The Financial System Is In 'An Age of Disruption,' BIS Official Admits

Both the world and the financial system as we know it is in “an age of disruption.” But instead of letting “disruption run its course,” central banks should “harness the power of innovation” so that the best elements of the current financial system can be preserved, according to Benoit Cœuré, head of the Bank for International Settlements (BIS) Innovation Hub.

Speaking at the Geneva Conference on the World Economy in Geneva, Switzerland on Thursday, Cœuré said that “cryptocurrencies, the rapid rise of decentralized finance (DeFi), and digital ID systems” are all disrupting legacy systems at the moment.

And although the BIS official admitted that new technologies “can foster greater efficiency,” he also said that they have the potential to spawn “financial instability, loss of privacy, and financial exclusion.”

However, despite his claims, decentralized cryptocurrencies, such as Bitcoin (BTC) might do the opposite and offer greater financial privacy and inclusion.

In either case, more specifically, Cœuré pointed to the risks he sees from stablecoins, and in particular so-called “global stablecoins” such as Facebook's Diem project.

“They are promoted as a way to provide faster and cheaper cross-border payments and deeper financial inclusion. And they do,” Cœuré said, before warning that they also “pose significant risks:”

“They can create closed ecosystems or ‘walled gardens’ that fragment the monetary system, by potentially taking large volumes of payments outside the system that has central banks at its centre.”

Moreover, the head of the BIS Innovation Hub also warned that stablecoins may pose risks for financial stability itself. To address this, Cœuré said stablecoins – if found to be “systemically important” – should follow “international standards for payment, clearing and settlement systems to safeguard financial stability […].”

Further, Cœuré, a French economist who has previously been an executive board member of the European Central Bank (ECB), said that the history of private money “is not a happy read,” and that “private issuers have always chosen profits” whenever conflicts arose between keeping money stable and making money.

“This is where central banks come in,” Cœuré continued by saying, before moving on to explain how a “well-designed” central bank digital currency (CBDC) could become both a “safe and neutral means of payment and settlement” in the time ahead.

However, he admitted that this disruption is more complicated than it might seem.

“Could technological innovation also disrupt the conduct of monetary policy？ This could be the next battle line. There are so many dimensions to this question, and I certainly dont have all the answers,” Cœuré said.

Sometimes called ‘the central bank of central banks,’ the BIS is an international financial institution headquartered in Basel, Switzerland. The institution is owned by 62 central banks from around the world, and is led by former Banco de México Governor Agustín Carstens.

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