Translation / Proofreading: Long Baitao
Note: Mr. Denis Beau, First Deputy Governor of Bank of France, closed the keynote speech in the morning at the 8th Annual Meeting of the French Payments Forum held in Paris on March 3, 2020.
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We now live in an increasingly digital world where technological advances enable people to market new goods and services that claim to simplify and enrich our lives. Innovation in finance, as in other areas, seems to follow a historical process that makes it almost invisible: as St Exupéry wrote in Wind, Sand, and Star, "Therefore, it is because the machine is perfect that it can cover its own existence." Behind this apparent simplification, however, are profound changes in financial activities and their ecosystems and international integration. This change poses many challenges to our national and European sovereignty. Fundamentally, sovereignty means our ability to maintain and impose our collective choices on the stability, efficiency, and fairness of the financial system.
As a central banker and regulator, the institutions I serve have been empowered by legislators to ensure the stability of the financial system, especially in the area of payment systems and payment methods-which is the theme of this conference-and to ensure that they (Payment system) to operate safely and smoothly, helping to implement these choices. Therefore, I cannot ignore these challenges to the escalation of our sovereignty. Now, I would like to share with you some ideas on the nature of these challenges and the contribution that central banks can make to effectively respond to them.
1. Digitalization of the economy and its challenge to sovereignty
The digitalization of the A- economy has brought about profound changes in the financial ecosystem . The development of the Internet-based network economy has provided businesses with more direct access to consumers, while reducing the fixed costs of launching and operating services. This change is closely related to changing lifestyles and higher expectations for service simplicity, availability, immediacy and even personalization. This is often referred to as "customer experience." Digital banks primarily interact with customers through mobile applications and is an example of a practical response to this new standard.
The changing model in practice has also prompted some companies to position themselves between customers and traditional service providers in specific segments to provide value-added services. This "intermediary intermediary" enables Europe to constantly adjust its regulation to regulate and ensure (secure) data sharing. This is driving the development of open banking. This trend benefits both relatively small players (fintech companies) and tech giants that base their business models on data monetization (GAFAMs and BATX, which have only recently entered the European market) (Note : GAFAM refers to technology giants such as Google, Amazon, Apple, Facebook, and Microsoft, and BATX refers to technology companies such as Baidu, Ali, Tencent, and Xunfei in China).
These changes are a natural consequence of the creative iterative process and will simplify practice through diversification. However, they can have a significant impact on the structure of the market and can materially affect our ability to implement and control public policy choices in financial services, especially in terms of legal, technical and operational certainty . E.g,
- When the provision of services involves existing participants in different jurisdictions, the legal requirements in different jurisdictions are sometimes contradictory. Which law should apply? The United States is particularly characterized by a broad definition of extraterritorial jurisdiction. In addition to determining the legal framework, there is also the question of whether the judicial authorities have the capacity to enforce the law given the size of the financial conglomerate, the number of intermediaries or the location of their various activities.
- The digitization of financial services has also brought a new form of dependence, namely dependence on physical (mobile phones and connected objects) and digital (search engines, mobile applications) portals. Non-European technology companies control and dominate these digital portals. However, competition laws proved to be incapable of dealing with these technology companies, which were enacted when the state took a stand on monopolies in the 19th century.
- Finally, the activities are dematerialized by increasing the number of interconnections and system entrances (Note: the entire process of production, transaction, transmission / delivery, and consumption of economic activities is completed in a digital form, so it is "dematerialized") Making them more vulnerable to potential “cyber attacks”, more easily used for money laundering and terrorist financing purposes, and making them more dependent on non-European actors outside the regulated financial sector.
B- In the payment field, digitization may bring additional consequences, which also poses a major challenge to sovereignty. Here, I want to highlight two issues that deserve special attention:
- The first is the development of new settlement assets. At present, the operation of our payment system depends to a large extent on the matching use of two settlement assets, which can be exchanged at any time for parity: central bank currency and commercial bank currency. The former is the only legal currency settlement asset used to settle transactions between financial intermediaries; the latter is generally the preferred settlement method for retail transactions. Some crypto asset projects are designed to compete with this system by providing alternative settlement assets-"coins"-not as a complement to this system. The value of "coin" is not necessarily linked to and fixed by the currency of the central bank or commercial bank. The implementation of these projects shows that it is not easy to create conditions for people's confidence in these alternative settlement assets. To date, the use of these assets has remained low. However, if their use grows significantly, their impact on the global economy may pose a major challenge to our current monetary order, with major concerns about stability and sovereignty.
- The second consequence that deserves special attention is the processing and storage of payment data . Applicable law, and the ability of private and public participants to ensure proper management of their data, depends on the location of the server. However, more and more data storage services are being outsourced to cloud providers, most of which are foreign. In addition, the use of public cloud services aggregates data from multiple customers on a single server, which raises data security and auditability issues.
Several recent incidents, such as U.S. sanctions on Crimea (2014) or the ineffectiveness of Amazon Web Services (2017), have demonstrated the real risks and impact of the instability of payment activities on the economy. They therefore emphasize the need for the (central bank) community to maintain end-to-end control over (payment) activities that are essential for industrial, commercial and public services.
2. In the face of these challenges, what role should the central bank play?
From this perspective, European private companies and public authorities responsible for developing the regulatory framework for the financial services industry clearly have a significant role to play. If Europe can rely especially on the capabilities of its private and industrial players, fintech companies and financial intermediaries to continuously adapt and innovate for themselves and their customers from one, at the European and international levels, open, competitive and highly integrated Benefiting from the payment market, Europe's sovereignty over its payment system will be more secure in the future.
The fundamental mission of central banks is to ensure and promote sound risk management. With this mission in mind, central banks, in fulfilling their regulatory responsibilities, contribute by coordinating the need for openness and supporting innovation (innovation is inherent in economies that integrate into world trade for the benefit of consumers).
But they can also contribute through two other traditional channels, as catalysts and providers of central bank currency settlement services.
A- In the field of retail payments, this catalyst is very important . In France, the currency of commercial banks is the main settlement asset. Although, like most EU countries, paper money and coins are still quite used in France. This multiple payment method based on settlement assets that can be exchanged at any time for parity is an advantage that should be retained for several reasons: On the one hand, because of financial inclusion responsibility, because the most vulnerable people also lack the banking services; But at the same time, it is also to diversify risks in the event of widespread failure of electronic payment systems.
However, it is widely believed that Europe faces two risks: the fragmentation of cashless payment methods; and excessive reliance on foreign players who have benefited from global network effects . This is especially true of international payment solutions in the area of bank card payments (Visa, Mastercard). In the EU, nearly two-thirds of bank card payments, especially cross-border transactions, are made through these bank card networks. Eighteen countries are totally dependent on international programmes for their domestic transactions. The increasing share of mobile payments is mainly dependent on mobile operating system developers such as Apple or Samsung. In addition, the number of private systems entering the real-time payment space–such as Paypal, Lydia, and Alipay, which will soon be launched in France–is likely to disrupt bank interoperability and competition. Restricting the use of certain proprietary technology solutions, such as NFC sensors or payment card acceptance software, may also pose obstacles to free competition.
Therefore, in this context, collective interest projects must be incorporated into the European retail payment strategy, which reiterates the need for the EU to ensure the independence of its range of payment solutions. A key example here is a project carried out by a banking group that proposes a solution called the European Payments Initiative (EPI) . This is why both the Bank of France and the Euro system as a whole are encouraging and supporting this market initiative, which will be another major milestone in the establishment of an integrated European payment area since the establishment of a single European payment area (SEPA). .
B- Central Banks can also serve as a central bank currency settlement service provider, especially in financial intermediation . In fact, the central bank currency is the cornerstone of settlement between financial intermediaries, and it should be the same in the future: experience shows that financial institutions need a risk-free settlement asset.
However, with the development of tokenization of financial assets, is it advisable to tokenize the corresponding settlement currency ? Doing so will not cause a change in the foundation of the central bank's currency, confidence, but will change the way currency is issued. It is against this background that there may be opportunities to "wholesale" central bank digital currencies. This requires central banks to invest in technological innovations that support the digitization of financial assets and their transfer methods, experiment and use them to improve the performance of the services they provide to the economy . That's what the Bank of France did. With the support of its laboratory, Bank of France has invested in blockchain technology for several years and has implemented the MADRE project at the operational level to manage SEPA creditor identification codes and bank branch databases. Another recent example is the Targeted Instant Payment Settlement (TIPS) introduced by the European Central Bank to ensure the coordinated development of instant payments (in the euro area). By placing its initiative within the framework of the Euro System's discussion of "e-Euro", the Bank of France will continue and strengthen its investments and expertise in the area of payment infrastructure and innovation in payment methods. To this end, it has recently established an Infrastructure, Innovation and Payments Board. The council will strengthen resources in this area, and I hope that it will participate in the work carried out within the BIS Innovation Hub. On an operational level, this commitment will soon prompt the Bank of France to work closely with market professionals to conduct experiments with a view to incorporating CBDC into the process of trading tokenized assets. In this regard, a project call will be launched by the end of March 2020 .
There is no doubt that the digitalization of the economy is a source of progress in the payments and other fields, as it diversifies and simplifies the services provided to consumers. However, despite this positive assessment, we must not ignore the growing interdependence among economies and this greater degree of mediation in the context of trade tensions (Note: Corresponding to the "intermediary intermediary" above) Possible sovereign risks. At the Bank of France and the French Prudential Regulation Authority (ACPR), we are ready to assist the market in making the necessary transformations to maintain and develop a strong and resilient European ecosystem that will ensure that our currency and financial system Continued sovereignty. To achieve this, we will decisively deploy all our actions and expertise. By recognizing the importance of experimenting in ecosystems, we have enriched these actions and expertise.
The first deputy governor of the French central bank, Denis Beau, delivered a speech on "financial sovereignty in the digital world" twice in five months, which actually reflects the anxiety of France and the European Union as a whole when facing multiple challenges under the digital wave.
These challenges include: (1) non-European large technology companies (mainly GAFAM in the United States, now adding BATX in China, etc.), bringing digital advantages to mobile applications, network platforms, cloud computing, and payment The erosion of European sovereignty in financial services and other aspects; (2) the erosion of European currency sovereignty by digital assets represented by stable currencies.
The EU itself lacks large-scale technology companies and online platforms that are equivalent to those of the United States and China, and its own integrated market is also facing serious fragmentation. Therefore, the EU hopes to address these issues urgently and accordingly, it has taken a number of measures, including EU retail Payment strategy, European data strategy (the goal is to form a single data market), central bank digital currencies, a single European bank supervision mechanism, a single bankruptcy mechanism, a unified deposit insurance mechanism, and the European Capital Market Union. These are essentially part of the challenges facing EU integration. The European Union or the Eurozone is currently only an economic and monetary union, lacking a unified fiscal policy, and is far from being truly integrated. European integration ultimately needs a political solution.