Ms. Anikó Szombati offered three clear directions for the future of finance.
First, a more efficient banking system. Upgrade of digital operations are needed to address the challenges brought by current deterioration in the ecosystem. Collaboration with new participants, such as new banking fintech companies, is needed for this purpose.
Second, decentralized financial (DeFi) services and digital assets. Thanks to the progress in decentralized financial services and digital assets, investor interactions are becoming more active. Peer-to-peer sales service models and the dissemination of detached digital assets are enjoying growing popularity. However, the upper limit for their growth is yet to be found out.
Third, CBDC-based systems. Central bank digital currency (CBDC) is a widely used central bank currency in the digital age. With the solid platform provided by central banks, CBDC is likely to grow into an innovative financial service system.
Apart from the three insightful predictions above, how central banks encourage financial innovation is also worth considering for the future of finance.
Banks and fintech are rich soil for innovation, and reasonable, appropriate regulation is the fertilizer essential for it to prosper. Regulatory authorities should provide regulatory tools to boost innovation, and implement targeted and digital-oriented regulatory measures.
To deal with innovative and decentralized business models, new approaches such as relevant financial intermediaries need to be included in the new regulatory framework. For example, anti-money laundering and terrorism, financing risk, technology, network risk, consumer protection, and potential financial stability all need to be regulated from a system-level perspective. The primary task is to establish a unified definition of digital assets. Regulators must continue to assess the risks and benefits for new trends and technologies. Regulatory agencies are expected to have a good grasp of the new technologies and establish operable frameworks for market development.
Apart from maintaining the stability of the financial system, regulators are responsible for protecting citizens’ data privacy and ensuring access to safeguard financial services. The Hungarian central bank monitors sustainability and the impact of financial services on the environment. Regulators must remain vigilant, intervene early, and support financial innovation through various methods such as innovation centers, regulatory sandboxes, and innovation competitions. CBDCs must evolve to keep pace with digital currency-related financial intermediaries, be accessible through low-cost means, and offer a platform for digital and large-scale precise fiscal transfers. They are also expected to provide backup systems and offline payment options in case of natural disasters or emergencies. CBDCs have strong potential to improve financial services’ accessibility and service level for people without bank accounts, thus making the market more inclusive.
In addition, the central bank digital currency platform can be used for the distribution of charitable donations, such as the distribution and transfer of public funds. Take the pandemic-related stimulus funds issued by the public sector in the United States as an example. Originally targeting a wide proportion of the US population, the funds ended up leaving two-thirds of the targeted population behind due to their lack of access through traditional distribution channels. Therefore, more diverse payment options are needed to support economic stimulus policies. A digital platform can enhance the effectiveness of monetary policy and be interoperable with the existing financial system, making it more powerful as a supplementary support system. This can further protect interest rate ranges and enable finance to serve the real economy.
In terms of payment, using more programmable, automated, and efficient payment methods can make transactions faster and more convenient. Complex transactions such as buying a car or a house would be a case in point. Programmable payment options can also be used for payment applications, such as Project Dunbar, a multi-CBDC for cross-border settlements. Unlike traditional electronic payment channels which may be limited during natural disasters or power outages, the CBDC system can be used offline in extreme situations. That said, central banks need to invest more in building the technical capacity and master the relevant professional knowledge for more efficient transactions.
In conclusion, the central bank must spare no effort in promoting financial innovation to provide a stable market for both local and international companies. As CBDCs are an important pillar of future payment systems, the central bank needs to be actively involved in designing related platforms and regulating policies.
Chief Digital Officer, Executive Directorate for Digitalization at Magyar Nemzeti Bank