||Central Bank Of Barbados
I would like to warmly thank the organizers of this forum for inviting the
Central Bank of Barbados to give a few remarks on the rapidly evolving world of
Fintech. It is not often that central banks are immersed in what can be
considered as ‘ground-breaking’ or ‘evolutionary’ financial developments. On
that score, let me express my gratitude to our host for being able to speak to
you this afternoon.
recent time the ‘hype’ surrounding distributed ledger technology and Fintech
solutions has been evidenced by the explosion in the number of Google searches
being conducted on these keywords. This
trend, and even today’s forum, reflects the increasing dominance of Fintech,
supported by the billions of dollars being poured into Fintech research and
development across the globe. Let us first remind ourselves that distributed
ledgers at its core, is a computer protocol that allows many participants to
record information on a single ledger that is shared among users, so each one
sees the same data. The best-known application of distributed ledgers is
Bitcoin, which is a decentralized digital currency that is an internet-based
medium of exchange. I want to draw the distinction between this and other forms
of Fintech, which is broadly defined as the application of computer programmes
and other technology used to support or enable financial services.
are three key differences that we need to be cognisant of related to recent
innovations in Fintech, compared to prior technological improvements:
first being the fact that today’s Fintech is being more heavily driven from
outside of the financial landscape, as opposed to being led by the
traditional market intermediaries.
Companies such as Apple and Google via Apple Pay and Google Wallet are
responding to customers’ demands and aiding the advancement by offering lower transaction
costs and more convenient personalised services that leverage the use of
smartphones and speedy settlement. All of these are closely aligned with the
desire for and expectation of instantaneous access to goods and money. Whereas
historically financial innovation in retail financial services resulted in the
traditional banking intermediaries remaining dominant players and adopting the
technology to suit their needs, this is
no longer the case for some of the new technology, which sets the stage for a
definitive shift that no central bank can ignore.
second difference is that the invention of
distributed ledger technology is now driving the necessity. Unlike Plato’s
saying “Necessity is the mother of
invention”, institutions and firms are now searching for, and discovering
new ways by which distributed ledger technology can be applied to their
day-to-day operations. It
is important to also note that not all Fintech innovations aimed at enhancing efficiency
are driven by distributed ledger technology.
third difference – the Millennials.
According to the Millennial Disruption Index, a third of Americans ages 15-34
years old believe that they will not need a bank in the next five years.
these factors, when the term financial evolution is used, the possibilities are
more far reaching than before.
What is the initial response of the
Central Bank of Barbados to exploring this shift? We
are paying close attention to developments and our evolving role in this
paradigm. As issuer of the nation’s currency with responsibility for monetary
policy execution and financial stability, our aim is to establish and nurture a
financial ecosystem that is supported by sustained collaboration between financial
institutions, us the regulator, Government, and entrepreneurs. Of course for
this ecosystem to thrive, it is imperative that each participant clearly
understands its role. Just last year, the level of engagement required was
aided by our then Governor, Dr. DeLisle Worrell, when the Central Bank of
Barbados hosted Dr. Simon Johnson of the MIT Sloan School of Management, to
facilitate discussions with stakeholders on the potential implications of
digital currencies and financial innovation.
must implement and enforce policies that foster a regulatory environment that
will engender the development of the financial ecosystem. Deepening the level
of financial digitisation has the potential to bolster settlement efficiency,
encourage entrepreneurial activity and to improve the country’s overall
competitiveness. It is our hope that regulation in this context is not viewed
as a hindrance, particularly since it is necessary to engender trust and
confidence among financial market participants and to build resilience.
In the early 2000s, our Central Bank advanced
its real-time gross settlement (RTGS)
payment system and the Automated Clearing House, which are
critical pillars of our market infrastructure. We remain committed to the modernisation
of the payments system and to facilitating increased use of technology in the
financial market. In this context, the Central Bank is willing to examine Fintech
initiatives that may increase financial settlement efficiency. The
Central Bank has formulated internal working groups to critically examine
varied aspects of the electronic payments evolution and to embrace the enabling
requirements for payments efficiency. The focus of these groups is as follows:
Review of Financial Legislation & the Regulatory Framework
is aimed at adopting the level of regulation required to provide adequate
oversight of unregulated entities that are growing in prominence and engaged in
offering new Fintech products.
of the Payments Infrastructure
modernise the payment system to address the issue of persons wanting more
immediate access to their money and reduced clearing times. This is inclusive
of enhanced data imaging, cheque truncation, and retail and large-value payment
settlement. Given the need for a more analytical focus, we also need to collect
more granular data on transactions to allow market participants and regulators
to better understand customers’ behaviour, so as to deepen the innovation in
Framework for Fintech
Central Bank’s main goal is to understand and assess the mechanics, limitations
and possibilities of new technologies, especially as we review options for
modernising our own payment system architecture. This framework is aimed at
keeping the Central Bank abreast of developments and to leverage lessons that
can be learnt from other emerging-market economies that have made greater
progress in many respects. For example, India has bio-metric identification
cards linked to e-accounts and in Kenya, social security benefits are received
on smart phones. What institutional agreements, access to consumer information
and security protocols were required for these types of initiatives? Should we
envision a reality where countries migrate to a system where all citizens are
issued with e-wallet accounts, to promote e-payments for financial transaction
involving government? How should these accounts be backed by central banks and
should they accrue interest?
the Central Bank, other critically important questions to be explored include: How can this new technology enable the further
digitalisation of our economy? What role does Government and regulators need to
play? At this defining moment for innovation in financial services another
very popular question is, “Do distributed
ledgers represent an evolution or revolution?”
frame our thinking, we need to also touch on two follow-on questions:
- Is this change likely to be
- What is yet to be determined about
this new technology?
for distributed ledgers suggest that the technology could create disruption
within the financial services industry by making processes more efficient,
whether related to cross-border payments or digital identities, making it the
next biggest innovation since the Internet. From a regulatory perspective,
distributed ledger technology can be especially effective in the reduction of
fraud and anti-money laundering efforts, since several industry observers
believe that illegal transactions continue to thrive in the current system,
despite the anti-money laundering and combating financing of terrorism
present, the majority of banking systems are housed on centralized databases,
making them more susceptible to cyber-attacks since all the information is
stored in one place, and some banking systems are out-dated and susceptible to
new forms of cyber-attacks. Given that the distributed ledger technology
stores, encrypts and verifies every single bit of data in a transaction, any
data breach, fraudulent activity, or trades with flagged entities would be made
immediately obvious to all parties who have permission to access the data on
the ledger. This is especially pertinent since data stored on a blockchain is
immutable and irreversible therefore the risk of duplication or errors would be
greatly minimized. Furthermore, regulators would quickly realize the benefits
of easily auditing and tracking all financial transactions.
studies have determined that by employing the use of distributed ledger
technology for Know Your Customer (KYC) requirements, banks would not only
reduce operational and compliance costs, but also increase the efficiency of their
compliance processes. Using the technology, access to KYC data can be shared by
banks and accredited organizations would have no need for a duplicated KYC
process. Ironically, a Goldman Sachs
report noted that a 10% reduction in staff could be achieved with the
introduction of blockchain technology in KYC procedures, which would equate to
US$160 million in annual cost-savings.
the response to that very popular question,
“Does distributed ledger technology represent an Evolution or Revolution?” really depends on who you are asking. From the
Central Bank’s perspective, it is more of an evolution that is likely to transform
our financial landscape. The role of the Central Bank in this process is
acknowledged as being focused on maintaining financial stability and promoting
economic development. This requires that we foster innovation by working
together with key stakeholders, to ensure a smooth transition to tomorrow’s
evolving financial system in a safe and sound manner, supported by the
requisite due diligence and regulatory reviews of new market entrants.
How can this new technology enable the
digitalisation of our economy and what is yet to be determined?
response to the tremendous potential benefits before us, central banks must be
open-minded and think outside of the box, while seeking to understand the inherent
risks so as to acquire clear approaches to containing these risks. In this
regard, the Bank of England (BOE) has been in the vanguard of the evolution of
digital currency. In March of this year, the BOE launched its Fintech
Accelerator Programme which aims to share developments, trends and insights, to
ensure that the BOE is engaged with different Fintech firms and to enable firms
with an interest in Fintech to network with a view to supporting the
development of the sector. To this end, they recently tested the use of distributed
ledger technology, which aims to make cross-border payments and the movement of
currencies more immediate. The BOE has also collaborated to test an artificial
intelligence system that allows for detecting abnormalities in financial
transactions and for analysing the quality of regulatory data input, as well as
recently disclosing its forthcoming version of a real-time gross settlement
(RTGS) payment system that will be compatible with distributed ledger
mode of experimentation by central banks is reflected across the globe. In China
research and trial runs on the prospect of issuing its own digital currency have
not only been conducted, but a Digital Currency Institute has been established with
a research focus on the use of distributed ledger technology and Fintech.
note, a recently published BIS study posited the view that whereas cash is the
only means by which the public presently holds central bank money, in the
future central banks will probably have to decide whether to issue retail or
wholesale central bank cryptocurrencies. The Cambridge Centre for Alternative
Finance indicated that 20 percent of central banks surveyed expect to be using
blockchain technology by 2019. If central banks issue cryptocurrencies, it
allows the public to hold these liabilities in digital form. This raises the
concern of universal accessibility and whether central banks’ settlement
accounts should remain available for a limited set of entities, namely banks, or
more widely accessed by individuals? Beyond these types of decisions, the consensus
by the major central banks that have tested these operations is that
distributed ledger technology is not yet mature enough for current adoption.
Furthermore implications for monetary policy, payment execution and net
clearing and settlement – are yet to be fully assessed. In reality, no one yet knows what the social
and economic payoffs to these realities will be.
is conceptually interesting to fathom an alternative future, such as one in
which there is complete disintermediation of banks and even central banks, with
state currencies being replaced by decentralized digital currencies. However,
the reality is that some form of cash is still likely to be retained, since it
allows for reliable ‘redundancy’ support. At a recent forum a very vivid
example was provided, “…even though we have the benefit of LED lights and
energy efficient appliances, when the electricity goes off, we resort to
candles and flashlights.” The reliance on cash is no different, as we were
recently reminded in the face of our regional neighbours’ natural disasters,
when there was mobile phone connectivity or access to online banking services.
In short, digital currencies still have a competitive disadvantage as a store of
value and medium of exchange, compared to traditional means. As such, even
though it is foreseeable that more central banks may issue digital forms of
their national currencies to retain monetary policy control, it is likely that
these will simply coexist with the physical form.
What else is yet to be determined? Financial
institutions, including the Canadian banks that are well-known to us, are
working hard to test and adopt new technologies and adjust to new trends. So
while the operations of the banking sector may look different in the future as more
Fintech adaptation is filtered to our local banks over time, banks will still play
a pivotal role in our financial ecosystem.
are still several developmental hurdles to be cleared for distributed ledger
technology to be more widely applied in being transformative to our system.
Some of these include:
A Sound Legislative
Base to provide adequate market
guidance and ensure that there is a level playing field for market entrants.
to ensure that the regulatory parameters are adequate to build trust by containing
risks, safeguarding financial stability, protecting market integrity through
rules that guard against money laundering and terrorism financing, provisioning
for liquidity support, financial inclusion, consumer protection, and finally compliance
with domestic and cross-border capital requirements.
Concerns require that there are
sufficient layers to prevent hacking and protect data privacy.
innovation in financial services, there must be active engagement between
authorities and the private sector. For example, the Monetary Authority of
Singapore engages in official regulatory
sandboxes, where for a predetermined period regulatory requirements are
relaxed, to allow an assessment of the impact and inherent risks of start-up
companies. This level of experimentation with technology-driven entities is
aimed at ensuring that economic opportunities are not foregone by creating the
space to explore innovation. This is something that the Central Bank of
Barbados has received a proposal for and is now considering.
closing, what is evident today is that:
in Fintech could have a net positive impact on the financial system, provided
that risks are adequately managed. Distributed ledger technology has obvious transformative
capacity but there are still important challenges to overcome.
is an evolution that presents the opportunity for financial institutions to
adapt to market demands and for new market players to join the financial
are still at the preliminary stage of exploring the adequacy of the regulatory
framework to ensure that it fits with the new realities and vulnerabilities, in
this new paradigm.
is the time for active engagement between financial institutions, new entrants
and policy-makers, in order for us to work together to create the right landscape
that can unlock the gains of new technology. This means some agreement on
governance, standards and protocols, as well as a solid legal framework to
allow for the best interoperability with existing systems in the financial landscape.
that note, I want to leave you with one other question of interest, “What do you think people will be saying
about distributed ledger technology, fifty or sixty years from now?
for your attention.