Central banks must be at cutting edge of technology

Technology is helping mitigate the economic and social impact of the Covid-19 pandemic, enabling economic activity to continue at arm’s length and partially overcome social distancing protocols. However, the ensuing accelerated changes in work and consumption patterns are likely to have a lasting impact on economic relationships.

Even before the pandemic, payments were at the forefront of technological change, with fintechs and big tech companies increasingly offering and supporting digital transactions. However, the crisis has highlighted both progress and shortcomings. The ability to use contactless payments in physical stores and for online purchases has supported economic activity, but they are still not sufficiently fast, cheap or accessible to all.

A rapid shift towards digital payments can improve cost, transparency and convenience for billions of consumers. As recently observed in some countries, this technology can enable governments to provide emergency support to households and small businesses affected by the virus, bridging the ‘last mile’ to those on the brink of disaster. Jurisdictions that have established retail payment and identity rails are already leveraging them to enhance their crisis response.

In developing economies, however, international co-operation is needed to support technological capacity, ensure interoperability between national systems, enhance cross-border payments and remittances, and support financial inclusion, to avoid spatial and social fragmentation. This is why G20 finance ministers and central bank governors have requested the Financial Stability Board, together with the Bank for International Settlements’s (BIS’s) Committee on Payments and Market Infrastructures, other relevant international organisations and standard-setting bodies, to develop a roadmap to enhance cross-border payments, which they will discuss during the 2020 Annual Meetings.

Digital currencies

The shift towards digital payments has sharpened the focus on central bank digital currencies (CBDCs). Central banks and policy-makers are assessing the opportunities and risks of CBDCs. Although they remain at the frontier of policy opportunities, emerging market economies report stronger motivations and a higher likelihood that they will issue digital currencies, with central banks representing a fifth of the world’s population reportedly likely to issue very soon. As of mid-July 2020, at least 36 central banks have published research into retail or wholesale CBDCs. While no major jurisdiction has decided to issue a retail CBDC, several projects have reached a pilot phase.

Whether Covid-19 will accelerate the demise of cash is an open question. But already it has highlighted the value of having access to diverse means of payments and the need for systemic resilience. With this, however, comes the need to ensure that their use can be expanded to all, including the millions of ‘unbanked’ people.

These developments make central bank public goods more important than ever. As the guardians of the stability of money and payments, they play a pivotal role in maintaining the safety and integrity of the financial system. To fulfil their mission in a rapidly changing environment, they need to be at the cutting edge of technology, working as a catalyst, overseer, operator and regulator.

Fostering innovation

To spearhead central banks’ response to digital innovation, the BIS last year established the Innovation Hub, with a mission to foster international collaboration on innovative financial technology within the central banking community.

The hub’s mandate is threefold. First, it identifies and develops in-depth insights into critical trends in financial technology of relevance to central banks. Second, it explores the development of central bank public goods — typically as proofs of concept to be delivered to central banks — to enhance the functioning of the global financial system. And third, it serves as a focal point for a network of central bank experts on innovation.

Reflecting the global nature of innovation and technology, the Innovation Hub has centres in multiple locations — in Europe, the Americas and Asia — building on the efforts of central banks that have already made significant advances in key areas. The hub catalyses collaborative efforts among central banks and co-operates, when appropriate, with academia, financial service providers and the broader private sector.

The first Innovation Hub centres were launched in Hong Kong, Singapore and Switzerland. In June, the BIS announced new centres in London, Stockholm (with a group of Nordic central banks), Toronto and Frankfurt/Paris (with the European Central Bank/Eurosystem) to be established over the next two years, as well as a strategic partnership with the Federal Reserve System in New York.

Digital payments and CBDCs are an important part of its agenda, but the digital transition beyond payments — particularly the development and application of regulatory technology (regtech) and supervisory technology (suptech) — is also an area of key interest.

Compliance tech

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 benefits for regulated entities and supervisory authorities to improve efficiency, reduce manual processes and make effective use of data are enormous.

In addition, financial institutions and fintech firms need safe platforms where they can discover one another, design experiments collaboratively and deploy innovative solutions rapidly at a low cost. To showcase this platform approach to regtech/suptech innovation, the BIS Innovation Hub, through its centre in Singapore and the Saudi G20 presidency, this year co-hosted the first global virtual TechSprint initiative, the winners of which will be announced in October.

This was the first time a virtual hackathon of this global nature and scale was held for regtech and suptech solution development. Fintech firms were invited to develop innovative technological — and deployable — solutions to address real-life challenges identified by supervisory authorities.

These challenges related to areas such as dynamic information sharing; for example, can a technological solution be developed to facilitate real-time sharing of critical information among regulators and supervisors? This is particularly relevant for current efforts to respond to Covid-19, as the use of an application that sources both structured and unstructured data could provide market feeds on measures undertaken within and across jurisdictions in terms of the regulatory and supervisory responses on a near real-time basis.

Monitoring and surveillance is another area where technology can bolster the supervisory armoury. Artificial intelligence and machine learning, data visualisation tools and other technologies could help financial institutions conduct better monitoring and report suspicious activities in a more timely and accurate manner for anti-money laundering and combating the financing of terrorism.

Other Innovation Hub projects contribute to the regtech and suptech agenda. In August, the hub centre in Hong Kong and the Hong Kong Monetary Authority (HKMA) launched the ‘TechChallenge — Digitising Trade Finance’ initiative to highlight the potential for new technologies to enhance trade finance mechanisms (tradetech). In collaboration with the Asian Development Bank, International Chamber of Commerce, Institute of International Finance, People’s Bank of China and Wolfsberg Group, the HKMA and the Innovation Hub centre in Hong Kong have identified areas where private and public sector ideas could help address tradetech challenges. Private firms were invited to submit innovative solutions focusing on connecting tradetech platforms, tech-driven trade finance inclusion for small and medium-sized enterprises, and tradetech infrastructure for emerging markets.

Among other projects under way, the Innovation Hub’s 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. The monitoring tool will initially focus on the foreign exchange spot market, although this may be extended to additional instruments, such as FX futures and/or markets at a later stage.

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 continually analyse technological trends in finance and their consequences for central banks and regulators, based on practical projects. We will create public goods that will promote not just the flow of commerce, but central banks’ and the BIS’s key mandate of ensuring financial stability.

Benoît Cœuré is head of the BIS Innovation Hub.