François Villeroy de Galhau: Digital innovation - what role can we
play as central banks?
Speech by Mr François Villeroy de Galhau, Governor of the Bank of France, at the Singapore
Fintech Festival, 8 November 2021.
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Ladies and Gentlemen,
It is always a great pleasure for me to have the opportunity to speak at the Singapore Fintech
Festival, and I wish to thank Ravi Menon and the Monetary Authority of Singapore for organizing it.
Although I am joining from Paris today, I look forward to coming back to Singapore soon to
continue exchanging.
Innovation may not be the first thing that comes to mind about central banks. After all, our
institutions have been around for quite some time: MAS just turned 50 - and I take this
opportunity to congratulate this golden Jubilee -, and Banque de France is more than 2 centuries
old. We are more associated with stability than disruption... Yet the blossoming of digital
innovation has the potential to transform the financial system in its entirety. We have to embrace
these changes, but there are also things that we need to preserve in this process: the stability of
the financial system. Innovation and stability can appear as contradictory in the short run; but
they are complementary through a common value; a keystone: trust. Trust of the public in
money.
To be implemented effectively, these dual principles of innovation and stability require a
cooperative setting. I will focus on how these principles can be put into practice, first through how
regulation can address new risks, and then how central banks can foster innovation, with the
example of central bank digital currencies.
I. New risks, new rules?
No corner of the financial system is left untouched by digital technologies, a look at the agenda of
this Fintech Festival tells it all: payments, decentralized finance and open banking, crypto-assets,
central bank digital currency, quantum computing, etc... These technologies bring competitive
pressure and such innovative pressure is healthy: it challenges inefficiencies, helps
improving services, brings down costs. Fintechs are key players in the modernisation of the
financial sector and I expect banks in particular to seize more systematically the opportunity to
participate to this transformation.
Can I quote Joseph Schumpeter? He wrote that "most of the creations of the intellect or fancy
pass away for good after a time that varies between an after-dinner hour and a generation. Some,
however, do not." Fintech has clearly made it pass the after-dinner hour; it is getting close to the
generation mark. I am convinced central banks are instrumental in making sure digital innovation
can bring long-lasting benefits.
Here, the emergence of decentralised finance raises new challenges for usual regulatory
frameworks. Left unchecked, it could result in increased volatility, lack of traceability or clear
accountability, concentration risk on certain technical infrastructures, insufficient customer and
investor protection, to name a few. I strongly disagree with the idea that confidence in rules and
public institutions can be replaced by some form of "algorithmic confidence" once and for all.
Preserving confidence in money and financial stability thus requires a clear, fair and balanced
"technology-neutral" regulatory framework with a simple principle: "same activities, same risks,
in order to prevent both excessive and hidden risks and regulatory arbitrage. But
same rules"
this is easier said than done! In the European Union, the proposal for a "Markets in
CryptoAssets" (MiCA) legislation aims at finding the appropriate balance between innovation and
security when regulating crypto-assets issuers and service providers. It needs to be adopted
rapidly but we also have to make sure the European rulebook leaves no gaps open in view of
most recent trends.
Another important issue to maintain trust is that of cybersecurity. Digitalization increases the
exposure - and therefore the vulnerabilities - to cyber-threats, for financial institutions as well as
for their customers, and their service providers. Cyber-risk is not only a major operational risk at
the entity level, but also a systemic one for the financial system as a whole. In that area, the
European proposal for a Digital Operational Resilience Act (DORA) is exploring how to
strengthen and upgrade IT security throughout the financial sector.
I would also like to mention artificial intelligence. Because trust is about not only the financial
system working well, but also making sure that algorithms do not lead to outcomes that are
unduly biased or unfair. Banque de France and especially our supervisory arm, the ACPR, have
been playing an active role in helping to consolidate the future European regulatory framework
for AI. ACPR also conducted this summer its first Tech Sprint on Explainability of AI, which
enabled tech providers, Fintechs and larger actors to showcase the potential and limits of
explanatory methods on credit risk predictive models: its results are to be published on our
website.
II. CBDC is a key area of our work to foster innovation
Central bank digital currencies is a key area - if not the key area - where the stakes are
especially high: central banks are responsible for preserving the soundness of money, whatever
its forms! This is a domain where Banque de France is convinced of the benefits of "learning by
doing". This is why we launched in 2020 a programme to carry out experiments on wholesale
CBDC with Fintechs, public and private market participants and other central banks. Our
objectives have been multi-fold, testing:
several use cases (securities settlement, cross-border transactions),
on different types of financial instruments (listed and unlisted tokenized assets, sovereign
issuances, payments),
with various technologies (public or private blockchains, open-source or proprietary
protocols),
and as proof of concept but also in real-life conditions.
A report on the key takeaways from this experimentation programme is being published today on
the Banque de France website.
The expertise we have gained through these experiments will be shared with the Eurosystem,
which launched in July an investigative work on a retail digital Euro (the decision to enter in a
realization phase will be made in 2023).
CBDCs are indeed an area where international cooperation is a must, for cross-border
efficiency as well as financial stability and monetary sovereignty reasons. In particular,
interoperability between CBDCs is an objective of critical importance.
Banque de France has explored those international aspects empirically in its experiments, by
implementing various configurations for multi-CBDC arrangements. In particular with the
Monetary Authority of Singapore, where we simulated cross-border transactions involving
multiple CBDCs on a common network between Singapore and France. We have also been
working with the Swiss National Bank, the BIS Innovation Hub or the Banque Centrale de Tunisie.
A lot of work is still necessary in this very promising field, and I am looking forward to
strengthening our cooperation in that area with our partners worldwide. In particular, Banque de
France will be keen to follow closely the very stimulating work conducted by the BIS Innovation
Hub with MAS and our fellow central banks from Malaysia, Australia and South Africa on
developing prototype-shared platforms for cross-border transactions using multiple CBDCs
("project Dunbar").
So we have much work to achieve together. I wish you an excellent Fintech Festival and I look
forward to our common realizations.
Thank you for your attention.