Jessica Chew Cheng Lian: Opening remarks - Central Bank Payments
Conference
Opening remarks by Ms Jessica Chew Cheng Lian, Deputy Governor of the Central
Bank of Malaysia (Bank Negara Malaysia), at the Central Bank Payments Conference,
Kuala Lumpur, 11 June 2024.
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First and foremost, I would like to thank the organisers, Currency Research, for inviting
me to speak today.
Evolution of payments
The payment system lies at the heart of economic activity. If money is the lifeblood of
the economy, then payment systems represent the veins that allow money to flow to
where it is needed.
While this fundamental reality has not changed, over the past few decades,
technological advancements have dramatically changed the form, methods and
experience of payments in our daily lives.
Not too long ago, we waited anxiously for cheques to clear to pay our mortgages or for
funds to transfer across borders for our family needs or children's education. Carrying
cash in our purses or wallets was as automatic as putting clothes on to leave our
homes.
Today, many of us conduct daily financial transactions digitally and through our mobile
phones - with a level of convenience not possible or imaginable before.
In the wholesale payment space, the transformation has been no less significant. We
have moved to highly automated, real-time systems that enable continuous and
instantaneous settlement. The financial system has also become more efficient as
settlement cycles for securities have been gradually reduced. Similar to retail payments,
many of these improvements have been enabled by technological progress, creating
greater efficiencies in the financial system.
Central banks' mandate for payments
These developments have important implications for the role and responsibilities of
central banks in relation to payment systems.
While this role may vary across countries, central bank responsibilities over payment
systems generally stem from an interest in: supporting the implementation of monetary
policy; preventing systemic risks that can arise from the transmission of financial stress
through the payment system; and promoting fair, efficient and inclusive operations of
payment systems given their central role in the economy.
In the case of Bank Negara Malaysia (BNM), our responsibilities have two dimensions.
First, as overseer to ensure the safety, reliability and efficiency of the payment system.
Second, leading and supporting a developmental agenda to ensure that the payment
architecture remains fit for purpose in support of economic activity.
Significant changes occurring in the payment landscape have impacted the way central
banks view their responsibilities for payment systems in at least two ways.
First, for many central banks, the payment mandate has taken on a much more
important strategic focus - perhaps not seen to the same degree in earlier periods.
Technological advancements offer enormous potential to achieve faster, lower-cost and
convenient payments. Harnessing this potential has inevitably involved a significant role
for central banks to address coordination issues in a way that reduces fragmentation
while encouraging competition. It also falls on central banks to ensure that payment
systems remain safe and reliable amid new and emerging risks. And central banks
have a keen interest in ensuring that technology works to create more inclusive finance
for all.
For these reasons, central banks have generally been very visible in strategic initiatives
to drive the adoption of digital payments, improve cross-border payment arrangements,
and modernise financial market infrastructures. In these examples, central banks have
assumed a key role in setting the pace and driving change by actively bringing together
stakeholders to work in concert.
The second notable impact concerns the more significant interdependencies that have
emerged across functions within central banks. Radical developments in the payment
space have created a strong current, forcing different parts of central banks to come
together to better understand and untangle payment trends and how they interact with
the economy and society. This effect has been pervasive - certainly in our experience -
involving those working within areas of supervision, financial markets, financial
development, monetary policy, technology, risk management, fraud and financial
education as well as financial inclusion.
This evolution in how central banks approach their responsibility for payments is driven
in part by a desire to encourage competition and innovation in financial services in order
to better meet current and future needs of the economy.
Critically, it also reflects the need to anticipate and manage risks to the central bank's
mandates. The pace of change and potentially far-reaching impact of payment
innovations requires central banks to carefully consider how such innovations affect the
complex balance between resiliency, inclusivity, efficiency and policy efficacy.
We need to remain vigilant to new pockets of risk even as we pursue measures that
aim to encourage responsible innovation.
For example, with many transactions becoming almost real-time, intraday liquidity
management becomes more crucial for players. IT infrastructure and cyber security
have shifted into sharp focus especially since the surface along the payment value
chain for threat actors to exploit has expanded significantly.
The regulatory perimeter today also poses new challenges. Banks now co-exist
alongside significant non-bank payment providers that include 'big tech' and crypto
asset players that may not be consistently regulated. New cooperative oversight
arrangements need to be carefully considered to ensure that emerging risks and
vulnerabilities remain well-managed. With instantaneous cross-border payments
becoming more pervasive, cooperation across borders also need to consider issues
surrounding capital flow management as well as dispute handling for fraudulent
crossborder transactions.
As central banks experiment with new digital forms of money such as central bank
digital currencies (CBDC) and tokenised deposits, the way central banks oversee
payments is also poised to change significantly as these instruments become more
widely used in the payment ecosystem. Indeed, the more imminent prospect of private
sector stablecoins is already raising important questions on the adequacy of existing
regulatory frameworks and their implications for the monetary system, including the
impact on transmission mechanisms for monetary policy.
International standard-setting bodies like the BIS, CPMI and IOSCO would have an
important role to play in supporting appropriate responses to these challenges by
fostering dialogue, considering standards, and facilitating greater information exchange
and collaboration between central banks and regulators around the world.
Developments in Malaysia and ASEAN
Against this backdrop, BNM has established a cross-functional Digital Currency
Research Hub (DCRH) to lead an open and pragmatic approach to innovation by
exploring how emerging technologies can futureproof our domestic payment
infrastructures.
An immediate focus has been an undertaking that is currently in progress to modernise
our RTGS system. Earlier this year, BNM issued a discussion paper that outlines plans
to modernise our large value payment system, RENTAS. This will include supporting
near 24/7 operations, wider participant access, enhanced data sharing and analytics
capabilities, and more effective liquidity management.
At the same time, we are actively pursuing exploratory work on the potential of
wholesale CBDC to futureproof RENTAS and improve cross-border payments -
including facilitating local currency settlements for cross-border trade and investment
activities to reduce foreign exchange costs and enhance resilience against financial
shocks. To this end, BNM is working to develop a wholesale CBDC prototype based on
identified use cases to help us understand how CBDC could support new payment
solutions that can overcome pain points faced today.
Concurrently, BNM also continues to be actively involved in projects conceived under
the BIS Innovation Hub, along with other central banks both in this region and beyond.
The DCRH has also been tasked to study potential use cases for asset tokenisation.
This would bring together money and assets on a programmable ledger that could
unlock significant efficiencies and benefits for the wider economy.
In the area of retail payments, we have no immediate plans to issue retail CBDC given
the highly efficient domestic retail payment systems operating today. Central banks in
this region have however, deepened our cooperation significantly in recent years to
enhance cross-border payment connections given the strong trade and economic ties
between our countries.
Notably, cross-border interoperability of fast payment systems has become a priority. It
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is projected that 84% of Southeast Asian consumers will use e-wallets by 2025. This
has motivated the establishment of numerous bilateral payment linkages across the
region, with more than 10 bilateral payment linkages already up and running.
Commitment to this goal was further cemented by the Regional Payment Connectivity
(RPC) memorandum of understanding signed by five ASEAN central banks, including
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Malaysia, in November 2022, which has now been expanded to eight ASEAN central
banks.
In parallel, ASEAN member states are collaboratively developing a multilateral network
to scale these linkages in a more efficient manner. Working with the BIS Innovation
Hub, several ASEAN member states including Malaysia are advancing a first-of-its-kind
multilateral network connecting multiple domestic instant payment systems through the
implementation of Project Nexus.
Nexus will expand access for individuals and businesses to low-cost, convenient, safe
and fast payments across borders by building on the familiarity of users with domestic
payment systems. This is expected to reap substantial benefits for cross-border P2P
transfers, while also expanding opportunities for micro and small businesses to serve
many more customers from different countries.
The recent conclusion of Phase 3 of the project brings us another step closer to
realising its potential to scale globally.
Conclusion
Looking ahead, the pace of developments in the world of payments shows no signs of
slowing down. Central banks are faced with a choice of helping to shape such
developments or react to them. I think we must be prepared to do both. This could
mean embarking on bolder strategies to test and learn, while remaining sharply focused
on our ability to carefully manage risks - both in terms of risks to the stability and
integrity of payment systems, as well as risks to our core mandates. This challenge
must be met head-on to deliver sustainable and beneficial outcomes for society and the
economy.
Clearly, this is not a journey that central banks can undertake alone. But it will require
some degree of clarity to emerge on the specific roles that central banks may choose to
assume at different points along the journey. And it will require a high degree of agility
within central banks to navigate the road ahead.
The good news is that collaboration among central banks has never been stronger.
Let me conclude here. Thank you for your attention and I wish you a fruitful and
productive conference.
Source: Southeast Asian Consumers Are Driving a Digital Payment Revolution | BCG
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Indonesia, Malaysia, Philippine, Singapore, Thailand and followed by Vietnam, Brunei
and Laos