The Bank of England’s governor has backed various FinTech initiatives, including opening its balance sheet to new payment providers like Facebook’s cryptocurrency.

Earlier this week, a cooperative of technology companies, led by Facebook, proposed a new payments infrastructure based on an international stablecoin – Libra. Backed by reserve assets in a basket of currencies including sterling, it could be exchanged between users on messaging platforms and with participating retailers.

“As designed, Libra may substantially improve financial inclusion and dramatically lower the costs of domestic and cross border payments,” commented Mark Carney in his final Mansion House speech yesterday evening.

“The Bank of England approaches Libra with an open mind but not an open door,” he continued. “Unlike social media for which standards and regulations are being debated well after it has been adopted by billions of users, the terms of engagement for innovations such as Libra must be adopted in advance of any launch.”

Carney said that if it achieves its ambitions, Libra would be systemically important, but added that it must address issues ranging from anti-money laundering to data protection to operational resilience. “In addition, authorities will need to consider carefully the implications of Libra for monetary and financial stability,” he said.

Open balance sheet

With that in mind, the Bank of England announced plans to consult on opening its balance sheet to new payment providers, in order to improve the transmission of monetary policy and increase competition.

“It can also support financial stability by allowing settlement in the ultimate risk free asset, and reducing reliance on major banks,” noted Carney. “This access could empower a host of new innovation.”

He noted that in wholesale markets, consortia of broker dealers are working to develop settlement systems using distributed ledger technology that could overhaul how markets operate.

“This could also plug into ‘tokenised assets’ - conventional securities also represented on blockchain - and smart contracts, which can drive efficiency and resilience in operational processes and reduce counterparty risks in the system, unlocking billions of pounds in capital and liquidity that can be put to more productive uses.”

Future of finance

Carney also used his speech to announce the results of Bank of England senior adviser Huw van Steenis’ review of the future of the UK financial system.

This explained that the shift to digitally-enabled services and firms is “already profound” and appears to be accelerating, with a move from banks to market-based finance “likely to grow further”.

Carney stated: “While there have been some notable successes, the UK system has a way to go before it meets these expectations.”

He referred to payment innovation and advances in the networks that underpin some of these apps, but said that the UK is still a long way behind countries such as Sweden, the Netherlands and India, where users can make direct, free and real time bank-to-bank payments in stores and online with a text or a scan of a QR code.

With this in mind, he threw the central bank’s weight behind the chancellor’s Payments Strategy Review, which was also announced yesterday evening.

“The revolution of payments may not be driven by the old bank-based systems but by a new architecture – major changes are on the horizon, bringing enormous advantages but also more than a few new challenges,” stated Carney.

SME support

Carney moved on to the small and medium-sized enterprises (SMEs) that are the backbone of the British economy, explaining that big data is opening up new opportunities for more competitive, platform-based finance.

Artificial intelligence (AI) and machine learning (ML) techniques are already mining fields of data generated by online activity,” he said, pointing out that this has the potential to yield “enormous benefits” for households and businesses by opening up new lines of credit, providing greater choice, better-targeted products and keener pricing.

“An open platform for lending would enable Open Banking and empower SMEs,” Carney said. “It would help avoid lock-in on existing platforms and enable providers of finance to compete for SME lending, helping to broaden the products available to companies and offer more competitive rates, making access to finance quick, easy and cost effective.”

Therefore, the Bank of England will submit a formal response on how to develop such a platform for competitive SME finance to the Smart Data Review referenced by the chancellor in his speech.

Cloud computing

“Just as the steam engine transformed manufacturing, AI, ML and cloud-based technologies are transforming services,” Carney commented. “Accordingly, the second focus of the bank’s initial response is how new general purpose technologies, like the cloud and AI, can be used to strengthen the resilience of the system.”

A quarter of major banks’ activities and almost a third of all UK payments activity are already hosted on the cloud, and there are considerable opportunities for even more intensive usage, he suggested, adding that cost savings can be passed onto customers and, if properly managed, improve the resilience of the overall system.

“For these reasons, the Bank of England is open to greater adoption of the cloud and usage of AI,” Carney said, before cautioning that these technologies must be adopted in a safe manner.

“Careful attention will have to be given to risks, including of those associated in the single point of failure and market concentration,” he noted, adding: “Two providers account for nearly half of revenues in cloud computing, bringing scale and efficiency, but also concerns about dependence and a single point of failure in the case of a cyber-attack.”

To ensure that the benefits of cloud computing are realised and the associated risks are well managed, the Prudential Regulation Authority (PRA) will issue a Supervisory Statement in the autumn that sets out its supervisory approach.

The Bank of England, together with the Financial Conduct Authority, will also establish a forum to discuss the results of a survey that it has conducted on AI use in finance and determine an appropriate supervisory approach.

Carney also mentioned the central bank’s use of the cloud, stating that the PRA is exploring how new technologies could streamline firms’ compliance and regulatory processes while improving our ability to analyse relevant data.

“Our vision is that the Bank could be able to ‘pull the data on demand’ from firms rather than ‘sit back and wait to receive data’ from them,” he explained. “With the right API, web portal or platform, manual interventions could become obsolete, making the process quicker, more efficient and hugely less expensive.”

That is why the Bank of England is launching a review to explore a transformation of the hosting and use of regulatory data over the next decade.

“This review will be conducted in close consultation with banks, insurers and financial market infrastructures,” said Carney. “We are also embarking on proofs of concepts, in collaboration with firms and the tech sector, to test how we can automatically extract regulatory firm data.”

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