By Denis Beau, First Deputy Governor of the Bank of France (Caption: This article is a speech by Mr. Denis Beau, First Deputy Governor of the Bank of France (ie the Bank of France), at the meeting of the “Technology and Finance Association” in Paris .)
Translation / Li Jing
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Denis Beau, the first deputy governor of the French central bank, discussed the issue of European financial sovereignty in the digital boom. Here are two interesting topics. What is financial sovereignty? Why are there such concerns in Europe?
The digital wave is profoundly changing the business model of the financial industry. The most prominent feature is the penetration of large technology companies based on digital advantages (such as network effects of large customer bases, big data and data processing experience) and cash reserves, leading a market and establishing entry. Barriers have caused traditional financial companies to become heavily dependent and even disintermediated.
Although Europe has basically formed a unified market (European Union) and currency union (Eurozone), in fact, Europe has not been able to form a native Internet technology giant under the Internet tide. Its traditional Internet field has been basically used by American technology giants such as Google, Facebook, Apple, Amazon, etc. In the past, there have been some countermeasures against the penetration of these giants in Europe, such as antitrust investigations, anti-tax avoidance investigations and customer privacy protection bills, but once these giants bring their digital advantages into the field of payment and fund transfer, they are challenging traditional financial regulation. In terms of its outline and function, Europe feels that the giants are threatening their financial sovereignty: how to effectively protect user data and data control; how to enhance the ability and flexibility of the financial system to respond to cyber risks; and to face competition in the payment field of non-European companies , How to encourage pan-European payment solutions; crypto assets designed for anonymity and circumvention of regulations; how to respond to the needs of anti-money laundering / anti-terrorist financing. Although the author did not mention currency sovereignty, combined with the recent speech of the German Bundesbank executive committee, we can understand that large-scale technology companies use payment as an entry point and establish a closed ecology on their own network platforms to provide users with diverse services and issuance. Global stablecoin, which has caused great concern for regulation.
In addressing the challenges of European financial sovereignty, the author believes that three foundations should be adhered to: First, the supervisory authority should identify the nature and scale of new risks and make appropriate adjustments to the regulatory framework to ensure proper management of potential risks. For example, when dealing with the problem of fluctuating customer experience when opening a remote account in France, the French central bank took measures to make necessary amendments to the French conversion of the European Anti-Money Laundering Directive, which not only ensured to take full advantage of the new technology, but also ensured that Efficiency of the anti-money laundering / counter-terrorism financing framework.
Secondly, there must be a sufficiently open mind to propose a framework to adapt to the new paradigm. From an open perspective, the regulatory framework provided by the Payment Services Ordinance removes technical and legal obstacles to accessing payment account data, leading to a new ecological development and providing consumers with a wealth of new services. Regulators must fully assume forward-looking observations, experiments, and action commitments, such as advancing the pan-European payment system to improve cross-border payment efficiency, developing the first decentralized registration system based on blockchain protocols, and defining artificial intelligence Control development conditions.
Third, we must have the courage to innovate. All public sectors must be mobilized to participate fully in the construction of the European ecosystem. We also encourage innovation within the system, such as projects involving the cooperation of a wide range of public actors that use artificial intelligence to analyze “weak signals” to find vulnerable companies. It also explores innovations in working methods and project implementation, such as the “internal entrepreneurship” mechanism established at ACPR.
Compared with Europe, China has large local technology companies such as Ant Financial and Tencent and is at the forefront of digital transformation in the world. However, it still faces the challenge of Libra's erosion of RMB currency sovereignty. EU countries' strategies in dealing with the challenges of financial sovereignty are worthy of reference from Chinese regulators. The usual practice in China is to provide a certain gray space for innovation (such as P2P, fintech, crypto assets, etc. in recent years) to allow the industry to grow spontaneously and savagely in an uncertain and unpredictable environment. Rude supervision. There is also a lack of communication and collaboration among various public sectors to form a coherent and coordinated regulatory framework. Therefore, French regulators' open mind and practical innovation attitude in the face of challenges are particularly worthy of reference for China. The author is proud of the “genes of the French and European ecosystems”. Only in this way, not only can China lead the innovation of technology and business models under the digital wave, but also it is possible to lead the innovation of mechanisms and systems under the digital wave, so that it can effectively implement General Secretary Xi Jinping's "Blockchain as the core technology" Call for an important breakthrough in independent innovation.
November 13, 2019
Ladies and gentlemen:
Thank you Ms. de la Raudiere for inviting me to this meeting, which reflects the growing interest of the financial community in the continuous development of the banking and financial system. The organizer of this meeting asked me, as the governor of the central bank and the regulator, to express my views on the complex issues involved in the digital boom in the financial industry.
I will try to make my point on this challenging topic. First, I observe that in recent years, Europe has entered a world where digital technology is profoundly changing the business model of many economic sectors. Banking and finance are no exception. New entrants enter the market with new proposals that are more suited to the use and needs of "digital" consumers. They challenge established companies by dividing traditionally highly integrated value chains. The first of these new entrants were fintech companies. These start-ups can provide consumers with new services or reduce costs, thereby surpassing past participants at some point in the value chain. The second is a large technology company. They rely on big data and experience with data processing, and by using network effects, they begin to attack strategic links (high-tech value-added services, and sometimes customer relationships) in the value chain in order to be able to provide new profitable activities. These start-ups benefit from their dominance in certain areas-taking cloud computing as an example-and their ability to expand. Their cash reserves allow them to penetrate a market, dominate the market, and use technology to establish barriers to entry. These new entrants have relied heavily on established financial companies, and even have a significant risk of imprisoning them.
Although today's large technology companies (at least in Europe) are subcontractors of banks and insurance companies, we cannot rule out the possibility of a business model reversal, that is, financial institutions can only play the role of professional service providers: credit issuance, intermediate and Back office, compliance .
These prospects raise several questions about European sovereignty : how can we effectively protect citizens' data (whether it is payment data or personal data) and give them real control over their use of data? In a global ecosystem with a more open architecture, how can we enhance the financial system's ability and resilience to cyber risks? Facing the increasingly fierce competition of non-European companies in the field of payment solutions, how can we encourage the development of pan-European payment solutions? In the fight against money laundering and the financing of terrorism, many crypto assets are designed for anonymity and circumvention of legal rules. How can we effectively deal with the challenges posed by crypto assets? Finally, as the governor of the central bank and the regulator, I face the question more directly: how can we consider fulfilling our regulatory mission in a financial field whose profile and function are changing?
I believe that a reasonable response to these issues must be based on three pillars: (I) a clear assessment; (II) a framework that adapts to the new paradigm with a sufficiently open mind; and (III) the courage of collective innovation. I would like to share some thoughts on these three topics.
The digital revolution now enables some companies to rely on a potential customer base equivalent to the combined population of Europe, the United States, and China for major incursions and possible systemic incursions, primarily in the areas of payments and fund transfers.
The scale of network effects and their speed of use may fundamentally change the scope and intensity of competition in the markets in which they exist. Network effects will not only exacerbate the scale of profits, but also the risks they create for financial system stability and currency stability. Will this prospect lead us to seek to maintain the status quo? I think there are at least two reasons not to follow the path of maintaining the status quo.
First, technology that allows change in scale has brought progress. The technological revolution, from the early stages of the Internet to the prosperity of blockchain protocols to artificial intelligence, has produced and will continue to generate new services. Many are improvements in the daily lives of consumers, especially in financial services. We are very concerned about Better financial inclusion.
Secondly, we have no reason to believe that the current framework for regulating financial services is intangible and cannot be adjusted according to changes brought about by technological innovation, including changes in scale, to ensure proper management of potential risks. To give a simple example: Compared to other European countries, the customer experience of opening a remote account in France is not smooth. Some participants we met often mentioned the French conversion of the 4th European anti-money laundering directive , which they considered to be a potential obstacle because it would not be sufficient Take advantage of technology. We have noticed this problem, and within the framework of the ACPR-AMF Financial Technology Forum, we have established a working group led by the ACPR Financial Technology Innovation Department to bring together technology providers, financial institutions and the public sector. Its purpose is to jointly develop proposals based on an objective assessment of the status of regulations and technology, while ensuring the efficiency of the anti-money laundering / counter-terrorism financing framework. As a result, almost all of these recommendations were adopted in the (French) conversion of the fifth edition of the directive. We know how to think outside the box when necessary. However, in order to maintain smooth risk management of projects that may take advantage of huge network effects and therefore may pose significant risks to financial and monetary stability, we should carefully ensure that the regulatory framework can fully address the risks of project formation before launching these projects in the market.
Central banks and regulators first have the advantage of legitimacy and can assist in the adjustment of the supervision and management framework to adapt to these profound changes, mainly due to their institutional mandates: prudent supervision, financial stability and the implementation of monetary policy. Their legitimacy is also rooted in their crisis experience and their contribution to crisis resolution. However, to achieve this legitimacy, new risks must be identified by public authorities, including their nature and scale, and clear, robust and relevant responses provided.
(II) An open attitude is a necessary condition for achieving this goal: it must guide us to propose a framework for adapting to new challenges and related risks.
The special nature of the changes brought about by the digital revolution, especially the multinational scope of the resulting network effects, also requires us to advocate the strengthening of international cooperation between authorities to ensure better coordination of national regulatory frameworks and to propose changes that affect global governance Suggestions. To illustrate this, I'll choose an example outside the financial realm: "general regulation on the protection of personal data (RGPD)." By establishing a common framework for the protection and dissemination of personal data, the European Union not only harmonized its regulations, reaffirmed its values, but also defined international references in this field, which aroused the interest of many partners, especially the United States. Representative scandals have repeatedly shocked the United States.
I believe that our recommendations and actions should be guided by two principles.
First, we need to think in terms of open systems. We must consider the development of the various interactions between the various "ecosystem" participants on which financial services development is based. This is a prerequisite for a (regulatory authority) to legally claim to regulate the interconnection (between participants). This is also a prerequisite to ensure the appropriate scope of the adjustment regulations and the coordination and coherence of these adjustments at the national, European and international levels.
To illustrate, let's take open banking as an example. The regulatory framework provided by the second edition of the Payment Services Directive (PSD2) removes technical and legal barriers to accessing payment account data. The direct result is the development of a new ecosystem that provides consumers with a wealth of new services. However, we also place high demands on data protection at the European level, especially with regard to the rules governing access to this information.
Second principle: In order not only to be a bystander of change or to react too late to change, we must fully assume forward-looking observations, experiments, and commitments to action. In the payment field, the recent moves of large technology companies with global influence have once again pushed the inefficiency of current cross-border payment solutions to the forefront . However, these projects may bring issues such as financial stability, monetary policy, and sovereignty, which motivate us, where appropriate, to consider the involvement of central bank operations and promote more efficient payments on the basis of consistent and coordinated use of new technologies. system.
In terms of infrastructure, we have been interested in blockchain technology from its early stages. We are the first central bank to develop a centralized registration system-the "MADRE" registration system. This system is based on a blockchain protocol and involves the specific use of SEPA creditor certificates. Of course, this is only the first step, and our experimental field is extremely extensive and diverse. The question that arises today is: which systems can be decentralized through technology, become more efficient or offer greater possibilities?
In the field of ACPR supervision and management, we apply the same principles. Take artificial intelligence (AI) as an example. How do we specifically define the conditions for the controlled development of artificial intelligence and define its control principles? It is in this spirit that we designed the AI  seminar: ACPR financial technology experts and the French central bank data scientists meet with established companies to understand They think about these technologies and assess their maturity. In the areas of anti-money laundering / counter-terrorism financing, internal models and consumer protection, the lessons learned from these meetings and tests under production conditions will provide us with key information to build a future framework that will help control the development of artificial intelligence.
(III) Clearly aware of the importance of the problem, anticipating the complexity of things, and always ready to change our regulations and mission execution, we must also be bold, that is, innovative. Finally, in concluding this statement, I want to highlight two important factors.
First, financial sovereignty in Europe depends not only on the regulations of its member states ’authorities or the European Commission; it first depends on the vitality of the European ecosystem and the innovative efforts of all participants, whether they are senior or newcomers. In this regard, the European payment industry should seize the opportunities provided by the digital revolution to develop a pan-European payment solution. We are institutions that are an integral part of the European ecosystem and intend to participate fully: the Bank of France Lab, the ACPR Fintech Innovation Division and its joint ACPR-AMF Fintech Forum, and all public sectors are fully mobilized Support the expansion and growth of this ecosystem.
Secondly, we will also carry out innovation within the system: Only when we innovate ourselves can we achieve our goals and truly support the market. In this regard, our projects are and must be many. I have mentioned MADRE, and I would like to mention in particular that we find vulnerable companies through artificial intelligence analysis of “weak signals”. What is remarkable about this project is that it involves cooperation between a wide range of public actors: the French General Administration of Commerce (DGE), the French General Delegation of Employment and Vocational Training (DGEFP), the French Central Agency for Social Security (ACOSS), French Department of Digital and Systems Inter-Ministry (DINSIC) and, of course, the French Central Bank.
Our exploration of innovation also means innovation in working methods and project implementation: the "internal entrepreneurship" we have established at ACPR is a good example. The idea is to mobilize all employees in order to come up with the innovations that best fit our mission, and then let the "internal entrepreneurs" implement these innovations, giving them great autonomy that rivals startups to develop their projects. I hope that our first internal startup project will enable us to benefit from artificial intelligence tools to perform our regulatory tasks in 9 months to 1 year.
All these initiatives are both important and exciting. They are the genes of our system, and I believe that this also reflects the genes of the French and European ecosystems.
Thank you for listening.
 Originally "transposition", meaning "transition". Because some EU laws are not mandatory for member states and need to be translated into national legislation, “directives” are generally guidelines.