BIS Follows National Regulators into the Innovation Business
A central-banking-focused initiative with global reach begins with three hub locations, more to be added
Friday, July 12, 2019
By Jeffrey Kutler
The Bank for International Settlements, which included in its 2019 Annual Economic Report an analysis titled Big Tech in Finance: Opportunities and Risks, has announced BIS Innovation Hub. It will consist of a network of “hub centers” around the world, with the objective of benefiting the central banking institution's members and the global financial system.
The initiative was approved in a BIS board vote on June 30 - also the release date of that annual report - and launches the world's central banks collectively on a course similar to that of financial regulatory agencies that have formally embraced or encouraged the fintech innovation trend in recent years. Thirty-five such regulators and seven observers, including the International Monetary Fund and World Bank, have come together in the Global Financial Innovation Network (GFIN), according to the June first-year review of that group, which grew out of a 2018 proposal by the U.K.'s Financial Conduct Authority (FCA).
The BIS Innovation Hub, unlike any national regulator, has an existing global footprint that can be leveraged “to foster international collaboration on innovative financial technology within the central banking community,” as stated in the June 30 press announcement.
It included a statement by Jens Weidmann of Deutsche Bundesbank, chairman of the BIS board of directors: “The IT revolution knows no borders and therefore has repercussions in multiple locations simultaneously. The establishment of the BIS Innovation Hub will enable central banks to extend their existing collaboration with a view to identifying relevant trends in technology, supporting these developments where this is consistent with their mandate, and keeping abreast of regulatory requirements with the objective of safeguarding financial stability. There are significant economies of scale in such an endeavor, and the BIS is the ideal vehicle to realize them.”
Basel, Hong Kong, Singapore
The first three hub center locations will be Basel, Switzerland, where BIS is based; a BIS facility in Hong Kong; and Singapore “subject to the completion of the necessary institutional arrangements,” BIS said.
Each of those countries has considerable fintech activity. Hong Kong is a close regional rival of Singapore, which in some research has ranked first among fintech development hubs; and Switzerland is a hotbed not only of fintech entrepreneurship, but also of blockchain and cryptocurrency development, on which central bankers are keeping a close watch.
Also, in each case, BIS is collaborating with the host central bank. The Monetary Authority of Singapore, which has been instrumental in promoting the city-state's global fintech leadership, established a pioneering sandbox for financial technology experimentation in 2016 and is a member, along with the FCA, Hong Kong Monetary Authority, U.S. Consumer Financial Protection Bureau, and seven others, of the GFIN Coordination Group.
BIS said it intends to add hub centers in the Americas and Europe in what it terms “a second phase of implementation.” That could bring into the fold such other leading fintech centers as London, New York and San Francisco.
Policy and Stability Implications
BIS General Manager AgustÍn Carstens summed up a March lecture on the future of money and payments saying: “(a) the introduction of CBDCs [central bank digital currencies] would have a major impact on the financial system; (b) there is not yet a noticeable and widespread fall in the demand for cash; and (c) central banks do not feel compelled to face a major change in the way they conduct monetary policy. Also, research and experimentation have so far failed to put forward a convincing case. In sum, central banks are not seeing today the value of venturing into uncharted territory.”
However, Facebook's recently announced Libra virtual currency, linked to fiat currencies and with a headquarters in Geneva, Switzerland, will raise new “big tech” policy questions for regulators and central bankers and for the Financial Stability Board, which operates under the BIS umbrella and “continues to monitor the financial stability implications of crypto?assets and is currently working to identify possible regulatory gaps in this area,” FSB chair Randal Quarles said in April. (See The BIS-FSB-BCBS View of Crypto)
Regarding the BIS Innovation Hub, Carstens said, “I am pleased with the trust and the confidence that our membership has placed in the BIS and its staff to take on this important task. With the establishment of a network of central bank experts on technology and innovation, we will now intensify work on a set of projects that reflect the innovation priorities of the central banking community and which could be scaled up through international cooperation over a relatively short period of time.”
Bank of England governor Mark Carney, chair of the Economic Consultative Committee and former FSB chair, said, “There is a new economy emerging driven by changes in technology, demographics and the environment. While the private sector is driving these innovations, their efforts will be more effective if the hard and soft infrastructure of the global financial system support this innovation, promote resilience and level the playing field on which to compete. Central banks have a major role to play. The BIS Innovation Hub will foster collaboration between central banks and, by extension, help the private sector to fully realize these major opportunities.”