Yannis Stournaras: Assessing the impact of digital finance on
financial and economic integration - risks, opportunities and
challenges for central banks
Speech by Mr Yannis Stournaras, Governor of the Bank of Greece, at the 2022
Conference of Mediterranean Central Banks "Building resilience in uncertain times:
safeguarding financial stability, encouraging investments", jointly organised by the
Central Bank of the Republic of Turkey, the Organisation for Economic Co-operation
and Development (OECD), the European Institute of the Mediterranean (IEMed) and
the Bank of Spain, Istanbul, 31 October 2022.
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Ladies and gentlemen,
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It is a great pleasure and honour to participate in the 7 Annual Conference of
Mediterranean Central Banks to discuss the critical topic of building resilience in the
financial system. Resilience is key, especially during these uncertain and challenging
times, which combine heightened inflation and increased debt levels, market volatility
and high energy prices due to the war in Ukraine, as well as intensifying climate related
risks. In this demanding environment, we need to encourage financial markets to
flourish and support our economies in a way that fosters economic integration and
strong cooperation.
In this session, I will focus on a topic that has demanded our attention in recent years,
that is the evolution of digital finance. How has it impacted the financial system? What
are the benefits it has brought alongside risks? What challenges are we facing, or are
we soon bound to face? I will share some thoughts on the stance that central banks and
regulatory authorities may take to overcome these challenges.
Beyond any doubt, almost every aspect of our everyday life is becoming increasingly
digital. It is no wonder that financial services follow this global trend. Consumers and
businesses access financial services digitally, market participants are deploying new or
existing technologies in innovative ways, incumbent firms' business models are being
transformed, and data is becoming a key asset for innovation, alongside IT
infrastructure. n 2020, acknowledging the importance of these trends, the European
Commission published its Digital Finance Strategy. Its key objective is to embrace
digital finance for the benefit of consumers and businesses.
Digital transformation offers benefits and opportunities that can have a positive impact
on financial and economic integration across borders, creating links between
economies both at regional and at global level:
Economic processes, such as supply chains, benefit from increased efficiency
gains. Certain processes which took weeks or even months in the past may now
be completed in hours or days. Payments have become faster, acting as a major
building block for e-commerce, especially during the pandemic.
Digital finance can strengthen competition and the supply of innovative products
and services. Businesses in smaller countries can penetrate neighbouring and
international markets and obtain financing for their innovative ideas.
Financial technology (FinTech) ecosystems can function as incubators for
cooperation between incumbents and start-ups, benefiting all participants across
financial sectors and facilitating capital flows.
The level of remote and ubiquitous access to services is unprecedented, as
individuals and businesses use applications to access accounts in financial
institutions which may be located in a different country. Application stores of
BigTech companies, such as Apple and Google, list financial tools for lending,
trading or crowdfunding, often oblivious to where the companies offering the tools
are established.
Lower demand for physical infrastructure reduces operating costs for financial
entities, which may divert funding to new sources of revenue across borders, as
well as to attracting talent to work remotely. Remote work has become a norm for
certain types of financial institutions, establishing a "digital nomad" culture.
Emerging economies may also benefit from digital finance. In certain cases, all it
takes to access payments is an account with a mobile operator, serving even
unbanked citizens across borders.
Stablecoins, crypto-currencies whose price is pegged to a reference asset (such
as the US dollar), can offer several benefits such aslower-cost, safe, real-time,
and more competitive payments compared to what is on offer today.
Finally, as we all know, a number of central banks are investigating the design
and implementation of central bank digital currencies, CBDCs, in order to
strengthen monetary sovereignty and enhance wholesale and retail payments
based on central bank money. On the one hand, wholesale CBDC discussions
revolve around upgrading existing central bank infrastructures in the settlement of
interbank transfers and related wholesale transactions in central bank reserves, to
make them safer and more efficient. On the other hand, retail CBDCs can enable
individuals and businesses to hold central bank money and use it for payments,
complementary to cash, while enabling traditional intermediaries to offer
innovative new products built on CBDCs. In the future, CBDCs may even co-exist
with stablecoins, like central bank money co-exists nowadays with commercial
bank money.
Against this backdrop of innovative technologies combined with financial services to
form what we call "digital finance", regulators and supervisors are responsible for
ensuring the smooth functioning of the markets within their respective mandates and for
safeguarding financial stability. Innovation can bring about major changes in the way
businesses operate. However, these changes may create new risks or amplify existing
ones. These risks relate to specific aspects of technologies or their application, and in
certain cases can effectively be mitigated only with concerted and multi-jurisdictional
effort.
First and foremost, heavy reliance on technological infrastructures exacerbates
cyber security and data protection risks. This year's ESRB report on Mitigating
systemic cyber risk, highlighted very accurately that the cyber risk landscape is
constantly evolving, attacks become increasingly sophisticated, and potential
targets may easily span sectoral and geographical boundaries. Currently,
authorities at national and international level, including the ESRB, the FSB and
the IMF, are investigating the concept of "systemic cyber risk" as a potential threat
to financial stability. Building cyber resilience, cooperative oversight and crisis
management frameworks are top priorities for financial authorities worldwide.
Cryptoassets and decentralised finance, commonly referred to as DeFi, have also
raised concerns among supervisory authorities with respect to financial stability,
market integrity, investor and consumer protection and anti-money laundering.
Assessing the relevant risk exposure of markets and institutions, as well as
potential contagion across borders, is a difficult task that requires extensive
enhancement of central banks' monitoring capabilities.
Another concern, from a cross-border financial stability perspective, is the
overreliance of financial sector entities on a limited number of third-party providers, for
outsourcing or technology provision purposes. This is particularly relevant in the
context of transition of critical infrastructures and services to the cloud, which may
lead to concentration, business continuity and data governance risks. In the case
of BigTech providers with global footprint, coordinated oversight becomes crucial.
Artificial intelligence, including machine learning, equips financial entities with
tools which enhance their capabilities and provide sophisticated mechanisms for
decision making and forecasting, fraud and cyber threat detection, risk
management, market surveillance and regulatory compliance. Nevertheless, they
may introduce risks with respect to the explainability of the output of artificial
intelligence models, as well as biases and inaccuracies based on the input data.
The need for a common approach to evaluating artificial intelligence - based
solutions in integrated markets becomes increasingly prominent.
Mitigating these risks is a constant and complex challenge for regulators and central
banks. Let me focus on four challenges and how they can be overcome:
The first is understanding digital finance fundamentals . In order to formulate
policy and fulfil our supervisory and regulatory mandate, we need to fully grasp
the intricacies of digital finance and the way it affects business models and risk
profiles. This requires knowledge, experience and talent. Innovation facilitators,
such as innovation hubs and regulatory sandboxes, help towards building the
relevant capacity. It is important to promote collaboration among those facilitators
in order to reap greater benefits. Two great examples in this area are the
European Forum for Innovation Facilitators and the Global Financial Innovation
Network, which have contributed to information sharing on the regulatory
treatment of digital finance innovations and set up frameworks for the
crossborder testing of such services.
Second, we need to address regulatory gaps . Crypto assets and decentralised
finance, artificial intelligence, as well as cyber threats, have highlighted the
limitations in the existing regulatory framework. In certain cases legislation is
fragmented; in other cases there are outright regulatory gaps. For example,
stablecoins, which could play an important role in the future of finance, have the
potential to be all but "stable" unless appropriate regulation is in place. In order to
overcome the above challenges, we need to adapt our supervisory and regulatory
stance. The European Commission initiatives for the Digital Operational
Resilience Act, and the Market in Crypto Assets Regulation, are prime examples
of regulatory reform aiming to tackle this issue. Other jurisdictions have engaged
in similar activities. The oversight of cross-border entities will require intensified
monitoring and cooperation at international level. Allocating resources to this effort
is crucial.
Third, we need to alleviate obstacles to financial market growth . We can
address this challenge by supporting the smooth integration of digital finance into
the economy in sustainable ways. Facilitating the establishment of FinTech
ecosystems at national and international level is key. Authorities are already
pursuing this objective, especially in Asia. This will create network effects and
encourage investments and successful partnerships. Removing obstacles to
cross-border payments, as highlighted by the Financial Stability Board, promoting
targeted government actions in our jurisdictions and fostering transition to "green"
digital services will also be key activities to overcome this challenge.
Last but not least, we need to overcome our own efficiency and adaptability
limitations, to keep abreast with all the technological advances in the market. To
do this, we need to increase our own technological footprint and infrastructure
capabilities. Central bank digital currencies (CBDCs) have the potential to enable
safe retail and wholesale payments with central bank money. This will affect
citizens across borders. Careful design of CBDCs and their distribution models
will address disintermediation concerns. Issues such as the cross-currency
payments in CBDC and the potential of foreign users gaining access to domestic
CBDC merit discussion at international level. Furthermore, as mentioned in a
recent BIS report, liquidity bridges for cross-border payments across central
banks may improve the efficiency and effectiveness of the global liquidity pool of
banking groups operating in several currencies, and reduce the opportunity costs
associated with holding liquidity buffers in multiple currencies. Upgrades to central
bank operated market infrastructures, potentially in the form of interoperability with
distributed ledger solutions, may also enhance the uptake of digital finance in
regulated crypto services. Finally, the adoption of supervisory technology, or
SupTech, will help us modernise our interaction with supervised entities and
revolutionise on-site and off-site auditing capabilities.
Let me conclude by saying that the evolution of digital finance is continuous and rapid.
Keeping up with this speed in the four aforementioned challenge areas will be very
demanding. Joining forces and sharing experience as frequently as possible, as we are
doing now in this conference, will help us safeguard financial stability and underpin
growth in increasingly integrated financial markets.
Thank you.