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Central Bank Innovation

This is Part 1 of 2 blogs on what Innovation looks like in the context of Central Banks, specially those in Emerging Markets.

Part 1:

  • Innovation & Central Bank Independence
  • Innovation & Central Bank Conservatism

Part 2:

  • Innovation & Central Bank Use Cases
  • Innovation & Central Bank Policy

Innovation & Central Bank Independence

In an era that demands continuous technological advances, many Central Bankers today face conflicting challenges to excel at their traditional mandates of market stability and effective monetary policy. Concurrently, challenges globally reflect moves to restrict Central Bank independence.

Central Banking Journal’s August 2019 survey placed these developments in context for Central Banks globally: Over 61% expect Central Bank independence to wane.

However, Central Banks in emerging markets actively looking at modernization must also be strategic by leveraging technology to align their independence in the financial market of the future.

Indeed, the lack of reliable and verifiable data limits the impact Central Bank have in their attempts to implement monetary policy. Without trusted data, transformative technologies, introduced to promote efficiencies can become politicized and may dilute the strength of Central Bank existing processes, policies and systems.

Financial stability and monetary policy, by necessity, must accommodate for systemic weakness and negative implications of unreported payment flows, growth and trade trends.

Therefore, modern Central Bank technology must be well integrated with Cloud Computing, Internet of Things and Big Data Analytics to help Central Banks remain a trusted, data driven and independent institution.

Innovation & Central Bank Conservatism

Over the last 10 years we’ve seen the innovation boom in the financial services industry. From Digital Payments, Finance Management to Cross Border Remittance, fintechs have transformed consumer banking. Yet, the Economist notes the average cost of cross border payments is forecasted to increase from the global average of 7% as of 2018.

As the total value of global remittance is expected to increase, so is the cost of transfers. Why is that?

The cost of compliance and the outdated infrastructures are significant contributors.

Although warranted, conservatism should also be a motivator to actively search for new ways to maintain stability in today’s quickly evolving financial market infrastructure.
Strategically it is critical for the Central Banks to seriously consider new technologies can deliver better Governance. By understanding and embracing technological improvement, regulators will be more effective at regulating an innovative, resilient and stable financial ecosystem.

In that spirit, here is an early framework on the use of Distributed Ledger Technology (DLT) for “Embedded Supervision” from the Bank of International Settlements (an entity owned by 60 Central Banks, representing 95% of the world’s GDP):

We found this concept to be a powerful proposition for the central bank to interoperate efficiently with a broader ecosystem in a balanced way.

This shows the ability to have a distributed network model that bypasses the disconnected silos we have today, to establish trusted ledgers that interoperate, while having the right controls around access management (cryptography + managed access rights).

It’s important to realize that Central Banks’ conservatism often contributes to the lack of clarity and processes around innovation, and in turn can be a potent market risk itself. Instead of banning certain solutions because they are new, modern Central Bank solutions must be robustly built on open platforms and establish trusted distributed ledgers with embedded governance and interoperability models.

We believe Blockchain/DLT and Artificial Intelligence can be powerful tools for Real Time Governance and Real Time Risk Monitoring, even for a conservative institution!