BIS Goes into Bat for Central Banks Amidst Payment Innovation

The Bank for International Settlements’ Committee on Payments and Market Infrastructures (CPMI) has published a report highlighting the importance of central banks and their role as the payments system continues to evolve due to technological innovation.

The report examines how technological innovation, changing user demand and the emergence of new types of payment service providers and arrangements are transforming payment systems. It builds on the analytical framework set forth by the Committee on Payment and Settlement Systems (CPSS) – predecessor to the CPMI – in its 2003 foundational publication on the role of central bank money in payment systems. 

The new report considers the implications of changes over recent decades for central banks and outlines the relevant policy tools, considerations and trade-offs. It also comes with what has become a standard BIS warning amidst technological innovation, that this, along with changing user demand and the emergence of new types of entities and infrastructures are transforming payment systems, with potential implications for their safety and efficiency as well as for trust in money. 

“Central bank money serves as the anchor of trust,” the BIS states. “It supports safe and efficient settlement in systemically important systems and provides the foundation for convertibility at par, while private means of payment promote innovation, competition and user choice.”

The report also observes that central banks can draw on a range of complementary policy tools in their roles as issuers of money, payment system operators and overseers, and catalysts for change. “They may consider policy choices holistically, while remaining adaptable and pursuing sustained and robust international cooperation,” it states.

It also accepts that the growing diversity of payment arrangements may create opportunities for greater efficiency, competition and innovation. At the same time, however, it warns that innovations may introduce new interdependencies and alter the way credit, liquidity, operational and cyber risks arise and are transmitted across the payment system.

The BIS says its analysis reaffirms the fundamental role of central bank money in a modern economy’s payment system, and highlights its complementary relationship with private sector means of payment and settlement assets. “Central bank money serves as the anchor of trust in the payment system, provides the safest and most liquid settlement asset for systemically important systems and supports convertibility at par among different means of payment,” the BIS asserts. “Private sector entities drive innovation and competition critical to economic growth and offer payment services tailored to meet diverse user needs.”

The report highlights four areas for central banks’ consideration; namely the need to consider which entities have access to central bank accounts, for which services and on which terms; how to modernise existing infrastructure or developing new platforms while balancing resilience, innovation and implementation risks; assessing whether emerging arrangements, such as stablecoins and tokenised arrangements, perform functions similar to financial market infrastructures as well as their systemic importance, governance and operational resilience; and the need to work with stakeholders to address collective action problems in payment systems, supporting the development of market solutions and fostering the adoption of industry standards and common practices.

The report calls for a holistic and forward-looking approach, recognising that central bank policy actions in one area may affect outcomes in another and that the payments landscape continues to evolve rapidly. As central bank policies may vary across jurisdictions, the report emphasises the importance of sustained and robust international cooperation in an increasingly digital and interconnected payments ecosystem.

“Payments are at the frontier of finance,” says Fabio Panetta, governor of the Banca d’Italia and chair of the CPMI. “It is in the payments space that new technologies are first deployed, new business models take shape and new risks surface. Central banks cannot watch this frontier from a distance; they must understand change as it happens and, where necessary, help shape its course.”