Technological Innovation: Small Steps and Giant Leaps
The theme "Navigating rapid innovation" could not be timelier. Facts speak for themselves. Netflix took three and a half years to reach 1 million subscribers; Spotify reached that number in five months; ChatGPT did it in five days; and Threads needed only one hour.1
All these innovative digital platforms created opportunities that didn't exist before. When the first smartphones appeared, nobody could have predicted the millions of apps that exist today. The platform had to exist first. Smart watches, wireless headsets and streaming video from a phone to a TV would not exist today without the Bluetooth technology that was developed in mid 1990s.
However, the acceleration of adoption that I just mentioned changes the impact that innovation has on societies, sometimes in unpredictable ways.
Often it is positive. Today, we see glimpses of this level of technological change in the financial system. In many countries, cash use is dwindling. Fast payment systems allow transactions to settle instantly and on a 24/7 basis. In some emerging market and developing economies, digital identity systems have made it easier and cheaper for people to open bank accounts and access the financial system.
When the Covid-19 pandemic hit us all four years ago, some small, developing countries in Africa were able to send e-money directly to people's mobile phones, while some very large, advanced countries were struggling to put millions of cheques in the mail.
Yet the picture is incomplete, and sometimes the impact is more complicated to evaluate. In many countries, even developed ones, too many people remain unbanked. And even in the most technologically advanced societies, many financial transactions still take days to complete and rely on time-consuming clearing, messaging and settlement systems, especially across national borders. Various technological solutions have appeared in the financial system. But many of them continue to exist in silos.
In too many respects, today's financial system is still serving the past, not the future. This is a missed opportunity and one that has both monetary and human costs.
Central banks have a duty to support the development of a financial system fit for the future. But how?
In my view, there are two distinct but complementary approaches: small steps and giant leaps.
By small steps I mean tweaks and improvements to existing financial systems and infrastructures. This approach has its place. It can deliver "quick wins" – timely improvements in the quality and efficiency of financial services that come at relatively little cost. It is comparatively low risk – an important consideration when dealing with critical infrastructure. And it can help reduce concerns that financial innovation could disadvantage smaller financial institutions and less technologically sophisticated consumers.
But incremental change also has its limitations. The need to look backwards to ensure compatibility with legacy systems constrains what new ones can deliver. As the layers build, the constraints become more binding, eventually holding back innovative developments.
This is why I believe that sometimes we need giant leaps that deliver a fundamental rethink of the financial system and foster the development of entirely new architectures.
Let me give you a concrete example of a giant leap.
Tokenisation is, in my view, a technology with transformative potential for the financial system. Tokenised digital assets contain the information necessary to uniquely identify assets and their owners as well as the rules and logic governing their use. When correctly used, tokens could increase the speed, lower the cost and heighten the efficiency of financial transactions.
Note my qualifier: "when correctly used". It is important. By themselves, tokenised assets could improve the financial system only incrementally. If tokens were to trade through existing financial pipelines, they would have to rely on the same long and complex sequences of messages passed back and forth between financial institutions. And these complex sequences are the cause of many costs and delays in today's financial system.
To unleash the promise of tokenisation – ie to deliver a giant leap – we need to bring the different kinds of tokens together: commercial bank money, central bank money, various assets. Unified ledgers are the platforms where this can happen. Once these different tokens are brought together in the same programmable platforms, new functionalities, like smart contracts and composability, can be deployed.
With these functionalities, sequences of transactions could be automated and seamlessly integrated. This would eliminate the need for manual interventions and redundant compliance controls, two issues that significantly delay transactions along the chain of a cross-border payment. It would also enable instant payments and immediate and simultaneous settlement across a whole range of assets.
Tokens could in principle contain any financial asset, but tokenised money is a core requirement. As Yuval Noah Harari – whom you will have the pleasure of listening to at this conference – said: "Money is the most universal and most efficient system of mutual trust ever devised." The unified ledger system would build on the trust of today's two-tier financial system: all transactions are carried out in commercial money, but their final settlement happens in central bank money.
And even greater leaps are possible.
In a recent paper, Nandan Nilekani and I lay out a vision of how multiple financial ecosystems can interact with each other to form the future financial system – which we have labelled the Finternet.
The Finternet would empower individuals and businesses by placing them at the centre of their financial lives. Unified ledgers, connected to each other through application programming interfaces, play a central role in this vision. They would be accompanied by a rich canopy of associated financial applications and services, delivering more choice and lower costs to users.
Technology is critical but not sufficient. It is only effective once it finds its economic and financial purpose and is underpinned by robust regulatory structures. To create a truly coherent vision of the future financial system, we will have to supplement cutting-edge technologies with an efficient economic and financial architecture and robust governance and regulatory arrangements.
I would dare to say that we are more advanced in the technology than in the other key aspects – legal, regulatory and operational – that are needed to make it work.
So then, how do we achieve these giant leaps? How do we transform a vision into reality?
The first steps in this long journey are exploring and experimenting. But, in doing so, we should always have in mind the larger purpose – the giant leap we hope to achieve.
That is exactly what we do here at the BIS Innovation Hub. As an example, let me describe our efforts to explore the potential for unified ledgers with Project Agorá.
This ambitious new project explores how the tokenisation of wholesale central bank money and commercial bank deposits on programmable platforms could improve the monetary system. A first use case is to push the boundaries of cross-border payments.
Agorá was designed to be global and inclusive. It brings together major international currencies: the US dollar, euro, yen, pound sterling, Swiss franc, Korean won and Mexican peso. The central banks that issue these currencies are some of the most advanced in the world in terms of their technical capabilities. Moreover, the regulated private financial sector institutions that will soon be invited to join Agorá will hail from these jurisdictions and that sit at the core of the global trading and financial system.2
Agorá illustrates how the BIS Innovation Hub is fulfilling its mandate to examine the potential for technology to build the financial system of tomorrow and to add practical applications to the careful theoretical and conceptual work that has started at the BIS with conceiving the vision of unified ledgers.
As you can see, we have great hopes for this project and the leap it can deliver and look forward to working with official and private sector partners around the world.
When we look at this year's Innovation Summit, the two approaches that I mentioned – the small steps that improve what we have and the giant leaps that create something new – are clearly embedded in the agenda. Over the next two days, you will have the chance to discuss in greater depth the elements of unified ledgers and the building blocks needed to enhance existing infrastructure. You will also hear more about Mandala, mBridge, Pyxtrial, Nexus and other very exciting BIS Innovation Hub projects.
Another technological innovation – artificial intelligence – features prominently in the agenda and poses very difficult questions for us. I started my remarks talking about the acceleration of innovation. Today, advances in AI are measured in months and sometimes in weeks. So, which of the approaches I suggested should we use to adopt AI tools? Incremental changes or quantum leaps?
I don't know the answer and hope you will help me find out. In any case, a key message that I would like you to take away from the Summit is that the real magic of innovation is to open up possibilities that were not there before.
By Mr Agustín Carstens,
General Manager of the BIS
1 See F. Duarte, "Number of ChatGPT Users (May 2024)", Exploding Topics, 20 April 2024, at https://explodingtopics.com/blog/chatgpt-users.