Can central banks be conservative and innovative at the same time? Morten Bech says yes!

 

Tanya König of finance.swiss speaks with Morten Bech, the head of the BIS Innovation Hub in Switzerland, to find out what projects they are currently working on and what they will be presenting at the Point Zero Forum in Zurich next week.

We’re meeting here at the BIS Innovation Hub Center in Basel. What exactly is your mandate?

Before I get to the mandate, let me just say a few words about the Innovation Hub in general. I think to most people, when you say central banks and innovation, it sounds like a contradiction. I like to see us as a bumblebee, something that in theory should not be able to fly. But somehow we are off the ground, and I would argue flying in the right direction. In terms of our mandate, it is really to make central banks better at what they are already doing today by introducing new technologies and innovation and [that] what we produce is of high quality. So I like to think of us as central bank innovation, Swiss-made.

 

And the central bank digital currencies, CBDCs, are one of the hot topics that you’re involved with here at the Innovation Hub. Together with the Swiss National Bank and SIX Swiss Exchange, you successfully examined the usability of CBDCs in Project Helvetia. How are the conclusions helping you to advance your work?

I’m very happy that you mentioned Helvetia. It was one of our first projects and a great collaboration with both the SNB but also SIX. In Helvetia, we examined how best to settle trades that occur on this new SIX digital exchange for tokenized assets. What are tokenized assets, you might ask? Well, tokenized assets are securities that are issued on platforms that are based on what is known as the distributed ledger of blockchain technology. And so what we learned from Helvetia was that we could do this in two ways: Either we could hook the SDX platform up to the existing payment system of the Swiss National Bank, or we could have the Swiss National Bank issue a so-called wholesale CBDC onto the SDX platform. And the conclusions were that while it was probably easier to use the existing infrastructure, there was a lot more upside in terms of issuing a wholesale CBDC onto SDX. And I think importantly, that’s also the conclusion that the Swiss National Bank has reached as they have recently announced they will be taking Helvetia forward. And for a limited time actually issue a live wholesale CBDC onto the SDX platform to settle real transactions. That might sound like a small step for the SNB, but in the world of central banking, that’s actually a giant leap. And I think it also shows that you can be conservative and innovative at the same time.

 

And it also shows that out of the proof of concept, something concrete happens.

Yes. That’s really ultimately the goal of the BIS Innovation Hub in that some of the things—prototypes or proof of concepts—that we produce are actually taken live, either by central banks or others. And so this is very good to see.

 

And another priority of yours is the improvement in payment systems together with the central bank digital currencies. It also reflects the priorities of G20 countries and central banks to improve cross-border payments. What does this entail?

It entails a lot of things, but first there’s a lot of things that work well in payments. One is that now many jurisdictions have what is known as instant or fast payment systems, where you can pay each other instantly. Also, since the pandemic, we have seen the spread of contactless payments throughout economies. But there’s still one big remaining pain point in payments, and that’s cross-border payments. And so recently, or a couple of years ago, the G20 decided that enough is enough and made it a high priority to actually improve cross-border payments, making them cheaper, faster, and more transparent. And so the BIS Innovation Hub is trying to do its part by trying to figure out where technology or innovation can move things forward. And we have a couple of projects where we are doing that.

Let’s talk about one of the projects, which is a current project called Mariana, a joint proof of concept between Eurosystem, the Innovation Hub, Bank of France, Monetary Authority of Singapore, and the Swiss National Bank. The first results will be presented next week at Point Zero Forum. What exactly were you examining?

One of the big challenges in any solution to cross-border payments is how you convert from one currency to the other. Mariana is a super exciting project, and actually I think demonstrates why it’s awesome to work in the Innovation Hub. In there, we’re working with the latest technologies, newest ideas in finance, and working together with great colleagues around the world. What Mariana is doing is really looking to the future. So it envisions a future state of the world where central banks have issued central bank digital currencies, and then ask a very simple question of how you can actually convert from one currency to the other.

 

How do you do that?

Here we borrow from decentralized finance, or DeFi. In DeFi, when you want to go from one coin to another, you often use something called an automated market maker. And what we’re trying to do in Project Mariana is to replicate this idea in a world with CBDCs. So we’re basically trying to build an automated market maker for central bank digital currencies, and hopefully that can then help speed up and make cross-border payments cheaper.