The Digital Finance Voyage: A Case for Public Sector Involvement

The digital finance journey: a case for public sector involvement

November 15, 2023

(As prepared for delivery)

President Tharman, Your Excellencies, Distinguished Guests: Good morning! It's a pleasure to be in Singapore again. And it is an honor to join you this morning in this impressive forum to take stock of how far we have come and set a course for the future.

There is no better place to look towards this future than Singapore, a place where fintech is flourishing and where this festival brings the boundless energy of fintech enthusiasts.

FinTech innovation has already been transformative (and will continue to be), changing the world of finance and making it much more accessible to hundreds of millions of businesses and people who used to be isolated from it.

I am proud that the IMF is part of this great community and to be with you today. I come in the footsteps of my predecessor, Christine Lagarde, who five years ago gave a speech speech Here policymakers are encouraged to follow the “winds of change” and embark on a digital money journey by exploring the use of central bank digital currencies, or CBDCs, and fintech.

Five years later, I'm here to give you an update on that journey. I have four main messages. First, the countries set sail. Many are researching CBDCs and developing regulations to guide digital money developments. Secondly, we haven't reached land yet. There is a lot more room for innovation and a lot of uncertainty about use cases. Third, this is not the time to back down. The public sector should continue to prepare to implement CBDC and related payment platforms in the future. Fourth, these platforms should be designed from the beginning to facilitate cross-border payments, including with CBDCs.

We have left the port and are now on the high seas. This requires courage and determination. We can learn from you: entrepreneurs, business leaders and investors. You are sailors in the world of fintech. Every day you brave the open waters. The waves and winds are your inspiration.

In any case, we need to raise another sail to gain speed. The world is changing faster than most imagined. Take artificial intelligence, a key theme of this festival. Look at the number of months before several apps reached 100 million users. The average is 3 years. ChatGPT took 2 months!

The CBDC Journey

CBDC adoption is not even close. But about 60 percent of countries are exploring them in some form today. CBDCs can replace cash, which is expensive to distribute in island economies. They can offer resilience in the most advanced economies. And they can improve financial inclusion where few have bank accounts.

In some countries the case seems unclear. today, but even they should remain open to potentially implementing CBDC tomorrow. Because?

First, the benefits of CBDCs will arise from what happens in the payments environment. How many other countries will adopt CBDC? To what extent will cash become obsolete? And will private forms of money proliferate?

Libra was a wake-up call that turned out to be a false alarm. But others, more docile, will knock on her door. In that case, CBDCs would offer a safe and low-cost alternative. They would also offer a bridge between private money and a criterion to measure its value, as is the case today with the cash we can withdraw from our banks.

Second, the success of CBDCs will depend on political decisions and how the private sector responds. The actions of many of you here today will matter!

Authorities in countries wishing to introduce CBDC may need to think a little more like entrepreneurs. Communication strategies and incentives for distribution, integration and adoption are as important as design considerations.

Will you fintech leaders and developers spend the resources on onboarding merchants to accept CBDC? Will it make it easier to integrate CBDCs into financial services and messaging apps so people can pay each other from any environment? It depends on your return, that's fair.

Third, the benefits of CBDCs will depend on how technologies evolve.

AI, for example, could amplify some of the benefits of CBDCs. It could improve financial inclusion by providing fast and accurate credit scoring based on various data. It could provide personalized support to people with low financial literacy. Without a doubt, we must protect personal privacy and data security, and avoid embedded biases so as not to perpetuate inequality but seek to reduce it. If managed wisely, AI could help.

Another important potential transformation resulting from the work of many of you is the tokenization of financial assets, such as bonds issued on blockchains. This opens another door for CBDCs, potentially on a wholesale basis, to pay for those assets.

Therefore, countries should continue exploring CBDCs.

In that spirit, I am pleased to announce the launch of a CBDC Handbook available on the IMF website starting today. The Handbook aims to collect and share knowledge on CBDCs for policymakers around the world, to help them move forward.

The journey of cross-border payments

To the extent CBDCs are implemented, they should be built to facilitate cross-border payments, which are currently expensive, slow, and available to few. Again, we must start this work today so we don't have to turn back tomorrow.

Efficient cross-border payments allow capital to get to where it is needed more quickly. Small businesses can grow across borders and households can receive necessary funds from abroad. While we see encouraging declines in the cost of remittances, they remain above the Sustainable Development Goal targets. We must ensure that countries are not caught on the wrong side of the digital divide.

We know what to do to make cross-border payments more efficient in the short term: improve what we already have. This is the spirit of the G20 Roadmap to improve cross-border payments. In fact, I am pleased to announce that the IMF and the World Bank will soon publish a common plan to provide capacity development to countries in precisely this area.

But in the medium term, new cross-border platforms can help. Think of them as next-generation virtual plazas where central banks, commercial banks, and potentially even households and businesses, can come together to exchange CBDC wholesale or retail. These platforms can even be created to interact with traditional forms of money and manage payment risks.

These platforms are being actively explored by a variety of actors.

Banks and fintech companies are at the forefront. They are building infrastructure to pay each other and exchange financial assets on common blockchain networks.

The public sector is also expanding its boundaries, including with the help of the BIS Innovation Hub. The Monetary Authority of Singapore is particularly active. His Guardian project explores platforms for exchanging money and digital assets. IMF staff will participate in the Guardian project as observers to advise on the implications for the international monetary system. Thank you Ravi Menon for including us!

As you all know, there are many ships that sail these waters. And that's very good.

But we may be at a point where the public sector needs to offer a little more guidance. Do not displace, do not disturb. But to act as a catalyst, guarantee security and efficiency and counteract fragmentation.

What we need on this journey is a compass.

One way to provide a compass is to establish the politically desirable properties of cross-border platforms. For example, platforms must allow countries to manage capital flows and maintain control over their money supply. Equally important is that we need common rules of the game in the fight against money laundering and the financing of terrorism, and in data protection, for example.

AI could help here too. Artificial intelligence solutions known as RegTech could reduce compliance costs. It would be like using priority lanes at airports, skipping the long lines at security.

Again, like CBDCs, we do not need to decide today whether cross-border platforms are desirable. It is about keeping the option open, building capacity and setting the design contours to support the integration and stability of the international monetary system. Otherwise, we could end up fragmenting it.

No institution can provide such guidance. We will have to collaborate closely between international institutions, central banks and finance ministries. The IMF can and will play its role.

Conclusion

Let me conclude with this: we will be on the high seas for some time. But the potential benefit is clear: a more inclusive international financial system that meets our future needs.

So let's not land on the first island. Nor turn back. There is value in the journey itself.

As Marcel Proust once said: “The true voyage of discovery consists not in seeking new landscapes, but in having new eyes.”

That speaks to the strength of the Singapore Fintech Festival and everyone gathered here: the strength of many eyes. The power to bring new perspectives to old and new problems and challenges. I look forward to continuing this journey with all of you. Let's sail together.