Technological innovation can foster greater efficiency, financial stability, and inclusion, but it can also do the opposite, the head of the BIS Innovation Hub has warned.

In a speech at the 23rd Geneva Conference on the World Economy on Thursday, Benoit Cœuré said that while new technologies can be beneficial, they can also generate loss of privacy, financial instability, and financial exclusion.

“Should we let disruption run its course, whatever the consequences? Or do we want to harness the power of innovation in a way that preserves the best elements upon which the financial system is built?” Cœuré asked attendees during his second in-person speech since he joined the BIS in early 2020. “I think the answer is clear. And this is where central banks must step in.”

At the conference, the BIS executive talked about the role central banks are playing in ensuring that technological disruption is a “force for good,” as well as in developing its own innovative technology.

Digitalisation disrupting payments

He used fast payment systems as an example of where technology is working well through services such as the UK’s Faster Payment Scheme. But he warned other changes, like stablecoins issued by Big Techs, come with risks as well as opportunities.

“They are promoted as a way to provide faster and cheaper cross-border payments and deeper financial inclusion, and they do, “ added the head of the BIS Innovation Hub, which was established in 2019 to identify critical trends in technology affecting central banking. “But they also pose significant risks: they can create closed ecosystems or "walled gardens" that fragment the monetary system, by potentially taking large volumes of payments outside the system that has central banks at its centre.”

Cœuré said that the history of private money initiatives is “not a happy read.”

“Whenever faced with the conflict of interest between making their money stable no matter what and making a profit, private issuers have always chosen profits,” he said. “This is where central banks come in.

“Money is ultimately a public good whose stability and use needs to be protected by the public sector.”

He said that this is why so many central banks around the world are working on central bank digital currency (CBDC).

But, he asked: “If CBDC offers lower interest rates than cash or commercial bank deposits, would you still want to use it? The answer is: up to a point – but we don’t know what that point is. I believe in fact that CBDC could have a greater impact on fiscal policy.”

Big data and algorithms disrupting banking supervision

Later on in his speech, Cœuré talked about how algorithms, AI, and machine learning, empowered by big data, are transforming financial services.

“Collateral is needed when lenders don’t have enough information about a borrower - data helps close the gap,” he said. “This is very beneficial for the so-called “thin file” customers, those who could not get a loan because of lack of credit history and couldn’t build a credit history because nobody would give them loans – a chicken-and-egg problem.”

But he warned that while there is financial inclusion benefit from the use of non-traditional sources of data for lending decisions, but also a potential risk for privacy and the management of personal data.

Cœuré concluded by suggesting that the next “battle line” could be technological innovation disrupting the conduct of monetary policy.

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