 We are back from the break and ready for the next panel discussion, which will look at technological innovation and systemic risk. Financial innovation, of course, can be beneficial to customers and increase competition in the financial system. It also brings challenges. The chair of this panel is Cecilia Skingsley, and she will introduce the members of the panel, and she will lead the discussion. So over to you, Ms. Skingsley. Thank you very much, Connie, and hello to you all. It's my utmost pleasure to chair this panel today on discussing how technological innovation is reshaping systemic risks. I have a very distinguished group of fellow panelists here to discuss the issue, and before I introduce them, I'd just like to give a couple of remarks, taking advantage of the fact that I'm chairing this particularly interesting and fascinating subject. So I'd like to start with something that might be sounding like a cliché, but allow myself to evaluate and deliberately a little bit on it. So we are in an era of big technological transitions in the financial sector, and the financial industry is experimenting how to use different new innovations. We often think about this, that this is mostly about crypto assets, stable coins, but also unbacked cryptos that are being developed and also taken up and used by our populations. But there is also other things going on, machine learning and artificial intelligence, and last but not least, great many central banks are actively considering different kinds of upgrading of their payment systems, and also exploring the possibilities of issuing central bank digital currencies or CBDCs. And there is a clear a lot of excitement about how technological innovation can shape the financial sector. There are those who says that technology will make a quantum leap in the way financial services are provided, we hope that this will make them more efficient and more accessible. And the hard work here really is to make the right calls into what could be fundamental changes and what is more smoke and mirrors. But like every kind of transition we have seen through the history, also this wave of technological transition comes with sort of two phases in the same sense that the Greek and the Roman mythology of God of transitions, namely Janus, was depicted with two phases. In this regard, the first phase is the one where we can see improvements in efficiency and effectiveness of the financial sector. And me representing the BIS innovation hub are exactly focused on the possible benefits that technological innovation can actually bring to the financial sector. So at the hub we conduct a number of practical experiments on how these new technologies could possibly be applied to develop public goods geared to improving the global financial systems in the world. For one example, we conduct and are conducting number of projects to improve the current payment systems and more importantly how different versions of CBDCs could be used to enhance cross-border payments but also retail payments. We all also have projects in the area of sub-tech where we test how new technologies such as AI and machine learning can help supervisors do their job in a more efficient way. But at the same time there is also the second phase of this great technological transition, which is the one where new interconnections, new concentration of exposures and potentially new risks brings nasty surprises to us all as regulators, policymakers and supervisors. So it is important that authorities, academia and key financial players continue to devote and expand collective thinking on which new systemic risks could emerge from the ongoing technological transformation and more also importantly how to mitigate those. Ultimately the lessons we learned from the 2008 great financial crisis and global financial crisis is a reminder that we should not allow imbalances to grow and explode in new areas that we do not understand sufficiently yet. So and at the BIS Innovation Hub we are contributing to the best of our ability to develop practical tools to monitor these new developments. I can take for example the crypto markets. One of our projects at the Euro System Center is developing an open source market intelligence platform to shed light in the crypto space on market capitalizations, economic activities and hence the risks to financial stability. But beyond practical tools it is also important that we collectively ask ourselves a number of questions and here I'd like to raise three of those. Number one is are we properly understanding the systemic implications that technological innovation is having in the financial system. Important question number two for the ESRB goes our are macro prudential tools appropriate to capture and address these new systemic risks and if they are not in what way should these macro prudential tools be expanded. And number three the current macro prudential regulation are they fit for purpose when this technological transformation occurs. Setting the stage now it is my great pride to introduce the views of these issues from our panelists and let me introduce our four panelists. We will start with Xavier Vives. Xavier is the Professor of Economics and Financial Management and Director of the Banking Initiative at the IESE Business School of the University of Navara in Spain. Professor Vives has conducted research work on the disruptions of digital innovations in banking and in the broader financial system. Xavier would be followed by Michael Labork, Managing Director at the Depository Trust and Clearing Corporation and Michael has a pivotal role in DTCC's thinking on systemic risk and DTCC is actively working on experimenting new technologies in the settlement and clearing space with a project of DLT based infrastructure looking into the possibilities and book and settle equities transactions using this technology. Michael will be followed by Nelly Liang, Undersecretary for Domestic Finance of the US Treasury Department and the US Treasury works extensively on a number of areas related to the benefits but also the risks of digital assets as has been mandated by President Joe Biden's executive order on digital assets. And our fourth panelist is Andrea Mechler, Member of the Governing Board of the Swiss National Bank and I'm particularly happy to have Andrea and the Swiss National Bank on this panel since Switzerland and that institution takes a number of important interesting steps embedding digital assets and DLT based infrastructures into its framework and developing with a very optimistic view of what these new technologies can do and it's a it's an important supporter as well with the BIS Innovation Hub. So we will start with Xavier Vives, the floor is yours. Thank you very much. Let me share the slides. Yes. Okay. Thank you very much. So I'm very pleased to be here. So thank you very much for the invitation at this conference. I would like to talk basically about markets and banks and intermediation so stability issues first in markets and then briefly also in banks and intermediaries in particular in respect to the competition of fintechs or the fintech entry into the lending markets. So the first topic is about the impact of electroneification in particular automation also and the market structural change in both equity and bond markets and how it relates to the drivers of market fragility. So let me motivate what I'm going to talk about with flash events. Those are those episodes of Southern liquidity dry dots with large price movements that quickly reverse and we've had them everywhere in foreign exchange, sterling dollar, euros with franc in bonds like the 10 year US Treasury yield rally in 2014 or in equities like the ETF episode in 2010 and quite a few others. More specifically, let me talk a little bit more about the US Treasury market or treasuries because lately there has been more talk about liquidity issues in this extremely important market. So there was a flash event in the 15 October 2014 which is depicted here in the green with the green line on this axis we have debt okay and here time and so the blue one is one on 17 September which in fact was due to some news that was deep in the depth of the market and then a quick recovery a while in the weekend of October that kept declining for quite a while and and debt issues were not so easily resolved although they were resolved eventually. In fact, quite a few of these events in particular in equity markets are with no news or with no apparent news okay so it's really our purely internal market dynamics. Back to treasuries so these I took from the Financial Times recently now they were mentioning in an article that it has become harder somehow to trade in treasuries because liquidity has deteriorated this again is market death and we see some with oscillations what are downward trend since 2013 or so and this is in a market obviously that has become vastly larger and important so the issue is important. The financial stability report of the Fed November 2022 mentions two points which I think are important and related to the issue we're talking about the first it stated the continued low level of market death means that liquidity remains more sensitive to the actions of liquidity providers that use high-frequency trading strategies to replenish the order book rapidly that's one statement and the other important statement is that greater concentration of liquidity provision among firms that may follow similar strategies correlated strategies can be a source of fragility making it more likely that liquidity could further deteriorate sharply in response to future shocks and then from the point of view of the participants so here we have Greg Peters from a fixed income company is basically seeing that in this expression I would say no the odds of a financial accident are just higher so a market is fragile when a small change in a parameter in a market parameter provokes large effects and this is the accident. What's behind this? Well now for a while we'll have a change in market structure the trading floor you see goes from our the old trading floor for example inequities where the liquidity was supplied by professional agents so there were agents in charge of keeping the market stable let's say to the modern with electrification and the limit order book now so this is for example not how it looks for apple there is all tool trading so there's to say there are no specific agents in charge of maintaining the market stable. What are the consequences? Well first the first consequence is that market information is vital to trade and also to provide liquidity and in general despite that there are more potential liquidity suppliers and there is more information provision there are two important frictions the first is that the participation of some liquidity suppliers is variable so it's not continuous they are not continuously present in the market and even some have retrenched like maybe banks for regulatory reasons others maybe for technical reasons are not continually present that's the first friction. The second is an information friction there are frictions in market information which limits some traders access to reliable and timely market information. What's the result? The result is that modern markets have improved liquidity and welfare on average I think there is no question about that but at the potential cost of increased fragility in the sense in the specific sense that the small changes in market parameters may have large effects in liquidity. What's the mechanism behind this fragility? According to some research I am conducting with Giovanni Cespa of Bayes Business School now and in fact in theoretical models where after the theoretical mechanism that may be behind this we see the following that market opacity is crucial so market opacity may prevent the participation of non-standard liquidity providers in the market and impair the risk bearing capacity of the same market and in fact then there is a feedback loop where a drop in liquidity may increase the demand for liquidity because of the increase basically on volatility of returns that it induces and generates a further drop in liquidity making liquidity fragile. When does this happen? This happens when the risk bearing capacity of the market is insufficient to absorb the hedging needs of the traders for example liquidity demand is strong the volatility of the payoff is large traders or market makers have higher risk coverage and you see that there are certain circumstances where all these are moved together basically and then furthermore fragility is aggravated by the withdrawal of market makers so that's to say some traders that make the market basically that sometimes for different reasons maybe for technical reasons or for risk control reasons they withdraw from the market. What's the consequence? Well the consequence is that the policy to foster risk sharing market stability and improve welfare is or has to be first to improve disclosure and transparency to make available reliable market information so this I know that in the in the U.S. as also has nearly pointed out to me there is there are there are taking steps in the U.S. steps steps are being taken to improve disclosure and transparency in the treasury market and in Europe we would benefit I think and in the equity markets from a consolidated take something that there is in the U.S. but it's not there in Europe so this would be a recommendation for Europe. Furthermore a measure that foster the continuous dealer participation in the market also would help. We have to there is a caveat though that even disclosure or transparency or this continuous dealer participation typically does not have linear effects but sometimes there are no linear effects that one has to be careful and at this point I don't have more time to elaborate on this but it's something that has to be taken into account. Okay second topic that I want to mention briefly and the second topic is on the impact of fintech so basically information technology and applied to finance in lending markets and in particular I'm thinking more for small and medium-sized firms what are the consequences for investment bank stability and overall welfare of market participants. So just a couple of slides to remind ourselves that the growth of fintech and big tech credit is relevant. Fintech credit is growing in Europe and big tech credit more is booming more in Asia but in both it's growing so this is from a study from the BIS is somewhat dated but still we see the trends for example in Europe for fintech and in Asia for big tech and more specifically let me just take just one example of my bank which of the unfinancial group so you see here how the extremely fast and would say exponential growth of individual micro small business lending lending from this type of technologically advanced bank and as you may know so behind this there is this substitution of collateral for information so this very small business cannot post collateral but they can provide information through their all the devices that are connected and that the unplatform may control. So the question is to what extent does the emergence of fintech makes banking more contestable more competitive more or less stable or better or worse aligned with social welfare so these are the big questions and then some partial answers and again based on theoretical models which I'm working with Ziggy and Yeh also from Yersey Business School on lending markets so what we find at this has all these findings have empirical support in fact if an intermediary adopts more advanced information technology then it can charge higher loan rates and is more stable because it has more skin in the game to monitor the loans of the borrowers so in fact there is evidence that banks that were more advanced technologically in the global financial crisis are far better in terms of default in terms of avoiding defaults from loans. However and this is an important proviso the impact of an overall adoption of information technology here on lending depends on its type and here I would like to distinguish between two types of information improvements in IT information technology that benefit the monitoring of these financial intermediaries type one and type two. Type one is a general improvement in processing information due to our two machine learning techniques the advances in cloud computing and storage information management software this is a type of improvement in processing information which really reduces costs and really does not change much the competitive position of banks as long as it is a general improvement and it betters bank stability. The second is this type of improvement in information technology that decreases the distance between the borrower and the lender for example in terms of physical distance friction because of the diffusion of videoconferencing now what we're doing now the smartphone mobile apps etc or decreasing the distance between the lender and the and the borrower in terms of expertise for example in terms of the expertise of the lender in terms of the industry. So these are different types of information technology which if they are type two they change the differentiation between banks and therefore they change the degree of competitive pressure in the market and this may be good if competitive pressure is insufficient but it may be bad if already we are in a situation which is quite competitive and which reduces margin so much that banks lose skin in the game or intermediaries lose skin in the game and then monitor less and then defaults a good goal. In any case also what we find is that any type of information technology improvement is good for welfare when it extends the market basically when it covers market segments that previously were not covered this basically it improves financial improvement. Okay finally and with this I will end again more specifically what could be the effects of the entry of fintechs in the lending market and here we have to distinguish quite carefully on whether banks have the same ability to price flexibly and to price discriminate than fintechs or not if they do not they are more rigid in pricing because of historical reasons because of regulation because of they are incapable technologically because they depend less on the cloud and more on the main frame then we find the following that a fintech can penetrate the lending market even with no advantage in monitoring efficiency or funding cost just because it can price more efficiently or more efficiently from the private point of view obviously. For entrepreneurs then of the same characteristics banks monitor effort is higher than the one on fintechs and in fact fintech borrowers are more likely to default and this also has empirical support furthermore fintech entry may decrease investment basically entrepreneurs investment if the competition within fintech is not sufficiently intense okay otherwise it doesn't it's it's good for investment. However all these things do not happen if banks can price as flexible as fintechs then fintech entry happens only if they have better efficiency or funding cost so a policy recommendation here is not to put obstacles to banks in pricing with further regulations so here a level playing field would help. Two last points fintech entry also can induce and in fact we have seen that bank exit of restructuring apart also because there was in fact in Europe in particular quite a bit of excess capacity in the bank branch networks and this potentially reduces the intensity of lending competition and may hurt investment so depending on the on the circumstances. However again fintech entry will be unambiguously good when it extends the market to unserve consumers and increases financial inclusion. Thank you very much I am done with this in the slides then you'll find references and also references to report which relates to what I've talked about and you will have available. Thank you very much. Thank you very much Professor Vivas I would now like to introduce it to you Michael Leighbrook managing director at the Depository Trust and Clear Incorporation Michael the floor is yours. Great thank you to the ESRB for the opportunity to speak at today's event. As brief background on DTCC we're a member owned and governed financial market utility. Our core clearing and settlement activities are comprised of three systemically important FMUs that cover U.S. equity products, U.S. government and mortgage back securities and DTCS securities depository. We also maintain global trade repositories worldwide. While my role at DTCC is to identify and monitor potential systemic risks I'll begin my remarks today by talking about the substantial current and future benefits of technology innovation. If you can move to the first slide please. There we go okay great. As you can see from the slide emerging technologies hold considerable promise and benefits for the financial system. A couple of examples distributed ledgers can be used to validate and track transactions on a distributed and decentralized platform providing resilient and cost-effective alternative to today's centralized payment infrastructures. The payments arena is also a great example of how technologies helped increase overall customer access. Instead of utilizing banking relationships or credit card providers for payments consumers now routinely use tools like Venmo, PayPal etc. Blockchain meanwhile can improve efficiency in international payments versus current payment systems and infrastructures. Also there's potential for real-time trade settlement not available today which will help capital efficiency and reduce risk. So it's clear that new technologies are changing the way society and our industry conducts business in a meaningful way. What I see as a changing paradigm in this space is the way in which technology is having an impact. For example initial fintech developments have focused mainly on enhancing existing capabilities while future applications will likely transform the way counter parties interact with one another. Begin with the next slide please. Great. In terms of some guiding principles I feel any development of digital asset solutions has to begin with a strong client and industry-centric approach. Solutions should allow the industry to optimize the full value chain or key components of it to achieve cost and operational efficiency. Importantly however any new technology initiatives should provide equal or greater resilience than existing infrastructures and solutions. These principles will help ensure that technology developments are designed to provide optimal benefits to the industry while keeping a close eye on risk and resilience. Next slide please. When I look back at DTC's role in emerging technologies I remember the 2016 paper we published called embracing disruption tapping the potential for distributed ledger. I think the title of that paper embracing disruption is very appropriate not just to describe DTC's mindset but also for today's discussion. As you can see from this list of initiatives the company's had a history of exploring and testing emerging technologies to reduce risk and cost in the post-trade space. Starting in 2016 DTC replatformed its trade information warehouse for credit derivatives using cloud and DLT. In 2020 we explored asset tokenization and digital infrastructure prototypes to support private market security issuance transfer and servicing which can improve liquidity and make settlement more efficient. And more recently Project Lithium now known as Security Settlement Pilot is a prototype to explore how a U.S. central bank digital currency might operate in the U.S. clearing and settlement infrastructure leveraging DLT. Next slide. Now that I've discussed some of the potential benefits of digital assets and some ongoing use cases in the U.S. I'll turn my attention to some of the potential threats I see from these technologies. First and foremost interdependency or interconnectedness risk. Recent events at FTX, Gemini and other crypto platforms highlight the increased risk of contagion to the financial sector and real economy. Correlations between crypto asset prices and mainstream equity indices have been steadily increasing according to a recent FSB report. Meanwhile use of DLT while minimizing some risks and providing efficiencies also increases the number of points of potential failure as well as the risk of data breaches, hacking, and other types of third-party risk. In terms of models, traditional models that leverage historical data can be inconsistent when predicting forward-looking outcomes. Overreliance on high-speed processing and algo decision-making can lead to errors, lack transparency, and include unintended biases. In terms of conflicting national priorities this could also be an impediment to effectively thwarting cyberterrorism, financial crimes, both of which are on the rise. And finally the use of social media platforms like Twitter, online forums like Reddit have the potential to impact market volatility and risk. Also low-cost digital platforms and brokerages have made retail financial participation largely frictionless, but the meme stock event is evidence of the potential for significant downside risk. I should note this is just a partial list of risks given the time available. A few additional areas of concern I'll briefly mention include fraud and conduct risk. According to a recent US Treasury report the US FTC logged almost 50,000 reported incidents of crypto related fraud between January 21 and March 22 for a value of more than a billion dollars. Asset bubble and volatility risk as we've seen occur in multiple time periods, operational risk especially due to the untested track record of many new entrants in the space, and the lack of a centralized organization as a governing oversight authority for certain technologies. Now some common mitigants across many of these risks include incorporating an interconnected risk management approach into traditional ERM frameworks which is something DTC has done, a heightened focus on resilience and third-party risk, enhanced focus on model risk management, and increased industry collaboration on emerging and non-traditional risks to name a few. If you move to the left side please. Since I'm speaking mainly from the perspective of the US CCP I thought I'd share some highlights about what I see as key developments in the US legislative and regulatory agenda. The key recent development was the White House executive order in March 22. Priorities of this order include a focus on consumer and investor protection, financial stability in the role of the US in the global financial system. In line with the executive order the Treasury has issued multiple reports including implications for consumers, investors, and businesses which outline implications of developments and adoption of crypto assets. Also as you can see here there are in-flight congressional proposals regarding digital asset spot market and stable coins given the increased focus in these areas. Finally in October of this year FSOC released its digital asset financial stability risk and regulation report as part of the digital asset executive order. The report focused on crypto asset risks and outlined regulatory gaps and market risks that could pose threats to stability. Given some significant risk events in the crypto markets of late we expect legislative activity to accelerate next year when the new Congress is seated. To summarize in my remarks today I covered what I see is the many potential benefits brought by emerging technologies. I mentioned how these can lead to greater access to products and services along with lower costs and efficiencies from consumers and institutions. However to date I suggest that many of these benefits have yet to be fully realized despite the great promise. At the same time we've already seen some significant unexpected risks materialized through dislocation and crypto prices. Consumer claims are fraud and a major failure of a crypto exchange. Therefore I believe this evidence to date indicates that the balance between prudent innovation and systemic risk considerations hasn't yet been achieved. Policy makers and regulators should act swiftly to ensure we have the appropriate guardrails and best practices in place globally and to ensure that any new technology initiative provide equal or greater resilience than existing infrastructures. At all costs we should avoid a scenario whereby in the pursuit of rapid innovation and the desire for speed and convenience we don't allow systemic risk to develop after so much progress has been made since the last financial crisis. Thank you. Thank you very much Michael. I think that the last slide was a very elegant connection to our next panelist which is Nelly Lang at the US Treasury Department. Nelly is the Undersecretary for Domestic Finance and it's a real honor to have you on this panel giving you the US Treasury perspective. So Nelly the floor is yours please. Thank you Cecilia and thank you to the ESRB for inviting me to be part of this panel. It's an honor to be here. I have some slides if we could put them up please. So following Michael today I thought I would focus on some of these digital asset reports that he referred to. So I'm going to focus specifically on investor protection and then systemic risk. So next slide please. Just the background President Biden's executive order issued in March 2022 to ensure the responsible development of digital assets was designed to establish a government-wide approach to address the risks and harness the potential benefits of digital assets and their underlying technology. Treasury led a number of reports and I'm just listing some of them here. One is the future of money and payments. A second implications of crypto assets for consumers, investors and businesses. Third issues financial security and then fourth international engagement and cooperation. Treasury also chairs the financial stability oversight council and issued a report on financial stability risks and regulatory gaps. And as I said today I'm going to just get a little bit deeper into the investor and consumer protection issues and then the systemic risk considerations. Before I dig in and just into the detail let me just mention a few of the main points I do want to make. So new innovations as part of this theme of this panel I believe are potentially transformational but there are clear and present risks. These new innovations pose these risks but I think actually the risks are quite similar and those channels for systemic risk are familiar to us. They are not so unique. We have consumer and investor protection laws for market integrity. We have enforcement authorities. I think we are have learned however they are not sufficient to address the types of risks that are common to financial activities that crypto pose and we will need legislation and the reports do propose various specific proposals for legislation. So let me just turn to the first. This report is the one on consumer and investor protections and the implications of crypto. The charge in this report was what are the current use cases for crypto assets and are vulnerable communities disparately impacted. The main findings of the report were that there are high frequency of operational failures, market manipulation, fraud, thefts and scams. I think we all saw the market value of crypto assets go up and go down and there's thousands and thousands of digital crypto assets that have questionable value. Consumers and investors were exposed to improper conduct, lack of transparency, non-compliance with existing regulations including misrepresentation of the availability of deposit insurance for example. And we did find that vulnerable populations such as the elderly or some low income populations were targeted but I think systematic data are inadequate to make a conclusion. The recommendations from this report related to consumer and investor protection were for the regulators to continue to aggressively pursue enforcement, to continue to issue guidance and rules where needed and to work together in a more coordinated way to provide consistent and comprehensive oversight. For those of you not familiar with the U.S., we have federal and we have a lot of state regulators who are involved in the crypto asset regulatory arena and then there was an explicit recommendation to provide better information to consumers. If you go to the next slide please. The financial stability risks of digital assets was written by the financial stability oversight council and builds on this earlier, this previous report. The charge of this report was what are the financial stability risks and are there regulatory gaps for digital assets and then to make explicit recommendations for how to mitigate systemic risks. The main findings to summarize a broad conclusion was financial stability risk could emerge if crypto assets increased in scale or the interconnections with the traditional financial system were to deepen and when activities were not appropriately regulated and rules are not enforced. A lot of words negotiated here but despite the rise in market value the activities were fairly limited in size. Their connections with the banking sector and other traditional financial parts of the system that are highly levered were still also limited but it allows for if the activities are appropriately regulated and rules are enforced it's possible that financial stability risks would not be significant. The report also noted that there are notable risks from stablecoins which we have all of us globally have been focused on trading platforms and in the United States a reliance on money service business licenses which are state-level money service transmitter licenses often implemented for anti-money laundering types of regulations but do not generally take on safety and soundness issues. Within the crypto system there are all kinds of vulnerabilities that lead to systemic risk vulnerabilities are significant but again I do not think they are unique to the crypto system. We saw speculative driven asset prices. There was run risk. There is leverage. There is interconnectedness and there are operational vulnerabilities. To me that sounds very much like the set of vulnerabilities we see in the traditional financial system and which many of our countries use to monitor for financial stability risks. The specific identified regulatory gaps that we highlighted was one, a spot market for crypto assets that are not securities. Second, the potential and taking advantage of regulatory arbitrage, domestic and cross border and then third direct access direct retail access to markets not through broker dealers or futures commission merchants. Please turn to the next slide please. So as the crypto events of the past year unfolded in some ways I think we were partly we were lucky in some sense and may not be so lucky next time. It was clear of the risk to investors and consumers surfaced and that we need better transparency and consumer understanding of these products and risks. Just as a few examples the SEC and CFTC have brought more than 146 enforcement cases. The state security regulators have brought 480 investigations and 145 enforcement actions. The CFPB our consumer protection bureau had over 8,000 complaints between 2018 and 2022 and of course governance in crypto assets this week. Instability was mainly within the crypto sector. Broader systemic risks were largely absent going back to what I said on the previous slide probably because of limited scale probably because of limited interconnections with the traditional financial sector and and just also at this point fairly limited use for money and payments. Next slide please. So just to highlight a few of the explicit recommendations that FSOC made again just focusing on the same risk same activity same regulatory outcome not unique to the underlying technology if it's providing the same type of financial service and providing the same type of risk to consumers investors and to the broader economy. Certainly need to enforce existing regulations securities and commodities rules and banking rules. In terms of legislation as I mentioned create a spot market framework these are for crypto assets that are not securities currently it's basically enforcement and one could you know create regulations here towards market integrity a more preemptive ex ante approach. Second regulate stablecoins for run risks the operational risks and not on the slide concentration stablecoins have the potential to scale up very quickly those are all key those again those risks are very common to financial services. Third regulate platforms that provide multiple services I think all of us know about these platforms are become much more familiar with some of these platforms supervisors regulators do not have visibility into the various affiliates this is domestic and onshore and offshore. There are uncertainties about exchanges and the role of custody whether you can what the rules relate to segregation of assets and also you need to increase coordination among the agencies. These platforms combine trading lending borrowing a number of activities they are not just exchanges and then finally let me just say there are we ask for a study of the potential systemic risks of direct retail access to crypto assets for example there are some vertical integration services provided by broker dealers retailers retail customers can go directly to these services without the benefits of broker dealers or FCMs. So I think to conclude I would just repeat we believe crypto assets digital assets more broadly are potentially transformational with many benefits for the economy and efficiencies but there are very clear risks that we need to address some of which could become systemic. We need to enforce consumer investor protection laws we need to establish legislation for the gaps that exist of which there are many and we need to promote global cross border cooperation. Thank you very much. Thank you very much. Natalie Lang forgive us this very important US perspective and without further ado I'd like to bring also Andrea McClary into the conversation Andrea is member of the governing board at the Swiss national bank Andrea the floor is yours. Thank you so much Cecilia it's a great pleasure for me to be on this panel and particularly after these really very interesting presentation on which I will try to build with a quite different perspective in the sense that as a central bank we've always had to strike the balance between of course safeguarding stability for the system but also embracing innovation I'm not going to go as far as embracing disruption as Michael did but we do try and I believe we have a responsibility to to embrace and understand innovation so my focus today is going to be on the rise of digital asset markets in particular the rise of DLT based FMIs distributed ledger technology based financial market in infrastructure and the role of central bank in mitigating some of the risk and particularly I want to focus on one risk on one risk is to settlement risk or the risk in the payment landscape so to discuss what may happen in the future and we've seen there's a lot happening and we do believe there is going to be quite a lot it's important to look to have a step back and look at the today system just super stylistically what how does today's system look like today we have what is called a two-tier financial system the central bank in the middle I know I'm sorry for the regulators very simple system the the central bank in the middle that provides liquidity to financial institution and also very importantly access to the central bank balance sheet for central bank money and the financial institutions are the one that deal with the retail sector so everything that has to do with the retail payment is in that blue sphere and this is not where my focus is going to be my focus is going to be how do you maintain that core system in the blue sphere here which let's face it in the domestic sphere if you think of payments and this interbank or wholesale payment has worked beautifully it's really been very little settlement risk in the traditional world and the conventional world and why is that that is basically because a technology actually in the 80s that was introduced in the 80s so almost 40 years ago has really allowed central banks to manage a very important risk which is the settlement risk and what is this technology that is the rtgs the real-time gross settlement system which are often mandated by the central bank why it and it wasn't and this is a point I believe that nely made beautifully it's not the technology that solved the problem but the technology allowed to to capture principles to address principles that are needed to mitigate risk in this case it was very simple what does the rtgs system all our countries have an rtgs system in the core in the middle and it does basically three things it allows large payments important payment to systemic part where the systemic risk is to be on one hand final irrevocable and in central bank money and the question I'm asking today is now that we're we having and we've seen in the previous presentation a new technology dlt-based infrastructures how do you deal do you think about these I'm going to call them old principle I should call them conventional principles do you keep them in the new technology do you need to address them what does it mean and I'm just going to give you three examples to run you through it could you please go to the next slide so the reality is in Switzerland we do have the emergence of a tokenized asset ecosystem it's still at the beginning but we do have one because it is supported by a sound and legal regulatory framework in 2021 a dlt act came into force that allows to have a legal basis for trading of rights through electronic register i.e. dlt-based so now we have a first regulated stock exchange that allows the trading and settlement of digital assets now I'm not going to go into whether this is more efficient whether it's better I'm going to take the assumption that we are in a world suddenly I'm going to move forward I agree that a systemic that that you do have you live in a world where there is a systemic flow of transaction taking place on such a dlt infrastructure and then the question is how do you make it safe and secure and that's where we've done a project together with the dis innovation hub it's called the project to elvizia to exactly look at that and and and doing it very simply we've done three things one we've done do we need to just use the old system i.e. create a simple link to the older conventional rtgs system it works it works beautifully but of course you don't get the synergies of using the new technologies or do you use a coin a wholesale cbdc do you need central bank money on that infrastructure you can also use private coin I'm going to focus on the wholesale cbdc we came to the conclusion that if you're going to have a systemic flow of transaction on a platform like this you will need just to apply the same principle as you did before and that principle is to have central bank money in digital form i.e. a wholesale cbdc that is available on such a platform now this is one thing we've done now we did two more things one is what does it mean for cross border as we know domestically you could argue it works quite well cross border quite a lot of questions and so we've done another project can you please go to the next slide and there we basically used one platform the platform we have in Switzerland and we have seen can you do a can you process a cross border transaction using wholesale cbdc we did this with the bank de france they issue a euro wholesale cbdc we issued a swiss frank cbdc and we did it on this shared platform again i want to say something very important in the end the key takeaway for us was not about technology the technology works i'm not going whether it's scalable but it works it works very nicely but the question for us was the governance right the question is how do central banks make sure they can keep control of their of their central bank money and we used here a particular design a dual nodary signing mechanism it works but also you had also another old old question who has access to one of those platforms so often the questions are the same but the question then we have to figure out what does it mean in this new system and we've gone one one more step again with the vis innovation hub and this is a project that is not yet finished we're just in the midst of doing it it's called the project mariana can you please go to the next slide and it's basically asking a similar question but going one step forward if you live in a dlt ecosystem again i'm making the assumption the assumption we're moving in that direction can you use really defy protocols to not just to actually create markets digital asset markets to trade and settle safely on using this new technology and what does it mean for our conventional principle that we have to maintain safety so what we're doing here is we're doing it actually bong de france swiss national bank but also um monetary authority of singapore just three we could have more in each central banks issues its own wholesale cbdc again the idea is if this is going to be systemic you need a wholesale cbdc you need the the dependent of what we have central bank money for settlement and the idea is each creates and issues it we have a bridge to some neutral network where we create this big liquidity pool and you can settle basically fx transaction and the last slide please using that setup we're exploring even one more thing is can you do trading ie can you use dlt platform to actually determine the prices of uh fx trades again we're not saying this is the right way because you know central banks are not going to be into market being a market maker but it is about understanding what can be new about technology and understanding what are the mechanism or the principles i'm going to call them old principle i should really call them more time tested principle to maintain basic trust and stability in the system and to understand which of those you need to keep conceptually do you just re duplicate them recreate them in the new system or at what point do you need to think about something different but that has the same purpose to maintain security i'm i'm going to stop it here thank you very much thank you very much uh andrea for uh that fascinating presentation of some of the things that we are working together in and and across the bias innovation hub and with uh swiss national bank as an important partner uh so i think we have opened up a quite a nice um set of of important questions and um it might feel daunting sometimes well everything that is going on in the industry uh in the central banking community and also on the regulatory side so i'd like to uh raise two questions since this is the european systemic risk board um involved obviously in system systemic risk uh assessment and mitigation and um using macro prudential uh tools as as one very important feature so i'll have one question about the governance in this future we're going into and one about the contents of policy but starting with governance we we it's obviously clear that many of the things we're discussing here um are crypto assets stablecoins defy uh they move uh cross border which means that the public sector response also had to be a solutions needs to be cross border um do you think we have the appropriate frameworks to cooperate at an international level to achieve uh efficient frameworks for for risk identification monitoring regulation avoiding regulatory arbitrage and the likes uh or do you think there is more to do uh in the uh cooperation in the international space so that's my first question and hope if anyone would like to take a shot at this you can either raise your hand or just take the word and the floor is yours i'll start i'll start okay i guess i'll i'm gonna start um so as i mentioned you know it's it's as you highlighted it's critical that supervisors and regulators have insight into has some visibility into all the different affiliates and of which some are overseas for example the bahamas um or and the us and um and that's critical this is again not a new situation this has happened in the past where um banks foreign banks set up you know and you don't have visibility into it it created a new regime um for foreign bank operations in other countries um so clearly international cooperation coordination is important the basal capital framework came together when needed um set global minimum standards that's an example ayasco sets uh principles i think um the actual mechanism by which to achieve coordination i think is open for discussion but there are examples in the past of how one can take that step you know through fsb through g20 through broader has been discussed recently maybe beyond g20 for for crypto um i would just i guess it would start there and then money and payments is a whole another issue than the crypto because money and payments as you and andrea have discussed there is some more fundamental um we want to get into systemic risk that is clearly the place and that you don't need to even stronger mechanisms for coordination but just a few thoughts throughout now i share that observation i in the way i think about it is we stand on the shoulders of our predecessors they learned hard-earned lessons and uh uh and we are doing the same um anyone else would like to discuss whether we have the appropriate forms of forums for international collaboration i would just add i i think we do um i'm sorry uh i from my perspective i i do think we have the right frameworks in place and delegates some examples of work that's happening i spoke to a few things i think as a starting point we should leverage existing standard setting bodies cpm isco and the principles they have um i know in the us that the sec and cfdc are looking to apply existing regulations to activity so i think before we consider what has to change we should leverage existing rules and principles that are in place but i think the framework is there is that the end yeah no i i agree with both uh what michael and nelly said just to uh for me are questions more than more than anything else um in this area um i think still we do not know very well how do we have to regulate domestically right so the the cross border issue for me already you know it's a it's a further step which is difficult but frankly we need more clarity of what we want you know i i understand that i am typically of the principle that not keep changing the regulations with things that happen you know so just to profit from the institutions or from the relations we have i think it's the same that you've said but uh but okay we should advance more in the clarity of what we want uh because what i see and in particular with the ftx episode and and this episode that also the nelly mentioned in the in the reports um my impression uh is that um after these things happen consumers want to be insured and want to be basically made full of the money they've lost and then we are in trouble right because this is clearly a moral hazard problem and so we have to think very carefully on how are we going to regulate not to induce uh no a further wave of claims that then the public you know the public sector feels compelled to you know to to attend so so that's one point and the second on this on the cross border i i see an obstacle uh which is kind of i think an elephant in the room which is the the geopolitical tensions that we have no the sanctions the tension between the us and china um that all this may you know pushes towards the coupling of systems so how do we do that you know all this that we want to do and to be efficient when maybe the system's really decoupling again i don't know okay and andrea just very quickly um i like um the points also what xavier said i mean you need to leverage what exists and it's not only cross border i think it's also border cross border sometimes uh get changed ultimately i see one of the big challenges is interoperability a lot of it has to do with access how do you mix digital into the traditional world and it's not just technical it's also about fungibility of of of money that ultimately comes there and it's also about access who gets to access what so and this is one of the oldest questions and whether it's it's true on the domestic side and it's true on the cross border side but i think i must say on this question cecilia i thought it was really helpful to have some of these project that i've shown and others the the bis innovation hub that allows exactly to do some cross border project in areas that otherwise would have been really difficult like we would not have been able to go into that depth but to really see what happens and i think this kind of a forum is can be really very helpful thank you uh so that was a some issues around the governance for for handling all these innovations on the private sector but also as we heard some a lot of things going on in the public as well let me go into more of the contents and i'm particularly interested in who have participators coming from macro prudential authorities across europe and when they are sort of dealing with new sources for new sources of such systemic risks that that could emerge in the regulated financial system what are your sort of best advice to them what's on what sort of granularity do they have to go into will future supervisors have to start learning to supervise smart contracts to to figure out automated market makers and the likes or do they need to stop somewhere else and and what would the future supervisor actually look like you think great question i am not a supervisor that year you you you teach the future supervisors what what career advice do you give them well well first to be tech savvy so this definitely i would give that advice today no to to be on top of i mean general advice no but to be on top of technological developments to understand to try to understand and and and in fact in particular as we know the crypto world is quite difficult to understand so at least if you are not a native in this world right so so definitely this i would say that this is the the thing i would say because i think it's very difficult to to understand the consequences of some of the new technologies and i think this has happened with all technologies no i think it happened with railways so which now it looks okay so how it could happen well it happened with a railway no so it also happens no with uh with these technologies and then for example certain algorithms introduce certain biases but fine but it isn't very difficult to not to find out you have a you need a lot of study a a lot of understanding on on how and why it happens but at the end of the day it's also to have a good team good advice but uh and personally to be on top of it i might just add from our perspective i think there's it's a combination of two things it's one yes this technology that is coming out it's clearly sophisticated new and all that that requires everyone to to learn more for example i understand the sec is increasing the size of its crypto asset and cyber unit the cftc is standing up in office of technology so i think those are all prudent and necessary actions but at the same time someone mentioned earlier i think that same risk i think is the term i was used ultimately the risk we're talking about manifest themselves in the same way as other risk liquidity risk operational risk so if you apply existing time tested principles to these new activities i think you can still leverage those existing skills and regulations you don't to reinvent the wheel completely so it's a combination of both i think i may have something there i think it's also has come up before but i think it's important to understand that the this financial crisis is like now again the fdx case which was no uh which is a case in point has all the ingredients of the classical financial crisis yes all it's a bubble excessive leverage excessive risk taking lack lack of controls potential fraud it has everything so it has reminded me for example some instances of the savings and loans crisis of what happened which is a very different case right but but i mean the features are similar so this means that i guess apart from being uh on top of the technical developments no one has to understand very well no if you want the the basic principles on on financial crisis no and and then put them together no i mean yeah aria just very quickly i think absolutely it's very important to differentiate the problems that are related to governance poor governance and governance mechanism that are ultimately extremely important but then i do think we should not underestimate that new technologies has the potential to change the structure of the markets and this is something that needs to be understood i think it came out very nicely xavi and what you showed and and and what's happening in the u.s treasury market we've done some work in the fx market and those are things that require ultimately whether we want it or not more granularity new data or even new data architect texture it needs new skills it needs new interconnection to understand this thing so i think it's both sides but we shouldn't just because there are when the governance doesn't work we know it's going to crash to underestimate how technology may also change more fundamentally things yeah so one of my points i tried to make earlier i do think the sources of systemic risk are still pretty common to most financial activities the excess leverage the mismatches in funding or currency or something the interconnection it's the complexity and then you have fraud and all that kind of thing those are common to most issues technology does add some complexity to the whole thing so there's somewhere in here so we were between where we what we know and how we adapt and we were adapting from banking system from credit systems that are dominated by banking to non banks i mean that's just an example like you had to learn securitization and and you know private funds and all that it this is not on that same order this is newer this is more technical but it's again financial activities to the extent they're used to provide financial services there are probably common common sources of vulnerabilities that can lead to systemic risk if i may chip in an observation myself also in the same sense as they were corporate casualties in the sort of the younger age of the market economy and we got an extensive financial auditing as a result we're counting and a tour auditing which in my view is the kind of private sector looking after itself because we can't have all the you know supervisors looking into all the auditing all the corporations in the world i my sort of speculation here is that we will see more elements of technological auditing in the in the space of machine learning artificial intelligence and the likes because at the end of the day it's really the interest of the private sector to to have a plane field that is not regulated in details i have allowing for one question from the audience which is actually very i think it was really interesting so i'm gonna quickly bring it to the table we know that it is a society creates a lot of large data sets opening up information that can be helpful in monitoring signaling risk in early stage if you would give the esrb some advice what is the first thing they should try to look at in order to kind of share more data across border cross sectors to get get a better feel for for what is happening is there any advancements in in this area someone would like to point to sharing and processing large data sets well the only thing i well the first thing is just for research is good to have access no to what i'm gonna say no it's good to have access to to those large data sets maybe sometimes anonymized no obviously properly so that there is no undue disclosure but at least for for research purposes um i think central must have advanced uh in this respect that's my impression that they are they have open more you know the research database uh which were very detailed for example loads of things like this uh to do excellent research and and and we have learned uh quite a bit you know so at least in this respect i think we have to follow uh we have to follow this line a couple comments um i think a little here i'm not sure the what the question for sharing is what we're after certainly for illicit finance risks in the use of crypto assets there are arrangements across countries to share when necessary um to help identify you know bad actors and prevent that so i think those kinds of arrangements are in place um you know the whole crypto asset space raises all kinds of questions about privacy and user protections and that and i do think the community the globally is still struggling with how to provide privacy and protections while insuring um national national security and prevention of those are issues that come up whenever we're talking about the future of money and payments um sure that so that's an area um and then one a little bit unrelated but came up with Javier's discussions today about um treasury markets uh we do there's an area where transparency in the u.s treasury markets has been a little slow incoming and um currently you can see weekly aggregate trading volumes um prices are available instantaneous you know prices are always available trading is not we are now moving to in the first quarter to daily transactions but have been also processing where we will be providing assessing how to provide transaction level data um which can allow for you know greater um access other more people to have more access to the data that can help with market making so i think in general disagreeing with broad data availability is useful um the sharing is a little bit what purpose we're trying to create you know the question that came into the audience i think is we could answer in a number of different ways but um data availability is usually can be helpful for most cases but you have to trade off privacy true okay uh our time is up uh and i'm not going to even try to um make a summary out of this very rich discussion i certainly learned a lot i hope it's been equally helpful for all the participators of this very well organized conference i'd like to thank Xavier and Ellie Andrea and and Michael for for really generous contributions and i would like to say thank you from my behalf in Basel and hand the floor back to Connie and the organizers thank you thank you everybody thank you thank you thank you thank you thank you miss Skingsley and thanks to the panel members for this thought for the discussion it's very interesting