Speech
Embargo
5 April 2018, 6.00 pm
The financial markets in changing times
Changes today and tomorrow: the digital future
Money Market Event
Andréa M. Maechler
Member of the Governing Board*
Swiss National Bank
Zurich, 5 April 2018
© Swiss National Bank, Zurich, 2018 (speech given in German)
*
The speaker would like to thank Nino Landerer, Andreas Wehrli, Carolin Reiss and Claudia Aebersold Szalay for their support in drafting
this speech, and her thanks also go to Giuseppe D'Alelio, Rita Fleer, Adriel Jost, Sébastien Kraenzlin, Susanne Mühlemann, Nicolas
Stoffels and SNB Language Services.
Ladies and Gentlemen
In his speech, my colleague Dewet Moser has demonstrated how being open to innovations
can pay off. However, he also underscores the point that it is entirely appropriate to carefully
examine their purpose and the benefits they offer. I would now like to apply this scrutiny to
the fintech innovations that are currently attracting a great deal of attention among the general
public and in the financial industry.
Bitcoin is one of the most talked-about topics at present, and the hype that has built up around
cryptocurrencies in general is considerable. It is estimated that well over 1,000 of these
currencies are in circulation today. If you search the internet for the word 'bitcoin' you will
find more than 300 million entries. By contrast, the term 'Swiss franc' generates just over 30
million hits. Furthermore, bitcoin has a very modest market capitalisation by comparison with
conventional currencies and investments, as we can see in the left-hand chart on the slide 1.
This highlights the marked difference between the level of public interest and the actual use of
cryptocurrencies.
Alternative private currencies are nothing new. We need only think of WIR money, or
regional currencies in French-speaking Switzerland such as the léman and farinet. In the
digital era, such currencies can be created more or less at the click of a mouse. Despite their
name, however, cryptocurrencies are not comparable with money - far from it. Money has to
fulfil several fundamental functions. It should serve as a viable medium of exchange in the
economy, that is to say it must be widely accepted as a means of payment. It also has to be a
stable unit of account for the value of the goods and services that are exchanged. And it
should also be used as a long-term store of value, for example for saving. Cryptocurrencies
such as the much-discussed bitcoin do not perform these functions adequately, if at all.
Trust is the very essence of a stable currency. This trust cannot evolve without a solid
framework, including a state governed by the rule of law, a sustainable economic and fiscal
policy, and also an independent central bank. Cryptocurrencies that have no link to a
conventional currency (the Swiss franc for instance) display a high level of price volatility.
They are more of a speculative investment instrument than a means of payment capable of
retaining its value. The chart on the right-hand side of the slide illustrates this. Compared with
exchange rates, commodities and equities, cryptocurrencies are subject to very high volatility,
and investors must be aware of the financial risks they are taking on when buying them.
Cryptocurrencies therefore do not meet the requirements of a currency. However, this does
not mean we can simply dismiss them out of hand, for behind all of the hype there is an array
of technological innovations. Particularly important among these is the distributed ledger
technology, known as DLT for short and often also referred to as blockchain. In other words:
it is important to make a clear distinction between cryptocurrencies as assets, and the
underlying technology, which does indeed have potential.
DLT could facilitate solutions in various areas of the economy that would enhance the safety
and efficiency of digital information flows. A distributed ledger is essentially a decentralised
and synchronised database that allows participants to read, write and save information. DLT
makes it possible to unequivocally define ownership structures within a computer network,
without the need for a central third party. These facets also give rise to interesting possibilities
for the financial sector, and DLT is therefore regarded as one of the biggest innovations in the
fintech area.
Today I would like to look at the effect fintech innovations could have on a key element of
the financial system, namely the financial market infrastructure. The financial market
infrastructure, FMI for short, comprises trading platforms, securities settlement systems and
payment systems via which financial transactions are conducted electronically. The FMI is
generally not in the spotlight. Nevertheless, both the financial sector and the Swiss economy
as a whole depend on a secure and efficient FMI. The SNB monitors developments in this
area very closely given that facilitating and securing the operation of cashless payment
systems is one of its statutory tasks.
In this speech I will be discussing the significance of fintech for the financial market
infrastructure. First, I will address DLT's potential in the FMI. Second, I will be talking about
the tried-and-tested division of roles between the central bank and commercial banks. I will
look at how this two-tier system paves the way for harnessing fintech innovations that could
enhance efficiency, while ensuring that this is not to the detriment of either safety or
reliability. Third, using the example of retail payments, I will show that there is a lot more to
fintech than just DLT, and that private sector players are much better suited to providing
timely solutions and flexibly addressing the needs of customers in this area. And finally, I will
take a brief look at digital central bank money for the general public, a subject currently
generating a lot of debate, and will outline why there is no need for it if the system for
cashless retail payments is efficient and innovative.
The potential of DLT for the FMI
So let me begin with the potential that DLT has to offer for the FMI. The FMI is the bedrock
of our financial system, facilitating the reliable transfer of securities and money between
buyers and sellers.
The slide 2 shows a simplified FMI process chain for the settlement of a securities
transaction. Transactions are first made via a trading platform, for instance a security is
bought on the Swiss Exchange. This purchase is then cleared and settled. Security and money
are simultaneously transferred between buyer and seller. In Switzerland, this takes place via
the securities settlement system SECOM and the payment system Swiss Interbank Clearing,
or SIC for short.
It is entirely possible that distributed ledger technology could take hold in various fields. I
would like to look here at two possible areas of application: securities settlement and
crossborder payments.
One of DLT's key characteristics is that it makes verified information available to a large
number of parties simultaneously. It is therefore particularly appealing in the case of complex
processes where coordination is required across a whole range of participants. This is the case
in the securities business, which comprises a network of many different participants trading,
settling and managing securities. Examples of these market participants - brokers, banks,
settlement service providers and custodians - are shown on the slide 3. With every
transaction, a wide array of booking information has to be reconciled bilaterally between the
parties involved For example, banks have to reconcile and monitor their securities
(slide 4).
holdings at custodians against their own internal accounts. The coordination requires
considerable effort, which in turn leads to high operating costs. DLT could help in this regard
by ensuring that all of the involved parties have the same information at the same time. The
slide 5 illustrates this step. Thanks to the synchronised distribution of information, the
aforementioned, highly complex reconciliation would no longer be necessary.
The potential for efficiency gains is indeed considerable, which is why extensive research is
now being conducted in this area. And innovations that enhance the efficiency of the financial
system or the economy as a whole are certainly worthy of closer inspection. The Australian
Securities Exchange ASX, for example, has recently announced that it is to use DLT in
redeveloping its core system for clearing and settling of equity transactions and recording
shareholdings.
In addition to the securities business, potential uses of DLT are also being envisaged in the
field of cross-border payments. The latter are slow, costly and lacking in transparency
compared with domestic payment transactions, and so the potential for efficiency gains is
particularly high. Certain central banks - those of Singapore and Hong Kong, for example -
are now focusing on this, as are private initiatives. Should the anticipated advantages
materialise, the attendant efficiency gains would be substantial. That said, for both of these
potential applications there are high barriers that have to be overcome in order for new
solutions to be implemented in practice and find their place in the market. The current
ecosystem comprises a large number of stakeholders, who would have to adapt their systems
and processes. The high level of investment this entails is curbing the pace of developments,
as are the technical and legal questions still to be resolved.
Tried-and-tested division of roles between banks and central banks
What is the SNB's take on these developments? We welcome innovations that enhance the
efficiency of processes. But while the initial experiments have been promising, there is still a
long way to go before market-ready DLT solutions become a reality in the FMI. DLT has still
to prove that the hoped-for efficiency gains can actually be delivered in practice. Furthermore,
simply enhancing efficiency alone is not enough. Such gains must not come at the expense of
the availability and resilience of the systems or the integrity of the data. This applies
especially to those parts of the FMI that are systemically important. Here we set the highest of
standards when it comes to stability and security.
The secure settlement of large-value payments is a prerequisite for the stability of the
financial system. Financial transactions, which as a rule involve substantial amounts and are
time-critical, are of great significance for the real economy. This is why it is so important to
have the settlement of large-value payments as a reliable foundation.
To avoid risks with regard to payments in this systemically important segment, there needs to
be a risk-free payment instrument. Today, time-critical, large-value payments in a currency
area are therefore usually settled in central bank money and via central banks' payment
systems, referred to as real-time gross settlement systems or RTGS for short. Switzerland's
RTGS system is Swiss Interbank Clearing (SIC). An RTGS system ensures that payments are
made when - and only when - there is sufficient money on the account of the paying bank. If
there are adequate funds to cover the payments, they are settled irrevocably and in real time.
This assures the safety of the settlement process. Using central bank money also eliminates
the risk of default by the settlement institution. Central banks can provide additional liquidity
if required at any time, and also serve as the lender of last resort. In this way, they ensure that
there is a reliable foundation for the FMI. This has proved effective to date, and also stood up
well during the financial crisis.
Could DLT also be used in RTGS systems in the future, i.e. as part of the reliable foundation?
We see a number of questions that are still to be resolved here. The technology itself does not
yet meet the requirements expected of the RTGS systems in terms of scalability, data security
and reliability. Modern RTGS systems such as SIC are already demonstrably efficient and
crisis-resilient. In this area, a payment system not only has to prove its efficiency; the
reliability of the RTGS systems is also absolutely crucial for the stability of the financial
system. New technologies therefore have to meet very high standards in this respect.
However, it is quite possible that DLT may take hold in other areas. If DLT were to become
established in the securities business, for example, these systems would be linked to the
reliable foundation in some manner or other. It is hard to envisage DLT-based system
environments developing in isolation.
So the next question is what form the coexistence of new DLT solutions and conventional
RTGS systems might take. There are different scenarios. One possibility would be a simple
technical interface between the DLT system and the existing RTGS system, as illustrated on
the Payment instructions would be exchanged via this interface, in much the same
slide 6.
way as the current solution between SECOM and SIC. However, direct
delivery-versuspayment settlement would require certain adjustments, for example to the opening times and
participant structure of both systems.
A second and more far-reaching possibility would be to integrate the cash leg into the
DLTbased infrastructure. This could be achieved by having the private operators of this
infrastructure issue a 'settlement token' on the DLT system, with the securities then being
settled against these tokens. An initiative launched by a consortium with Swiss participation is
working on such an approach under the project name 'Utility Settlement Coin'. This example
shows how a market solution could ensure cash-side settlement of securities on the distributed
ledger. This scenario is outlined on the Such a privately issued settlement token
slide 7.
would be equivalent to commercial bank money, and fully secured by central bank money.
However, it would also be possible in principle for central bank money to be tokenised for the
settlement of interbank transactions. Central banks in some countries - Singapore among
them - are conducting experiments to gain a better understanding of the associated risks. As
you can see on the slide 8, this is similar in concept to the previous option. However, there are
a number of questions still to be answered in this respect as well.
As you can see, there would be various forms that this coexistence could take. What is crucial
is that the safety and reliability of the FMI be maintained. The central bank has an important
part to play in the reliable foundation, that is to say with regard to payments in the RTGS
system. Around this solid foundation, however, it is the market that has the main role. Here it
is the commercial banks and other private sector stakeholders that choose the best
technologies and solutions.
The division of roles between central banks and commercial banks results in a good balance
between safety and efficiency. At the first level, the central banks facilitate the settlement of
interbank transactions on secure systems and in electronic central bank money. In so doing,
they minimise the risks in the systemically important segment of payment transactions,
beyond which the risks can be borne by the market. At this second level, settlement can take
place via alternative channels, without necessarily having to be based on central bank money.
This division of roles between central banks and commercial banks epitomises our current
two-tier financial system. In the first tier, the central bank acts as the banker to the banks. In
the second tier, the commercial banks act as the interface to the end customers. And it is the
competing commercial banks that decide which services they want to provide for companies
and private individuals. This system is efficient and proven.
There is much more to fintech than just DLT
In connection with fintech, I have so far focused mainly on DLT. However, there is of course
much more to fintech than just DLT. In addition to DLT, a whole array of promising
innovations could potentially be applied to traditional financial services. We need only think
of mobile payments, robo advisers, crowd lending or big data. The multifaceted interplay of
ever greater processing power and storage capacity, together with the increase in the mobile
use of services, are opening up entirely new business areas. This is also reflected in the large
number of different business models currently represented in the Swiss fintech industry. The
shows the different business models in Switzerland. Only 15% of the enterprises
slide 9
within this segment are focusing on DLT, while the remainder are spread across other fields
of application.
One of the key areas for fintech is retail payments, i.e. payment transactions for companies
and private individuals. A well-functioning system of payment transactions for end customers
is a key pillar in any efficient economy. This payments area is undergoing a period of rapid
technological change.
As with all fintech innovations, the primary focus is on the user-friendliness and speed of the
services offered. Technological advances have led to marked changes in consumer
expectations and requirements. Consumers want payment services to be ever faster and more
user-friendly, and they want to be able to use them wherever they may be. End consumers
these days are asking why it should take them longer to make a cashless payment than to send
a WhatsApp message. As elsewhere, customers expect immediate service when it comes to
payment transactions, and demand round-the-clock availability as well.
To satisfy these demands, fintech companies and banks are working on new solutions, such as
new applications, functionalities and services. Examples include linking the payment
application to retailers' customer programmes, or cross-institutional analysis and visualisation
of end customers' payment data. Experiments are being conducted in China on linking face
recognition technology and payment transactions, opening up the possibility of making
payments in the future by smiling into the seller's camera. In this process of innovation, it is
of course essential that the key questions relating to aspects such as misuse or criminal usage
as well as the protection of customers are addressed effectively and coordinated
internationally. It is therefore important that the same business models with the same risks be
subject to the same regulation.
As part of its statutory mandate, the SNB also has a role to play when it comes to innovations
in the field of cashless payments. Specifically, it is the commissioning party and system
manager of SIC. At infrastructure level, the latter's function is to offer the most attractive
framework possible for a cashless payment system that is fast and ensures high availability.
The SNB works together with stakeholders on the ongoing development of the SIC system.
One year ago, for example, the operating hours of this system were adjusted at the request of
the participants.
However, end customers' needs in respect of payment transactions are best met by private
sector solutions. Here, too, the advantages of the two-tier system come into play. The
slide 10
illustrates the point, taking payment transactions as an example. As I explained earlier, the
SNB as the bankers' bank ensures that there is a reliable foundation for the settlement of
payments. In the retail payments space, financial services providers use this as a platform for
delivering their services to customers, doing so in competition with one another. Operating on
these two levels, this system ensures that the financial sector remains agile and safe, and that
the best ideas can thus take hold in the market without this compromising the systemically
important segment.
Digital central bank money - few advantages, significant risks
Ladies and Gentlemen, before I sum up I would like to say a few words on the subject of
digital central bank money for the general public. A more prominent role for central banks in
the end customer segment is currently being discussed, involving this and other associated
terms such as 'cryptofranc' and 'e-franc'. However, we are convinced that private sector
solutions are better suited for meeting end customers' needs in this area. Digital central bank
money for the general public is not necessary to ensure an efficient system for cashless retail
payments. It would deliver scarcely any advantages, but would give rise to incalculable risks
with regard to financial stability by calling into question the tried-and-tested two-tier system.
Instead of operating as the bankers' bank as it does today, the SNB would be acting as a
commercial bank for end customers. This would exacerbate the threat posed by bank runs in
times of crisis. Moreover, Switzerland would be alone in adopting such a solution: no other
central bank has implemented such a solution to date.
This brings me to the end of my speech. Please allow me to briefly sum up the key points.
Conclusion
I hope I have been able to demonstrate clearly why cryptocurrencies are not genuine rivals to
conventional currencies. That said, the underlying distributed ledger technology does indeed
have potential, especially in complex areas such as securities settlement and cross-border
payment transactions. Nevertheless, the technology still has to prove itself in practice.
As well as being efficient, DLT-based solutions must not give rise to any systemic risks in the
financial market infrastructure. In the systemically important segment of cashless interbank
payments, the SNB plays an active role by providing a reliable foundation. Any future
DLTbased systems will have to be linked with the latter in some form or other.
In turn, in the area of cashless retail payments, the private sector is better placed to address
customers' needs. The division of roles between the central bank (as the bankers' bank) and
commercial banks (as the interface to the end customers) has certainly proved its worth over
the years. This brings me to an important conclusion: If cashless payment transactions are
efficient and innovative, there is no need for digital central bank money.
What is important is that we remain agile. Our existing set-up contributes to the stability of
the financial system, while at the same time allowing sufficient leeway for innovation. This
can be said of both the financial market infrastructure and the two-tier financial system as a
whole. In safeguarding this stability, we should nonetheless remain open to new
developments.
The SNB will continue to keep a close watch on developments to ensure that we are always
able to assess their potential impact on the financial system in good time. Flexible and safe
solutions often evolve from cooperation between market participants, regulators and central
banks. So let us shape the digital future together.
Thank you for your attention.
The financial markets in changing times
Changes today and tomorrow: the digital future
Andréa M. Maechler, Member of the Governing Board
Zurich, 5 April 2018
low market capitalisation, high volatility
Cryptocurrencies:
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price
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30-day
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Realised
USD:
Sources: * ***
Financial market infrastructure: bedrock of financial system
Trading platform
Trading platform
(Swiss Exchange)
Trade
Securities settlement
Securities settlement
(SECOM)
Settlement
RTGS payment system
Financial market infrastructure: linking market participants
Trading platform
Broker
Trade
Bank
Securities settlement
Settlement service
Settlement provider
Custodian
RTGS
SNB
Source:
Central bank
Today: complex centralised and bilateral reconciliation
Trading platform
Seller
Buyer
Trade
Bank
Securities settlement
Settlement service
Settlement provider
DLT: decentralised and automated synchronisation
Trading platform
Broker
Seller
Buyer
Trade
Bank
Securities Securities settlement settlement
Settlement service
Settlement provider
Coexistence: message exchange via interface
Trading platform
Broker
Seller
Buyer
Trade
Bank
Securities settlement
Settlement service
Settlement
provider
Coexistence: settling payment leg using private token
Trading platform
Broker
Seller
Buyer
Trade
Bank
Cash
Securities settlement
Securities
Settlement service
Token provider
Coexistence: tokenisation of central bank money
Trading platform
Broker
Seller
Buyer
Trade
Bank
Cash
Securities settlement
Securities
Settlement service
Token provider
Fintech: more than just DLT
SWISS FINTECH INDUSTRY (220 COMPANIES)
DLT
15%
22%
Payments
12% Deposits & lending
12%
Investment management
2018
15%
Study
Analytics
Fintech
24%
IFZ
Banking infrastructure
Source:
9 5 April 2018 Money Market Event | Andréa M. Maechler | © Swiss National Bank
Two tiers: allowing flexible market solutions for end customers
RTGS
SNB
Source:
Central bank
Thank you for your attention.
© Swiss National Bank