour...

Project Helvetia

Project Helvetia is a collaboration between the Swiss National Bank (SNB), BIS Innovation Hub (BISIH) and our host SIX. We explore how central banks can support settlement of tokenised securities issued on a distributed ledger technology (DLT) platform. The experimentations use the test environment of the SIX Digital Exchange AG (SDX) platform. SDX was recently approved by the Swiss financial markets supervisory authority, FINMA.

The first phase of Helvetia settled such assets either by issuing wholesale central bank digital currency (wCBDC) onto SDX or by linking SDX to the existing SIX real-time gross settlement (RTGS) system. The second phase further investigates operational, policy, legal and governance aspects of integrating wCBDC into an emerging tokenised financial ecosystem. It establishes end-to-end connectivity between the SDX and the core banking systems of five commercial banks as well as that of the SNB. Phase II is set to complete early next year.

Project Jura

While Project Helvetia has a domestic focus, Project Jura has a cross-border perspective. It is a public-private collaboration involving the Bank of France, the Swiss National Bank (SNB), the BIS Innovation Hub (BISIH) and a private sector consortium. It explores cross-border and cross-currency settlement of tokenised financial instruments and wholesale CBDCs. In the experiment a tokenised commercial paper settles against a euro wholesale CBDC via delivery versus payment (DvP) and euro wholesale CBDC is exchanged against a Swiss franc wholesale CBDC via payment versus payment (PvP). The experiment involves transactions between banks domiciled in France and in Switzerland. Project Jura adds a cross-border dimension to the Project Helvetia and is expected to be completed by the end of this year.

Conclusion

Let me conclude with another Bill Gates quotation, this one more forward-looking: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten."

We must work on innovation and keep our eyes on the future, but not allow ourselves to be carried away by it. Again, history offers some perspective. Just think about the number of technological companies that were labelled "the next big thing", and then disappeared a couple of years later.

Contrary to the hopes of the more radical DeFi proponents, central banks are not going anywhere. Central banks continue to be relevant as reliable public institutions that provide stability and trust in a rapidly changing financial system. Central banks provide the backbone for the financial system in which institutions like yours can serve their customers.

Many people say that CBDCs are a threat to commercial banks. I don't know of any central bank that wants to start serving customers and enter the area in which commercial banks most definitely do a much better job.

Collaboration to explore the benefits and challenges of innovation is key – among the central banking community and, as importantly, in private-public partnerships. That's why we have set up the BIS Innovation Hub and are delivering on its promise.

Let me end my remarks by making an invitation to you. While the BIS Innovation Hub is very young, the BIS last year commemorated its 90th anniversary. Due to Covid, we are celebrating one year later, by opening our tower building in Basel for a week to the public. Tomorrow is your last chance to come and visit us in Basel, learn more about our institution in an exciting multimedia tour, and enjoy the beautiful view over Basel from the top floor of the BIS tower. I hope to see some or all of you tomorrow in Basel.