08 October 2021

BIS Couere: Finance disrupted

New technologies can foster greater efficiency, financial stability and inclusion. But they can also do the opposite, spawning financial instability, loss of privacy, and financial exclusion.

Let me begin by stating the obvious: we live in an age of disruption. We hear every day about businesses, industries, and governments being disrupted. And, of course, our private lives have been disrupted by the pandemic. But tonight, I would like to talk about a specific type of disruption – disruption arising from technological innovation in the financial sector.

Two years ago, "Banking disrupted" was the title of the 22^nd Geneva Report. The report presciently raised competition issues arising from big techs and fintechs. Tonight, I would like to make the point that disruption goes well beyond banking.

Think of cryptocurrencies¹, the rapid rise of decentralised finance, or DeFi, and digital ID systems using biometric data. Think of the explosive growth of data and how firms – particularly big techs – exploit these data. Think of the massive hacks that regularly compromise the personal data of millions of individuals.

What do these stories tell us? They tell us that technological innovation and associated disruptions can be good or bad. New technologies can foster greater efficiency, financial stability and inclusion. But they can also do the opposite, spawning financial instability, loss of privacy, and financial exclusion.

The Great Financial Crisis didn't stem from technological change but from opacity and greed, but it taught us a useful lesson: when finance doesn't work, it takes a heavy toll on society. It took a decade to clean up the mess and reform the financial system.

New technologies are disrupting every corner of the financial sector. Should we let disruption run its course, whatever the consequences? Or do we want to harness the power of innovation in a way that preserves the best elements upon which the financial system is built?

I think the answer is clear. And this is where central banks must step in.

Tonight, I will focus on the role that central banks are playing in ensuring that technological innovation is a force for good, and in developing innovative technological solutions themselves – both domestically and, increasingly, internationally. I will focus on the work we are carrying out at the BIS Innovation Hub, and on the technological disruptions we see in payments and money, banking supervision, and financial markets. At the end, I will share some tentative thoughts about the consequences of innovation for monetary policy implementation.

Digitalisation disrupting payments and money

Payments and money first jump to mind. This is an area of rapid and unprecedented change. Cash is declining while digital payments are on the rise. Covid-19 has just given another jolt to this transformation.

Change started with how customers make payments. We can use our smart phones and watches. Contactless and mobile payments have become part of daily life in many countries including emerging and developing markets.  Four in five Kenyans are using a mobile money service like M-Pesa². Alipay and WeChat Pay accounted for 94% of all retail payments in China last year. Gloves with payment functions are being prepared for the Beijing Winter Olympics.

Most of innovation has been on the "front end" but in recent years, it has moved to the "back-end," the part of the payments system that consumers don't see, involving money flows, and clearing and settlements between financial institutions – the part that not long ago used to be called "plumbing".³

Fast payment systems are a great example, although consumers don't see the new plumbing that is needed to ship money in real time between banks. Services such as the UK's Faster Payment Scheme or the ECB's TIPS allow real-time payments 24/7 and deliver new benefits to consumers.

But other changes come with risks as well as opportunities. Think of global stablecoins, especially if issued by big techs. They are promoted as a way to provide faster and cheaper cross-border payments and deeper financial inclusion. And they do. But they also pose significant risks: they can create closed ecosystems or "walled gardens" that fragment the monetary system, by potentially taking large volumes of payments outside the system that has central banks at its centre.

Stablecoins may also pose risks for financial stability. As clarified yesterday by the Committee on Payments and Market Infrastructures and the International Organisation of Securities Commissions, stablecoin arrangements should observe international standards for payment, clearing and settlement systems to safeguard financial stability, if they perform a payment function and are found to be systemically important.⁴

Walled gardens also have serious implications for competition. They augment the already significant market power of big techs. They also risk threatening consumer privacy and challenge existing regulatory practices.⁵

The history of private money initiatives is not a happy read. Whenever faced with the conflict of interest between making their money stable no matter what and making a profit, private issuers have always chosen profits.

This is where central banks come in.

Money is ultimately a public good whose stability and use needs to be protected by the public sector. This is why so many central banks around the world are working on central bank digital currency, or CBDC – essentially, to ensure that the next generation of money continues to serve the public interest.

If well-designed, CBDC could be a safe and neutral means of payment and settlement asset, serving as a common platform around which a new payments ecosystem can develop. It could enable an open finance architecture that welcomes competition and innovation; and preserve democratic control of the currency.⁶

The BIS Innovation Hub (BISIH) is helping to foster the international development of CBDC. Our centres in Hong Kong SAR, Singapore and Switzerland are building six proofs of concept, or prototypes, with ten central banks in Asia, Europe, the Middle East and Africa, looking at different types and uses of CBDC.

We are looking at wholesale CBDC, which may be used only by central banks and large financial institutions, to facilitate cross-border payments and avoid the use of the correspondent banking system that we all agree is slow, opaque and expensive. And we are investigating the digital equivalent of cash – general purpose (or retail) CBDC.⁷ With the opening of new BISIH centres and partnerships, there will be more projects to come. 

Big data and algorithms disrupting banking supervision

It's not all about CBDC though. Far from it....

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