In recent years, we've witnessed unprecedented changes in the global landscape. Could you share your thoughts on the pace at which our world is transforming?

Absolutely. The past few years have truly shown us how quickly our world can change. Particularly in the last five years, the acceleration brought about by technology-driven changes seems to be increasing exponentially. Digitalization has revolutionized our communication channels and workflows. It's not just about being able to send emails faster or having meetings over video calls. It’s about a fundamental shift in accessing and processing information, and how quickly we can respond to changes. Disruptive technologies are emerging rapidly, influencing both the economy and society significantly.

With this kind of transformation, how is the financial system coping?

The financial system is right at the heart of this transformation. Currently, it’s undergoing significant changes to adapt to this new digital era in the private as well as in the public sector. Here, the role of central banks is evolving to effectively carry out their mandates within this rapidly changing digital landscape.

Speaking of central banks, how significant is the role of Central Bank Digital Currencies (CBDCs) in this context?

Issuing CBDCs could be one of the most effective tools to address the major challenges we face today. This includes fostering financial inclusion, ensuring the role of public money as a monetary anchor – also in the digital world, reducing dependencies on a few private players in digital payments, and increasing the efficiency of today’s payment systems which are often burdened by fragmentation, costly friction, and insufficient automation. CBDCs can promote a more inclusive, resilient, and accessible financial system. It’s pivotal for central banks to keep pace and collaborate closely with the private sector. The goal isn’t for central banks to take over the role of private providers, but to maintain their pivotal role in ensuring monetary sovereignty and supporting economic growth.

In light of the recent executive order from the U.S. administration prioritizing digital assets while prohibiting the issuance of CBDCs, how do you see this impacting global CBDC initiatives?

The initiative of the U.S. administration pushes the development of the token economy. Stablecoins are privately issued settlement assets that can be used in various use cases; however, they do not fulfill the function of public money, nor do they serve as efficient retail payment instruments. This executive order might actually accelerate CBDC initiatives in other countries as they seek to maintain their monetary sovereignty and ensure their currencies remain competitive. It definitely stimulates discussions on the role of public money in the future finance system.  I think this executive order underscores the urgency for central banks worldwide to advance their CBDC projects to safeguard their roles as guardians of their national currency and financial stability.

How can CBDCs address fragmentation in the financial system?

CBDCs have the potential to address fragmentation in the financial system by serving as a common digital currency standard that can be utilized across various payment systems. This mirrors the historical consolidation where central banks became the sole issuers of cash, replacing the system where individual banks issued their own banknotes. This transition brought about a unified standard of money, which not only simplified transactions but also supported the efficient operations of commercial banks.
By designing CBDCs to adhere to common standards, they promote interoperability, which is crucial for ensuring the seamless flow of funds between different payment systems. A highly interoperable CBDC would lay the groundwork for frictionless transactions, thus enhancing efficiency and reducing costs within the financial system.

Expanding on the idea of CBDCs reducing fragmentation, what potential do they hold for driving innovation in the financial services industry?

CBDCs can essentially be viewed as public infrastructure, much like highways for the digital economy, while the private sector can innovate on top of this platform – like cars on a road. Central banks provide the core platform and establish the regulatory framework, ensuring interoperability and access for all market participants, including non-traditional players. This environment lowers barriers to entry, encouraging diverse innovations such as programmable payments, enhanced security solutions, and new business models. This promotes healthy competition among private entities and reduces fragmentation in the financial system.

As we continue our journey towards a more digitalized world, are there any final thoughts or reflections you’d like to share?

I’d like to cite a quote from 2007, which said, “There’s no chance that the iPhone is going to get any significant market share.” We all know how that turned out. I believe CBDC will have a comparable transformative impact on people’s lives. 

The joint report with OMFIF is a call to action to set the course now for a future that embraces technical advancements while ensuring stability and inclusion in our financial systems.