The path is set, but how long will it take to walk?

Central bank digital currencies (CBDCs), crypto assets and new technologies are so embedded in the future we see for financial markets that conversations are focusing on the collective journey we’re all taking, with the remaining hurdles to overcome discussed throughout day three of Sibos.

There is a casualness with which panellists now acknowledge the role that new technologies and digital asset-linked developments like central bank digital currencies (CBDCs) and tokenisation will play in the financial markets.

But even the tone and the nature of Sibos 2021 has been astounding. No longer theory or speculation, an overwhelming acceptance across discussions gives a sense of the impact these developments have had on the largest of organisations, which have – on the whole – now figured out the part they will play in the digital world of the future.

Day three began by diving headfirst into some of these developments, with ‘Assets of the future’ and ‘CBDCs through the bankers' lens – challenge or opportunity?’ as a fitting one-two punch.

Financial service providers are looking to leverage new technologies, and the likes of CBDCs, stable coins, NFTs and the digitalisation of assets are offering opportunities to change what they do today – with three simple goals: to be faster, better and cheaper. “There is no shortage of institutions working on this or visionaries,” said Jennifer Peve, Head of Strategy and Business Development at DTCC.

We are moving quickly down the road when it comes to our digital future. When it comes to digital assets, there are far-reaching benefits around liquidity, transaction efficiency and access, along with the emergence of real collaboration that can often be overshadowed by some of the negative connotations and press around cryptocurrencies.

“When we look at this space – and we talk about how transformative it is – there’s a disproportionate attention to the prices of these assets and the volatility, and not enough towards the transformation, the new operating models, the new roles that are emerging,” said Mike Demissie, head of digital assets unit and advanced solutions, BNY Mellon.

“That’s a disservice; we need to go deeper and see how this future is going to emerge and prepare ourselves to tackle that. We see the innovations with the far-reaching implications, the same way the internet was transformative in how we share information globally, these technologies are equally powerful. They are not only touching payments, remittances and capital market transactions, but change the way we collaborate and use digital identity.”

Overall, these innovations represent a great opportunity to reimagine how our industry will operate in a more digital world.

CBDCs – good or bad for central banks?

On the topic of central bank digital currencies (CBDCs) Lieve Mostrey, CEO of Euroclear noted “we do not imagine a world in which securities would be tokenised, be handled on a digital ledger, and central bank money not being so”. It’s this kind of acknowledgement and acceptance of these concepts, which has moved the conversation on from whether to implement, to how.

In addition, a morning session on CBDCs explored whether such a development was viewed positively or negatively by commercial banks. John Orchard, CEO, OMFIF and moderator of the panel, began by asking Tom Mutton, Director of the CBDC unit at the Bank of England why central banks are looking at CBDCs at all. Mutton noted that there are different types of CBDC. A retail scheme provided by a central bank to meet the basic needs of households and businesses would indeed be a significant innovation as it would introduce a new form of money into the economy. At the moment, retail central bank money is only available in the form of banknotes. On the other hand, said Mutton, “we already have central bank digital money available to wholesale participants in the form of central bank reserves.”

Much of the debate around CBDCs is about innovation in technology as much as it is innovation in money. “We encourage innovation when it is responsible and safe,” said Mutton. “CDBC could be part of that, but we need to check. We should be open minded about innovation.”

In Asia, explorations of the potential of CBDC are picking up the pace, said Soon Chong Lim, Group Head, Global Transactions Services, DBS, with the Monetary Authority of Singapore, for example, bringing financial institutions and fintechs together to address the development through a hackathon sandbox. The key development, though, would be if the eCNY pilot being run by the PBOC would be extended for cross-border use, raising issues of interoperability. This could have a major impact on the use of USD in intra-Asian trade.

Of the numerous European projects, Florence Lubineau, Head of Central Banks & MDBs/Supranationals, Europe, BNP Paribas, singled out the ECB’s digital euro project, announced in June, which aims to address key issues regarding design, distribution and digital identity. It envisages three years of development following initial investigation, meaning such a digital currency with central bank approval could be a reality in four to five years. Lubineau added a note of caution: in Europe, she said, commercial banks are systemically important and therefore highly regulated. There are therefore some concerns about giving access to central bank money to non-banks.

Positivity echoed

Much of the positive sentiment was echoed in ‘The Future of Money: the panel’ where it was highlighted how CBDC pilots are multiplying, and stablecoins and cryptocurrencies should not be ignored.

The benefits of many of these developments and technologies centre around financial inclusion, an upside of this new world often quoted.

Lockdowns during the onset of the COVID-19 pandemic shifted consumer behaviour towards digital banking. In Brazil, 36 million people – representing 17% of South America’s unbanked population – were brought into the banking system via a government emergency aid programme. For the first time, these people were able to access banking services and have the potential to access credit.

Financial inclusion and digital inclusion are linked; the digitally excluded struggled during the pandemic. While many people adopted online or telephone banking, an accelerated shift from the physical to the digital could leave some people behind. In the UK, more than one third of people are not fully engaged with the internet and are not comfortable or experienced in using online banking.

The situation has been exacerbated by the high levels of fraud and financial scams perpetrated during the pandemic. “Banks have to ensure that people can access money. During the pandemic, NatWest partnered with a security company and distributed more than £2 million of cash during the first lockdown in the UK. This was delivered to people who couldn’t leave home, such as the elderly, the vulnerable and those who simply did not have access to the internet.” said Marion King Director of Payments, NatWest Group

One panellist mentioned earlier in the day that the biggest risk with new technologies and digital assets was the risk of missing out – albeit with a smile and a wink – but in Spotlight on Managing risk, experts dug into cyber risk, data risk, climate risk and more.

If we focus on digital inclusion, that will support and enable financial inclusion as we move forward"

Marion King Director of Payments, NatWest Group

“I started working in risk in 2008, the year of the financial crisis,” said Lydie Vallese, Chief Risk Officer (CRO) at BNP Paribas Securities Services. “I’ve seen a huge evolution of the risk function since then as it has moved more centrally to the board room level.” CROs have also had to respond post-crash to Basel III and other such capital adequacy measures. “I strongly believe we need to recharge and re-energise now to face a new plethora of emerging and expanding pre-existing risks that are gathering in strength.”

COVID-19 has changed the ball game when it comes to risk. As Johan Gerber, EVP Security and Cyber Innovation, MasterCard, pointed out: “It has brought new supply chain problems, work and economic disruptions, and other risks to the fore. The impact of COVID-19 has been profound. It has forced everyone into a digital ecosystem.”

Some corporates are now hiring chief bio-risk officers, for instance, to try and plan for future pandemics."

Johan Gerber, EVP Security and Cyber Innovation, MasterCard

The human angle

Of course, within the discussion of transformative technology getting the human angle right is crucial and should not be forgotten. Vasant Dhar, professor of information systems at New York University, and moderator of the session, reminded us of this by reiterating that the financial services industry is built on trust, fairness, inclusion, low latency and low errors. In that context, he suggested a possible contradiction: technology has been largely about disintermediation and disrupting processes. At the same time, issues such as trust and inclusion require human input.

The underlying question, said Bruce Weber, Dean of the Lerner College of Business and Economics at University of Delaware, is when we trust machines and when we want humans involved in decisions. Technology has vast transformative power, but there is a human element to consider at the level of both the individual and the organisation.

We see digitisation and automation as good, but not to the exclusion of human interaction”

Nigel Dobson, Banking Services Lead, Australia and New Zealand Banking Group

“We see delivery as a hybrid. When it comes to really big life events, the human angle is important, but backed up by digital interaction,” added Nigel Dobson, Banking Services Lead, Australia and New Zealand Banking Group. He pointed out that technology can actually have a positive impact on human interaction. “When running a large organisation with geographically distributed teams, virtual interaction gives all participants a space and a voice. It's exhausting, but the democratisation across large teams has been a great win,” he said.

With a whole day of crypto talk, Sir Jon Cunliffe, Deputy Governor of Financial Stability, Bank of England and Chair of BIS CPMI, addressed whether the world of ‘crypto finance’ poses risks to financial stability. Would this speech shoot down the dreams of the day from Wednesday’s optimistic panellists?

Crypto – should it stay or should it go?

Cryptoassets have grown by roughly 200% in 2021, from just under $800 billion to $2.3 trillion today. “When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice. They have to think very carefully about what could happen and whether they, or other regulatory authorities, need to act,” he said.

However, he noted that at the same time, they need to be careful not to overreact – particularly when faced with the unfamiliar.

We should not classify new approaches as ‘dangerous’ simply because they are different”

Sir Jon Cunliffe, Deputy Governor of Financial Stability, Bank of England

While Cunliffe noted that financial stability risks from the application of crypto technologies are currently limited, he pointed to a number of reasons to think that this might not be the case for very much longer.

“Bringing the crypto world effectively within the regulatory perimeter will help ensure that the potentially very large benefits of the application of this technology, can flourish in a sustainable way,” he added, before signing off by urging that regulation needs to be pursued as a matter of urgency.

Fear not optimists of the day.

‘Views from the Top’ were very much the cherry on top of the day, with the CEOs of market infrastructure giants Euroclear and CLS gracing the virtual stage.

Lieve Mostrey, CEO, Euroclear spoke with Global Custodian Managing Editor, Jonathan Watkins about a range of topics, ranging from lessons learnt as an organisation over the past 18 months, the role market infrastructures can play in ESG and the group’s fintech investments and partnerships.

On DLT, Mostrey, said Euroclear can see a future where the whole world is connected to the same ledger and can [operate] without limitations of necessary energy, without need for reconciliation and be almost simultaneously all together settled, but the difficulty is how we get there, it is very much a ‘chicken and egg’ scenario.

Kenneth Harvey, Chairman, CLS spoke with Tom Groenfeldt from Forbes extensively about data intimacy and the strength banks have in risk management. Stating that they have not only the knowledge to build models and create value from raw data, but also potential to transfer that into the customer intimacy areas, to enhance customer experience.

One more day to go folks.