National Bank: High Bar for a Digital Currency


National Bank: High Bar for a Digital Currency

According to the Swiss National Bank, alternative payment methods and new digital technologies still have to prove that they create added value. In this interview, Dewet Moser and Sébastien Kraenzlin talk about the digitalization of payment transactions, instant payments, cash and Libra, and the central bank’s role with regard to financial stability, efficiency, and security.

Until just a few years ago, the topic of payment traffic hardly received any public attention. Now it is omnipresent in the media. How do you explain that?

Dewet Moser: Payments are a reflection of the economy. As national economies move closer, economic areas merge, and international trade increases, payment transactions have moved into the spotlight. Supply relationships are increasingly globalized, not just between companies but also with private customers. Many companies nowadays have a global customer base. All this has fueled the need for simpler payment solutions, while technological progress has created the possibilities for this. It’s not just trade that benefits from the digitalization of the economy, but also payments of course. And along with the possibility for digital and mobile payment, competition in payment traffic has also increased enormously.

There have been calls from all sides for central banks to issues digital money themselves for both banks and consumers. To what extent do you see this as just pie in the sky?

D.M.: I have to start by saying that everything we do as the National Bank is based on our statutory mandate: As well as having an obligation to ensure the supply of cash to the economy, we must also facilitate and secure functioning cashless payment. In addition, we have a duty to contribute to the stability of the financial system. These are the guiding principles that we also have to consider when further developing payment traffic. It should be noted that the SIC system we have today has proven highly successful. Designed 40 years ago and in use for 33 years, it has continuously been enhanced to keep it up to date. When it comes to the debate about alternative payment methods and new digital technologies, we don’t yet have any evidence that these really generate added value, whether in terms of functionality or efficiency. Furthermore, if we wanted to offer the population digital central bank money, we would ultimately have to be willing to shake at the foundations of the financial system. At present, there’s a clear division of tasks between the SNB as the central bank and the banks as service providers for customers. We would have very serious concerns about calling this two-tier banking system into question. In particular, this could entail risks to the stability of the entire financial system.

S.K.: Over the past 33 years, the SIC system has not only proved that it is highly efficient and secure. It has also demonstrated that innovations at the customer-bank interface can be offered on the basis of SIC. We believe that banks or other financial intermediaries are best placed to offer these innovations and that it’s not the role of the central bank to implement them on the market. Our task is to identify what needs are arising and what innovations are taking place on the market, and how the SIC system – as the core infrastructure of Swiss payment traffic – can support these innovations and create synergies.

 

When it comes to the debate about alternative payment methods and new digital technologies, we don’t yet have any evidence that these really generate added value.

Have there been specific deliberations on this matter?

D.M.: In addition to the key issues mentioned before, digital money would involve in particular an in-depth review of the new technological possibilities for digitalizing payments, such as the distributed ledger technology (DLT). Here we also focus, for example, on more efficient processing of financial market transactions or on international payments. A very active and intense discussion on these issues is also taking place between central banks and public authorities. Specifically, we are involved in projects at the Innovation Hub center in Switzerland together with the Bank for International Settlements (BIS). One of the projects in which SIX is involved is a feasibility study in which we examine the integration of digital central bank money in a distributed ledger technology infrastructure for financial institutions. Specifically, part of the current SIC deposits would be converted into franc tokens with which the financial institutions could then process banking or stock market transactions, for example, with one another. But this is still a long way off. And the bar is high, as the current system is already very efficient.

In 2002, Stephan Zimmermann, then President of the Board of Directors of what is now SIX Interbank Clearing Ltd, said that Switzerland had coined the term RTGS with the SIC system. What other pioneering roles have the SIC generations played?

S.K.: I followed the launch of SIC4, which went into production five years ago. With this generation, we were the first in the world to introduce ISO 20022 in an RTGS system. We thereby facilitated the innovation with the QR-bill, among other aspects. This was a very important milestone.

D.M.: In general, we can say that the SIC project benefited from a collaborative approach across all generations. Nowadays, we would talk about a “public-private partnership”. Maybe we experienced this at the time without calling it by that name. The fact is that the banks were willing to establish a system like this together with the National Bank. And in addition to the actual interbank payment traffic, we also integrated customer payments in the SIC system as far as possible at an early stage. As a result, SIC can efficiently and promptly process not only large-value payments but also retail payments of smaller amounts – at least at the interbank level. I think that we can see this as a pioneering service and as a model for the current situation, which is about speeding up payments between bank customers and making them more efficient and secure, whether for the purpose of making the credit available quickly or initiating another step forward in digitalization thanks to technological progress. To sum up, all SIC generations certainly have an exemplary nature both in terms of their design, architecture, and technology, and also with regard to governance. While we’re on the topic, I still remember well how Christian Vital, one of the founding fathers of SIC, was in China in the 1980s and advised the Chinese central bank as it moved to a modern system. Back then, payment records were still transported from place to by place by the simplest means, so it took several days or weeks to process payments over longer distances.
 

 

One of the projects in which SIX is involved is a feasibility study in which we examine the integration of digital central bank money in a distributed ledger technology infrastructure for financial institutions.

With WIR money, a niche parallel currency has been in circulation in Switzerland for decades. The Libra currency, which is currently in the starting blocks, seems to be of a very different caliber, especially in terms of its potential distribution. What is your position on this foreseeable competition with the Swiss franc?

D.M.: Money has different functions and can take different forms. Traditionally, a currency is something sovereign that is issued and managed by a central bank with the aim of maintaining its purchasing power so that it can perform its functions: as a payment method, as a store of value, and as a unit of account. The new technology that exists and is used in the private sector essentially makes it easier to provide money in a private form, too. And this also means that Libra should not be seen as competition to the existing money, but rather as a potential supplement to it. Although the original concept stipulates that Libra is based on various existing currencies, it is ultimately a private currency. This raises the question of how the relationship with the sovereign currencies will be organized and how stable, reliable, and recoverable this private currency will be once it has been issued. Whether or not Libra becomes widespread will ultimately depend on whether it can take on the properties of good money, i.e. stable value, broad acceptance, and the possibility of efficient payment. All of this and much more are things that we don’t yet know about Libra. For example, a wide variety of players are planned in the Libra system (e.g. designated dealers, virtual asset service providers, validators, custody banks). It is still unclear which institutions would perform these different functions and what rights and obligations would be associated with them. With traditional money, it’s simply a bank that assumes an obligation to the customer. With the Libra system, it’s not clear what role non-banks and other service providers will play. While all of these questions remain unanswered, Libra will hardly be able to meet the regulators’ requirements. The intention to make international payments more liquid, efficient, and secure is laudable in itself, as there is certainly a need for action here. However, it remains to be seen whether this can ever actually be achieved.

S.K.: With regard to international payments, the exponents of Libra have stated that they want to contribute to financial inclusion, so that everyone in the world can have an account and make payments efficiently and cost-effectively. The current inefficiency in international payment transactions is evident. First, it takes a long time for money to be transferred to another country. Second, these transfers are expensive. This is something that Libra and other market initiatives want to address. I think this is an important issue that should also be addressed by the current players in payments, including central banks. It will not necessarily require new technology. At an international level, measures have been identified to address the inefficiency in international payment transactions. These include the ISO 20022 migration, the admission of new providers in payments (including fintechs) to accounts at central banks, and the extension of operating hours. Switzerland has already implemented these measures in the SIC system.
 

How much demand is there in society for instant payments?

S. K.: This demand exists and is increasing further as a result of digitalization. Overall, cashless payments are benefiting from widespread use of smartphones and the growing importance of online purchases. At the same time, there are new providers of payment solutions, and end customers expect making a payment to be as easy as sending a text message. Many people already use mobile payments and are used to receiving money transfers immediately, whether with TWINT or with other mobile solutions. Such use will also increase further over the next two or three years until instant payments are implemented in the SIC system. However, very few people are aware that with the current mobile payment solutions the transfer between the banks does not actually take place in real time. For example, if you pay a car dealer using a mobile payment so that you can take the car away with you immediately without having to bring along cash, the car dealer’s bank makes an advance payment. The bank credits the amount to the car dealer before receiving it itself one or two days later. Here, the new generation of the SIC system reduces risks by processing the payments within a few seconds, and also provides the option of new solutions that are not yet available.

D.M.: This is also a question of efficiency and security. What we currently have in SIC with the real-time gross method in the interbank sector is also to be replicated in the relationship between banks and their customers. The end-to-end real-time processing of the transactions from the payer via the banks to the payment recipient, and thus also their irrevocability, makes the system more robust.