CENTRAL BANKING
AND FINTECH
A BRAVE NEW WORLD
CHRISTINE LAGARDE
In September of last year, I had the opportunity to deliver an address at the
Bank of England. I noted at the time that returning to Fleet Street—the heart of
London’s financial center—always feels like a journey through history.
In the Middle Ages, that street was an important center of commerce, much
of which has now moved online. By the 19th century, the street was home to
ticker-tape machines and reporters racing each other to make the evening
papers. That world, aussi, has largely moved online.
En effet, much has changed for the
bankers and policymakers in the City of
London and in the rest of the world, pas
only since the Middle Ages but in the past
20 années. But the changes of the past two
decades are only the beginning. Let us
spin the hands of Big Ben forward to 2040
to catch a glimpse of the world in our near
avenir. We might see that:
(cid:2)(cid:1) Cars have disappeared, because people
are moving about in hovering drones,
or “pods,” which elegantly avoid each
other in the morning rush hour.
(cid:2)(cid:1) One of those pods carries the central
bank governor, who recently started
her second term. As part of her morn-
ing routine, she swipes through a holo-
gram of news videos curated by a digital
assistant, before arriving at Thread-
needle Street (the location of the Bank
of England).
(cid:2)(cid:1) The governor disembarks, walks up to
the columned façade, opens the door
et. . .
Who will she encounter inside the
bâtiment? Are there economists sitting at
desks or debating policy choices around a
table? Or is there an intelligent machine
making decisions, setting rates, and issu-
ing money?
In other words, how will fintech
change central banking over the next gen-
eration? That is the focus of my remarks
aujourd'hui.
In this essay, I would like to consider
the possible impact of three innova-
tions—virtual currencies, new models of
financial intermediation, and artificial
intelligence.
Some of these innovations have
already found their way into our wallets,
smartphones, and financial systems. Mais
that is only the beginning.
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Are you ready to jump onto my pod
and explore the future together? As one
famed Londoner—Mary Poppins—might
have said, bring along a pinch of imagina-
tion!
VIRTUAL CURRENCIES
Let us start with virtual currencies. Être
clear, this is not about making digital pay-
ments in existing currencies through
Paypal and other “e-money” providers,
such as Alipay in China, or M-Pesa in
Kenya.
Virtual currencies are in a different
category because they provide their own
unit of account and payment systems.
These systems allow for peer-to-peer
transactions without central clearing-
houses, without central banks.
For now, virtual currencies such as
Bitcoin pose little or no challenge to the
existing order of fiat currencies and cen-
tral banks. Why? Because they are too
volatile, too risky, too energy intensive,
and because the underlying technologies
are not yet scalable. Many are too opaque
for regulators, and some have been
hacked.
But many of these are technological
challenges that can be addressed over
temps. Not so long ago, some experts
argued that personal computers would
never be adopted, and that tablets would
only be used as expensive coffee trays. Donc
I think it may not be wise to dismiss vir-
tual currencies.
Better value for money?
For instance, think of countries with
weak institutions and unstable national
currencies. Instead of adopting the cur-
rency of another country—such as the
U.S. dollar—some of these economies
might see a growing use of virtual curren-
cies. Call it dollarization 2.0.
IMF experience shows that there is a
tipping point beyond which coordination
around a new currency is exponential. Dans
the Seychelles, Par exemple, dollarization
jumped from 20 percent in 2006 à 60
percent in 2008.
So why might citizens hold virtual
currencies rather than physical dollars,
euros, or sterling? Because it may one day
be easier and safer than obtaining paper
bills, especially in remote regions and
because virtual currencies could actually
become more stable.
For instance, they could be issued
one-for-one for dollars, or a stable basket
of other currencies. Issuance could be
fully transparent, governed by a credible,
pre-defined rule, an algorithm that could
be monitored. . . or even by “smart rule”
that reflects changing macroeconomic
circonstances.
So in many ways, virtual currencies
might just give existing currencies and
monetary policy a run for their money.
The best response by central bankers is to
continue running effective monetary pol-
icy, while being open to fresh ideas and
new demands, as economies evolve.
ABOUT THE AUTHOR
Christine Lagarde is the Managing Director of the International Monetary Fund.
© 2018 Christine Lagarde
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Christine Lagarde
Better payment services?
Par exemple, consider the growing
demand for new payment services in
countries where the shared, decentralized
service economy is taking off.
This is a type of economy rooted in
peer-to-peer transactions involving fre-
quent, small-value payments, often across
borders.
Four dollars for gardening tips from a
lady in New Zealand, three euros for an
expert translation of a Japanese poem, 80
pence for a virtual rendering of historic
Fleet Street: these payments can be made
with credit cards and other forms of e-
money, but the charges are relatively high
for small-value transactions, especially
across borders.
Citizens may one day prefer virtual
currencies, since they potentially offer the
same cost and convenience as cash—no
settlement risks, no clearing delays, Non
central registration, no intermediary to
check accounts and identities. If privately
issued virtual currencies remain risky and
unstable, citizens may even call on central
banks to provide digital forms of legal
tender.
Donc, when the new service economy
comes knocking on the Bank of England’s
il
door, will policymakers welcome
inside? Offer it tea—and financial liquidi-
ty?
NEW MODELS OF
FINANCIAL
INTERMEDIATION
This brings us to the second leg of our
pod journey—new models of financial
intermediation.
One possibility is the breakup, ou
unbundling, of banking services. In the
avenir, we might keep minimal balances
for payment services in electronic wallets.
The remaining balances may be kept
in mutual funds be invested in peer-to-
peer lending platforms with an edge in big
data and artificial intelligence for auto-
matic credit scoring.
This is a world of six-month product
development cycles and constant updates,
primarily of software, with a huge premi-
um on simple user-interfaces and trusted
security. A world where data is king. UN
world of many new players imposing
branch offices.
Some would argue that, if there are
fewer bank deposits and money flows into
the economy through new channels, il
puts a question mark on the fractional
banking model we know today.
How would monetary policy be set in
this context?
Today’s central banks typically affect
asset prices through primary dealers, ou
big banks, to which they provide liquidity
at fixed prices—so-called open-market
opérations. But if these banks were to
become less relevant in the new financial
monde, and demand for central bank bal-
ances were to diminish, could monetary
policy transmission remain effective?
Central banks may well have to
increase the number of counterparties to
their operations. The Bank of England is
already leading the way by including large
broker-dealers and central counterparty
clearing houses.
All this, of course, has regulatory
implications. Plus
counterparties
implies that more firms will fall under the
central bank’s regulatory umbrella—
which is the price to pay for liquidity on a
rainy day. Whether the future holds more
or less rain is an open question.
The remit of central banks will grow,
and with it perhaps, also public scrutiny
and political pressure. Independence—at
least in setting monetary policy—will
need further defending and require clear-
er communication.
We may also see a shift in regulatory
pratiques. Traditionnellement, regulators have
focused on overseeing well-defined enti-
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Central Banking and Fintech: A Brave New World
liens. But as new service providers come on
stream in new shapes and forms, fitting
them into buckets may not be so easy.
Think of a social media company that is
offering payment services without man-
aging an active balance sheet. What label
should we stick on that?
All this is good for lawyers but not so
good for regulators. The regulators will
likely have to further expand their focus,
from financial entities to financial activi-
liens, while possibly also becoming experts
in assessing the soundness and security of
algorithms. Easier said than done.
Cooperation is key
To make things smoother—at least a bit—
we need dialogue. Between experienced
regulators and those that are just begin-
ning to tackle fintech. Between policy-
makers, investors, and financial services
firms. And between countries.
Reaching across borders will be criti-
cal as the focus of regulation widens—
from national entities to borderless activ-
ities, from your local bank branch to
quantum-encrypted global transactions.
Because of our global membership of
189 des pays, the IMF is an ideal plat-
form for these discussions. Technologie
knows no borders: what is home? What is
host? But how can we avoid regulatory
arbitrage and a race to the bottom? This is
about the IMF’s mandate for economic
and financial stability, and about the safe-
ty of our global payments and financial
infrastructure.
The stakes of—and gains from—
cooperation are high. We want no holes
in the global financial safety net, cependant
much it gets stretched and reshaped.
I am convinced that the IMF has a
strong role to play in this respect. But the
Fund will also have to be open to change,
from bringing new parties to the table, à
considering a role for a digital version of
the SDR (Special Drawing Rights).
Autrement dit, the IMF is along for
the pod-ride.
ARTIFICIAL INTELLIGENCE
Which brings us to the third and final
leg—the transformative effect of artificial
intelligence.
Would our governor in 2040 walk
into the Bank of England to take instruc-
tions from a monetary policy-setting
robot powered by artificial intelligence?
Even if such an extreme outcome were
not to come to pass, how would the wide-
ly reported prediction made by Andy
Haldane, the Bank’s chief economist, de
15 million jobs being automated in the
ROYAUME-UNI. affect the Bank and its world-class
staff?
One thing is clear: we will continue to
gather more data about every aspect of
the economy and human behavior, lequel
will in turn support the further develop-
ment of artificial intelligence capabilities.
Some estimates suggest that 90 percent of
the data available today are generated in
the past two years.1. This is not just infor-
mation on output, unemployment, et
prices, but also behavioral data on the
quirks and irrationalities of the homo eco-
nomicus.
Thanks to smartphones and the
Internet, these data are now abundant,
ubiquitous, and increasingly valuable as
we pair them with artificial intelligence.
Artificial
is making
intelligence
immense strides. Over the past year, pour
exemple, some of the world’s best players
of Go, the ancient board game, have lost
to a self-learning computer. For many,
that day of reckoning was supposed to be
decades away. The machine learned tac-
tics, recognized patterns, and optimized
its game—better than we could.
Clairement, the economy is vastly more
complex than a game of Go. But machines
will almost certainly play a larger role
over the next generation—in assisting
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Christine Lagarde
central banking is less Mary Poppins and
more Aldous Huxley—a “brave new
monde,” much like the one described in
Huxley’s famous novel.
I believe that we, as individuals and
communautés, have the capacity to shape a
technological and economic future that
works for all. More importantly, we have
a responsibility to make this happen.
That is why I prefer Shakespeare’s
evocation of the brave new world in The
Tempest: “O wonder! How many goodly
creatures are there here! How beauteous
mankind is! O brave new world.”
1. “Ten Key Marketing Trends for 2017,” avail-
able at https://www-
01.ibm.com/common/ssi/cgi-bin/ssialias?html-
fid=WRL12345USEN.
policymakers, offering real-time forecasts,
spotting bubbles, and uncovering com-
plex macro-financial links.
But let me reassure you, humans will
still be needed.
For one thing, there is immense
uncertainty about the economy. Changes
in basic economic relationships need to
be spotted and risks evaluated. Judgment
and constant questioning by peers,
diverse of opinions, and even a few mav-
erick spirits will remain essential to good
policymaking. But what if the machine
could do that too?
Next is the question of communica-
tion. Good monetary policy, as we know,
is about story-telling. Policy is effective if
only it can be explained clearly so the
public can form expectations about future
politique. Could machines really explain
their decisions in plain English?
Even if that hurdle could be over-
come, a last one remains. Even with the
best algorithms and machines, targets will
be missed, crises will occur, mistakes will
be made. Can machines really be held
accountable to the young couple unable
to buy a house, to the working mother
finding herself unemployed?
Accountability is key. Without it, nous
cannot have independence; how else to
bestow so much power on a technocratic
organization? And without independ-
ence, policy is bound to go astray, as this
conference reminds us, loud and clear.
In sum: Non, I do not see machines
taking over monetary policy. Dans 2040, le
governor walking into the Bank of
England and other central banks around
the world will be made of flesh and bones,
and behind the front door she will find
people— at least a few.
CONCLUSION
As our pod journey comes to an end,
some of you may wonder about my
upbeat tone. For many, this new world of
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