Payments Innovations and the Role of Central Banks:
Addressing Challenges Posed by Stablecoins
Speech at the Symposium for the 35th Anniversary of the
Center for Financial Industry Information Systems
Haruhiko Kuroda
Governor of the Bank of Japan
I. Introduction
It is my privilege to be here today at the Symposium for the 35th Anniversary of the Center
for Financial Industry Information Systems (FISC). Since its foundation in 1984, FISC has
contributed enormously to enhancing financial information systems and to improving the
efficiency of financial services in Japan. I would like to express my respect for FISC's many
years of service and extend my heartfelt congratulations on the 35th Anniversary.
Today, I would like to talk about payments innovations and the roles of central banks.
Recently, there have been various changes in Japanese retail payments: person-to-person
payments and merchant-to-person payments. For example, in October 2018, financial
institutions started to provide their customers with "24/7 fast payment services," which
enables real-time fund transfers between deposit accounts on a 7-days-a-week, 365 days-a-
year basis, including nighttime and holidays. The providers of these services have aimed at
responding to the demand for more convenient payment services arising from changes in the
lifestyle of consumers and the spread of e-commerce. In addition, when we look at the
payment interfaces between consumers, merchants, and payment service providers, a wide
variety of devices, such as smartphones and IC cards, have become available. Not only
financial institutions but also various agents such as nonbank firms with strengths in IT -- so
called FinTech firms -- have started to provide cashless payment services. This is also a
significant change surrounding payment services in recent years.
Since this October, the Japanese government has introduced the point reward program for
consumers using cashless payments. It aims to improve the productivity of relevant
businesses and to increase the convenience of consumers through further dissemination of
cashless payments. The Bank of Japan has received several comments from its nationwide
branch offices that the program has helped increase cashless payments.
government's
This year, we have never run short of news on payments, but the one that attracted most
attention was stablecoin initiative, Stablecoins have emerged as an
Facebook's "Libra."
alternative to crypto-assets, whose severe price volatility has made them difficult to use as
payment instruments. Numerous types of private digital money have emerged to date across
the world, but Libra differs in some aspects. With its large customer base built by Facebook,
Libra has the potential to find wide global use as a private currency denominated in its own
unit of account. Global stablecoins (GSCs), such as Libra, may offer convenient payment
services to many users, if legal certainty and technical stability are ensured. However, users
cannot continuously appreciate the benefits of GSCs unless various challenges and risks
related to money-laundering, cyber-security, data protection, and consumer and investor
protection are properly addressed. The spread of GSCs could have significant implications
on the financial system and the transmission of monetary policy. As pointed out in the G7
working group report on GSCs, no GSC project should begin operation until the legal,
regulatory and oversight challenges as well as associated risks that are outlined above are
adequately addressed.1 This view was also shared at the G20 Finance Ministers and Central
Bank Governors Meeting.
Today, I would firstly like to discuss the public response to GSCs in terms of
authorities'
in ensuring the stability of the global financial system. To maintain the
"global governance"
global financial stability with free capital mobility, the authorities need to cooperate to
establish globally consistent rules and regulations and require issuers of GSCs to comply with
these rules. It is important to understand what impact GSCs could have on a supply channel
for a global public good,
"financial stability."
I would then like to mention the challenges in improving the existing retail payment services.
The emergence of private sector innovations, including GSCs, highlights shortcomings in the
existing payment systems. For example, cross-border payments remain slow and expensive.
The authorities should not only highlight risks and issues posed by the emergence of new
digital money, but also encourage improvement of the existing payment systems. As
mentioned earlier, while new means of payment have emerged and have demonstrated efforts
to enhance customer convenience in Japan, there remain various challenges toward the wider
use of cashless payments. In this regard, today, I would like to focus on the interoperability
of payment services.
II. GSCs in terms of Global Governance
Supervisory and regulatory authorities and central banks have recognized the need for close
international coordination and collaboration, rather than individual effort, to address the
issues of GSC initiatives, such as Libra. The idea of the could help us
"financial trilemma"
understand why the authorities agree on this view.2
Financial Trilemma
The financial trilemma states that the following are incompatible: (1) financial integration
under free capital mobility, (2) financial stability, and (3) national financial policies. Any two
of the three objectives can be combined but not all three; one has to give. For example, let us
take the case where each jurisdiction maintains its own national financial policies in a
financially integrated world. In a lightly regulated jurisdiction, financial institutions would
tend to take on more risks and engage in risky business overseas. Firms and households in
that jurisdiction would increase borrowing, including foreign currency denominated
borrowing. Such increased leverage could eventually lead to financial instability. In sum,
when and financial are chosen,
"financial integration" "national policy" "financial stability"
must be sacrificed. To achieve financial stability in the financially integrated world, the
authorities need to give away their national financial policies and cooperate with other
countries to introduce globally consistent financial policy.
GSCs are digital tokens issued against funds collected from customers all over the world. The
reserve of funds would be invested in a basket of major fiat currencies, consisting of
and bank deposits. Using GSCs as a means of cross-border payment
government securities
would further facilitate and promote cross-border capital flows. Taking these points into
account, GSCs can be interpreted as a scheme that would deepen financial integration.
Therefore, to maintain financial stability, which could be undermined by the emergence of
GSCs, globally consistent financial policy is indispensable. That is the reason why the
financial authorities and central banks have been coordinating and discussing how to address
the issues raised by GSCs since this summer.
Given the enormous benefits derived from global financial activities, the private sector
entities have a strong incentive for regulatory arbitrage. Even if transactions in GSCs are
prohibited in some jurisdictions, they may expand in other lightly regulated jurisdictions. In
times of stress, this could bring adverse effects on the global financial market as a whole. For
example, even if GSCs are not widely used in advanced countries, an increase in transactions
of GSCs in emerging markets could subsequently increase the reserve assets, consisting of
government securities and bank deposits issued in advanced countries. Once the credibility
and reputation of GSCs are significantly undermined, or the value of the reserve assets
decreases, customers could rush to request redemption of GSCs for fiat currency. As a result,
the issuers of GSCs would be forced to withdraw bank deposits or sell government securities,
increasing the volatility and vulnerability of the financial markets in advanced countries.
To mitigate such risks, supervisory and regulatory frameworks of relevant jurisdictions need
to be mutually consistent and discourage regulatory arbitrage of GSC issuers. Legitimate and
sound fund transactions are the basis for financial stability and financial integration, and
therefore, measures against money laundering and those to counter the financing of terrorism
(AML/CFT) need to be implemented consistently across jurisdictions. Furthermore, an
overarching approach to global coordination, including the areas of cyber-security, data
protection, and consumer and investor protection would be necessary.
Financial Stability as a Public Good
Financial stability is an essential for firms, individuals and financial institutions
"public good"
to engage in economic activities. Public goods have two features. One feature is that
consumption by an individual or a group of individuals does not reduce the availability
good's
to others.3 The other feature is that the good is available to all and cannot be withheld, even
from people who do not pay for the goods.4 As people are not required to pay for public
goods regardless of how much they consume, a free-rider problem could arise. Therefore, if
the supply is left solely to the market, these goods will not be provided. Financial stability
can be considered to have such features. For this reason, supervisory and regulatory
authorities and central banks ensure that public goods (i.e. financial and monetary stability)
are provided through monetary policy and prudential policy by establishing adequate
regulatory frameworks.
GSCs aim to stabilize their value by linkage to a basket of fiat currencies of the major
countries. In other words, the scheme of GSCs utilize a global public good (i.e. global
financial stability), which is made up of a basket of public goods of each jurisdiction. Global
financial policy can be interpreted as constituting rules for the appropriate consumption of
global public goods. Therefore, GSC issuers need to comply with the rules, because they
provide payment services using global public goods.
If GSC issuers were to overconsume a public good (i.e. global financial stability) and expand
business beyond their risk management capacity, it could cause stress in the global financial
markets, such as rapid capital flight, when risks materialize. As a result, the public authorities
would be forced to incur additional costs for providing a public good (i.e. financial stability).
For example, the central bank, as a lender of last resort, would provide liquidity, or the
government would step in to take fiscal measures.
Looking back on the era of up until the mid-2000s, US and European
"Great Moderation"
banks rushed to take on excessive risks. Although they were subject to financial regulations
at that time, many of them simultaneously became overconfident about future financial
stability and held optimistic views on risk. Such risk perception led to credit expansion and
asset price increases in a synergetic manner. In the wake of the subsequent Great Financial
Crisis, financial authorities established the macro-prudential regulatory framework, which
put in place more stringent rules regarding the appropriate consumption of a public good (i.e.
financial stability).
While regulations on banks were strengthened after the Great Financial Crisis, nonbanks such
as investment funds expanded their presence in the market of mainly
"credit intermediation,"
in US and Europe. Meanwhile, GSC initiative, Libra, could be an example of
Facebook's
nonbank efforts to replace banks and increase their presence in the market of
"payments."
Regardless of whether they carry the function of credit intermediation or payments, not only
banks but also nonbanks need to comply with the rule of the appropriate consumption of
public goods.
GSCs and the Financial Version of the of the
"Tragedy Commons"
As I have mentioned earlier, one of the features of public goods is that consumption by an
individual or a group of individuals does not reduce the availability to others. For
good's
example, no matter how much air (i.e. public good) I breathe in, it does not limit your air
consumption. So, you may wonder why I am warning about the overconsumption of a public
good (i.e. financial stability), by GSC issuers. Simply put, the reason is that a wide use of
stablecoins in a global scale could transform financial stability from a into a
"public good"
"common-pool resource."
A common-pool resource has the same feature as public goods in that it is available to all and
cannot be withheld, even from people who do not pay for the resource. But unlike public
goods, consumption by an individual or a group of individuals does reduce the
resource's
5
availability to others. A typical example is fishery resources. Overconsumption of a
common-pool resource can lead to the complete and permanent destruction of the common-
pool resource. This problem is known as the of the When farmers put
"tragedy commons."6
their cows on a common
pasture, each individual farmer will put as many cows on the pasture
as possible, acting independently according to his own self-interest. This will eventually
result in the over-exploitation and destruction of the pasture, and all farmers will be damaged.
GSCs could bring about a "tragedy of the commons." Central banks provide public goods (i.e.
financial and monetary stability) through monetary and prudential policies. Meanwhile, GSC
is a scheme that utilizes public goods (i.e. financial and monetary stability), provided by
central banks. If GSCs are widely used with over-exploitation of public goods in such a way
that GSCs begin to substitute for fiat currency in each jurisdiction and GSC-denominated
transactions and assets/liabilities increase, this would undermine the monetary policy
transmission of central banks. When the effects of monetary policy are weakened, the
provision of public goods (i.e. financial and monetary stability) will be disturbed, and this
would destabilize not only the value of GSCs but also overall economic activities. This can
wide use of stablecoin
be thought of as the financial version of a "tragedy of the commons." A
on a global scale common-pool
could transform financial stability from a public good into a
resource.
The risk of currency substitution to GSCs could be higher for countries with a weak economic
base and lacking effective payment infrastructures. When the effects of monetary policy are
undermined by the spread of currency substitution across these countries, it would lead to
instability in the real economy, the impact being transmitted to other countries. Given the
progress in economic globalization and stronger interdependencies among financial systems,
there is a risk that the financial markets of advanced economies would also be subject to
instability. As a result, the provision of a global public good (i.e. global financial stability),
would be reduced, and a tragedy of the commons could occur.
The public authorities, in coordination with other domestic and foreign authorities, need to
address various challenges posed by GSCs, including the tragedy of the commons.
III. Reform of Retail Payment Systems
As described above, GSCs could have significant implications for the international monetary
system and settlement system. They should not begin operation until the various challenges
and risks are adequately addressed.
At the same time, I would like to assert that the Bank of
Japan takes the position of promoting private sector innovations. The recent GSC initiative
has posed us challenging questions: What are the shortcomings of the existing payment
services? What are the remedies? This is an inevitably important issue for a central bank
responsible for improving efficiency and safety of the payment and settlement systems. There
are many issues in the current payment and settlement systems that must be dealt with, such
as costly cross-border payments and financial inclusion. It is vital for us to understand that
the advent of private sector innovations derives from issues originating in the existing
payment and settlement systems.
Network Effects and Interoperability
Costly cross-border payments and financial inclusion are not the only issues that need to be
addressed. While major advanced countries have been upgrading their domestic retail
payment systems by adopting 24/7 fast payment services, there is more room for
improvement. This is obvious when we consider why GSCs have attracted so many people's
attention. For example, Facebook has over two billion users, and they are all potential users
of Libra. Benefits from payment services become more valuable when more people use them.
This is known as "network effects." It is easy to predict that the Libra platform, with its huge
customer base, will leverage network effects significantly.
Many studies have attempted to carry out quantitative analyses of the benefits of network
effects, and one of the prevailing views is The law states that the value of a
"Metcalfe's law."
network is proportional to the square of the number of users participating in it. In fact, some
studies have shown that Metcalfe's Law is a good quantitative explanation for the value of
Facebook's platform.7 In terms of network effects, it seems that the customer bases of
existing payment service providers in each country are inferior to Libra's potential customer
base.
However, while platforms with strong network effects can offer considerable benefits to users,
platforms can create monopoly problems by locking in users. In other words, if the number
of users and merchants participating in the network exceeds a certain size (critical mass), the
scale of the payment platform will expand rapidly due to the network effect, which may lead
to an oligopoly or monopoly of the market. If a particular provider becomes a dominant player
in the retail payment services market, problems such as distortions in the pricing system and
reduced incentives for innovation may eventually arise. Monopolies impede competition and
innovation, and can ultimately have a negative impact on consumer benefits.
At first glance, it seems difficult to achieve both the benefits of network effects for users and
the long-term benefits for society through competition and innovation. But it is not impossible.
between payment service providers and platforms can help achieve both
"Interoperability"
these goals. Interoperability across multiple platforms enables a customer participating in one
platform to make payments to customers on other platforms. This greatly improves user
benefits gained from network effects. The network effect based on interoperability arises from
the collaboration among multiple payment service providers and multiple platforms, and it is
not provided exclusively by a single payment service provider or platform. By ensuring
interoperability, payment service providers such as banks and FinTech firms can expand the
overall market size of cashless payments and achieve a win-win relationship among them.
Also, the payment service providers can still compete by combining payment services with
other financial and non-financial services and create their own unique added value. Payment
service providers will be released from launching endless discount campaigns to lock in
customers and will instead be able to look ahead toward the creation of new value. Such
competition will drive innovation, too. In this way, collaboration among payment service
providers by ensuring interoperability will promote both competition and innovation while
avoiding monopoly problems.
Strategies of FinTech Firms
Now, let us look at interoperability in Japan's retail payment systems. What are the
challenges? I would like to consider this topic from the perspective of the payment business
strategies of FinTech firms and banks.
Firstly, the strategies of FinTech firms. There are a number of payment platforms operated by
FinTech firms, and competition among them has become quite fierce. Several FinTech firms
have already developed radical strategies to lock in customers, such as rebates and reduction
of the merchant discount rate. These strategies are designed to scale up the platform as fast
as possible and achieve a critical mass.
While such strategies are rational on their own, they could be risky when a strong rival exists,
as they may not be as effective as expected and FinTech firms may be worn out. In Japan, the
biggest rival of cashless payment service providers is banks' branches and their CD/ATM
networks supporting cash payment. Japanese banks maintain geographically dense networks
of branches and ATMs, enabling people to withdraw cash from their accounts very easily.8
What makes cash payment convenient is not only the number of bank branches and ATMs.
The interoperability of ATM services across banks also contributes to this. It allows
customers of one bank to withdraw cash from ATMs of another bank.
In Japan, it is undeniable that FinTech firms' payment platforms pale in comparison to cash
networks in terms of interoperability. Recently, some improvements have been made to
FinTech platforms, such as the standardization of QR codes and merchant sharing, but
firms'
overall, there remains more room for improving the interoperability of their payment services.
Retail Payment Strategies of Banks
Regarding retail payment strategies of banks, the following two common points have been
observed.
Firstly, banks provide FinTech firms with access to their deposit accounts and
customers'
offer account transfer services. In order for customers to use FinTech cashless payment
firms'
services, they need to top up from their bank accounts or to use a bank account debit function.
In some sense, bank accounts and payment services provided by FinTech firms can be
regarded as complements, like coffee and sugar. If you compare coffee with sugar sachets
attached and coffee without sugar sachets, the former is preferable. Similarly, between bank
accounts linked to FinTech payment services and bank accounts that are not, the former
firms'
is preferable for customers. From the viewpoint of competition among banks, those providing
account transfer services to FinTech firms have an advantage in attracting new customers
and/or preventing existing customers from closing or deserting their accounts.
Secondly, banks participate in cashless payment platforms operated by the banking industry,
competing with FinTech firms. As cashless payments through FinTech firms become more
prevalent, the banks might face the greater risk that they will be a mere provider of deposit
accounts and thus lose a close relationship with customers and merchants. If banks want to
access payment information and sales information, banks need to
customers' merchants'
provide payment services to customers at the front end. This is the reason why banks have an
incentive to participate in cashless payment platforms operated by the banking industry. In
some sense, the payment services provided by banks and those provided by FinTech firms
could be viewed as substitutes, like coffee and tea.
These two strategies are rational choices for each individual bank in terms of competition
with other banks and with FinTech firms respectively. However, if many banks follow the
same strategies, the "fallacy of composition" could arise, and the combined effects of the two
strategies may be lower than expected, namely, one plus one being less than two (1 + 1 < 2).
While banks support FinTech payment services by providing them with real-time
firms'
account transfer service, they act as acquirers themselves and seek out merchants who will
join payment platforms operated by the banking industries. However, since FinTech firm and
bank payment platforms lack interoperability, none of these platforms is likely to grow
significantly, making it difficult for banks to recoup their investments.
Collaboration Among Payment Service Providers
When multiple payment platforms exist but lack interoperability, payment service providers,
both FinTech firms and banks, have a strong incentive to lock in customers in order to beat
the competition. This may lead to fragmentation of payment services, undermining network
effects and user convenience. As a result, banks and FinTech firms would end up wearing
themselves out in the process. Especially in Japan, where there exist very efficient cash
services supported by
geographically dense networks of CD/ATMs with a high-level of
interoperability, payment service providers must devote a significant amount of resources to
expanding the market for cashless payment services. However, the expansion is unlikely to
be achieved if FinTech firms and banks act separately in pursuing their own cashless payment
services.
In such a situation, a desirable option is that payment service providers collaborate with each
other - that is, make their services interoperable - in order to maximize the network effects
of digital yen. Collaboration among payment service providers can take various forms:
between banks, between FinTech firms, and between banks and FinTech firms. At first glance,
interoperability may seem like giving away the benefit to the other parties. That would be
true if the market for cashless payment services does not scale up even with the introduction
of interoperability. It would simply escalate the competition among payment service
providers. However, if interoperability among payment service providers and payment
platforms is ensured, benefits to users will increase, leading to an increase in the use of
cashless payments, hence the expansion of the market for cashless payment services. As a
result, a win-win relationship benefitting all the payment service providers can be established.
Many studies have indicated that network interoperability will bring a win-win relationship
between related parties.9 In fact, this has also been proved by some examples that are quite
familiar to us. One of them is the interconnection of transportation IC cards, such as PASMO
and Suica. As this has improved convenience for users, the cumulative number of
transportation IC cards issued has now surpassed 100 million. The advantage for users (riders)
that they do not have to buy a ticket each time they travel is also an advantage for
transportation companies, since they do not have to sell a ticket for each journey. The
interconnection of transportation IC cards has made it possible for each transportation
company to save labor costs in checking tickets, fares, and commuter passes. This has led to
punctual operation (as the result of efficient boarding), reduction of the human workload, and
optimization of human resources.
There is also an interesting example regarding interoperability in the banking sector; the
CD/ATM network. In 1980, city banks divided themselves into two tiers, the upper tier and
the middle and lower tier, and initiated an online network alliance separately for each tier
group. The division into two tiers was said to be the result of opposition by banks in the
middle and lower tier. They were concerned that online networks are integrated into one
"if
alliance, customers will move their bank accounts to the upper tier banks, and the middle and
lower tier banks will be left to serve only as providers of
machines."10 However, the advent
of a nationwide online network for postal savings, which was the banks' common and strong
rival, eventually pushed these two tiers to integrate. In 1984, a new city bank cash service
(BANCS) was launched by unifying the two tiers. After that, the multi integrated cash service
(MICS) was launched by integrating the networks of city banks and regional banks. The
interoperability of CD/ATM services across banks did not create any particular losers, and
many banks found that the number of deposit accounts they provide increased, resulting in a
win-win situation for everyone and more convenient services for users. This has led to the
convenience of cash payments today.
These examples demonstrate that ensuring interoperability is critical for improving retail
payment services in Japan. For the widespread use of cashless payments, payment should be
stress-free for consumers and merchants, and interoperability of payment networks is an
essential element. Specifically, there are various options, such as interconnection among
payment platforms, participation of payment providers on a common platform,
standardization of payment terminals, retail point of sale compatibility, and merchant sharing.
When we look overseas, interoperability is the common feature of countries where cashless
payments are widely used. For example, there are a number of payment platforms enabling
customers to transfer money instantly on a 24/7 basis using mobile phone numbers.11 Banks
participating in these systems share a common database linking customers' bank account
numbers to mobile phone numbers. There are also some cases where nonbanks such as
FinTech firms participate with banks in the same payment system.12 As the recent GSC
initiative has highlighted the necessity for more convenient services, we should start to
seriously discuss and consider possible solutions in the Japanese market. I would like to
encourage relevant parties to put their proposals on the table.
IV. Concluding Remarks
Today, I have discussed the challenges and risks posed by GSCs as well as the need for the
reform of retail payment systems.
While GSCs have the potential to improve payment services, their widespread use and the
increase in GSC-denominated transactions could undermine the effects of monetary policy
transmission and financial system stability. Therefore, the public authorities, as providers of
a public good (i.e. financial stability), need to not only support private sector innovations but
also promote the use of digital money denominated in a fiat currency in their jurisdictions.
This brings me to another important issue. Should central banks issue digital money, central
bank digital currencies (CBDCs)? To date, many central banks around the world have already
been engaged in research activities for CBDCs. In some European countries, central banks
have been encouraged to accelerate work on issues surrounding possible public digital
currency solutions in order to counter private sector initiatives in stablecoins. In Japan, the
amount of cash outstanding is still increasing, and it does not seem that there is a demand for
CBDC from the public at present. Nevertheless, the Bank of Japan has been conducting
technical and legal research on this matter in order to stand ready when the need for CBDC
may arise in the future13. The Bank also needs to study the impact of CBDCs on financial
intermediation.
Currently, there is a wide variety of private digital money denominated in Japanese yen. It is
improving its functions to bring
very important to promote the use of such private money by
it closer to the expected functions of CBDC. In this regard, the network effect through the
increase in
the number of cashless payment users is a key to improving the convenience of
It is more desirable to gain such a network effect through the
private digital money.
interoperability among multiple payment service providers and platforms rather than by a
single payment service provider or platform alone.
If interoperability between private digital
money increases, private money will approach more closely to central bank money in terms
of general acceptability. In addition, the wide use of private digital money denominated in
Japanese yen, which would be enhanced by competition and coordination among payment
service providers, could help the Bank of Japan maintain the channels for providing public
13
In technical aspects, the Bank has been conducting research on new technologies, including
distributed ledger technology (DLT). For example, the joint research project with the European Central
Bank,
"Project Stella" is being carried out as part of our research. In legal aspects, the Bank has been
the potential legal issues and implications that may arise from the issuance of
working to explore
CBDC in Japan. For more information, see of the Study Group on Legal Issues regarding
"Report
Central Bank Digital Currency
(Abstract)," Institute for Monetary and Economic Studies, Bank of
Japan, September 2019.
goods (i.e. financial and monetary stability). This is desirable for the national economy as a
whole.
The Bank of Japan, as the operator of the BOJ-Net and as a catalyst promoting dialogue in
the