2026 Financial Markets Conference – Policy Session 3 Transcript - May 19, 2026

May 19, 2026

Policy Session 3: The Evolution of Central Banking in the Digital Era

Some central banks have embraced emerging financial technologies, proactively integrating them into their operational frameworks. Others have adopted a more cautious approach, preferring to delay implementation until the implications for monetary policy and financial stability become clearer. This panel explored a broad spectrum of issues surrounding central banks' experiences with adopting and regulating digital innovations in the financial system. Key topics included central bank digital currencies, advancements in cross-border payments, the potential impact of generative artificial intelligence, and the growing role of fintech firms in financial intermediation.

Transcript

Paula Tkac: Good morning, and welcome back—to everyone in the room, and to our online attendees. We're looking forward to another really interesting, fascinating, thought-provoking day—a lot of AI, some financial markets. We're going to have a whole variety of panels, but we're going to start off here with central banking in the digital era; and now I'll leave it to our wonderful panel.

Linda Goldberg: Welcome, everybody. I'm Linda Goldberg, from the Federal Reserve Bank of New York. We're going to talk today about the evolution of central banking in the digital era.

I thought it'd be useful to start out with just something basic on what central banks actually do. We, of course, implement monetary policy, and we make sure it shows up in market prices. We also run and oversee the plumbing—the payments, the settlements, the collateral, the liquidity—and we safeguard financial stability through regulation, supervision, and also crisis tools (and a lot of this was discussed yesterday). This has always been the core business.

While the current topic today is the digital era, it is worth remembering that technological change is always present in finance and in central banking. And arguably, consistently, the biggest operational application concerns payments, whether it's domestic or international. And technological change is not new, yet the current wave seems broader and faster. It reaches more directly into core payments, into data, into liquidity and intermediation, than do earlier episodes.

You could think, for example, of prior changes over recent decades; think of check processing, so moving from paper check processing to digital checks. That was a big change, even though—surprisingly, to many of us—the long-awaited demise of paper checking still hasn't come in the US.

So, we've seen widespread growth in electronification of retail payments and peer-to-peer payments. We see new institutions, new business models developed, algorithmic and trading, faster speeds, ability to have net settlement instead of gross settlement in some spaces, and lots of trading strategy changes. These have all shifted the timing of payments and settlements, the way liquidity is managed by institutions, and of course, from the central banking side, our monitoring of the financial system.

This current wave brings a potentially distinct combination of always-on payments, large digital platforms and intermediation, tokenized assets and stablecoins, and the use of AI. So, we have a lot that's going on right now, and layered on with this are the opportunities and complexities that are involved with cross-border payments.

So, this sets up this panel. Questions arise about the use cases for different technologies (some of that was discussed yesterday), the types of services and institutions that will either be displaced or expanded, the ownership of information, the implication for risks and financial stability, for exposure to liquidity risks—and also, critically, coming back to the mandate of the central banks: What is the effectiveness of key policy instruments that are used to achieve the central bank mandates?

Now, you have all this technological change, yet central banking is in a hybrid period. We still rely on some of the tools and instincts built for the old architecture, and we're stepping into the future with different pipes, different players, different information flows. So, the job of the panelists today is to connect the past and the future, without losing the stability and policy effectiveness that people expect from central banks—so we're going to talk about tokenization, digitalization, central bank digital currencies, and bring to all those questions very different perspectives.

So, Andréa Maechler is the deputy general manager for the Bank for International Settlements. She has extensive direct experience on these topics from her work previously at the Swiss National Bank, and her current role as one of the key leads of the BIS; she's going to talk to us about tokenization for wholesale cross-border payments, what's special for central banks, and the importance of trust and confidence in a central bank currency.

Kingsley Obiora is a former deputy governor of the Central Bank of Nigeria; amazing to have him here. He has direct, incredible experience leading the first central bank digital currency, from design to implementation. He's going to share with us the insights, from somebody who's actually done it, into why Nigeria launched the CBDC, the risks, the key collaborators, and the lessons that he's learned along the way.

David Andolfatto is professor and economics department chair of Herbert Business School at the University of Miami. He brings perspective to us from both central banking and academia, and David will discuss what the key concerns are that actually held off CBDC in the United States. He's also going to provide us with historical perspectives on technological change and central banking.

So, we're going to proceed with each panelist having something like up to five minutes for comments, then I will moderate. I will give some Q&A with the panelists, and then we'll open it up for your questions submitted through the conference app.

So, with that—Andréa.

Andréa M. Maechler: Thank you, Linda. It's a great pleasure for me to be here; beautiful morning. So, I will focus my remarks on money and tokenization, and in particular, yesterday—Dan, I don't know where you—Dan Awrey talked about good money and good payments. And at the BIS, we've been doing quite a lot of work to try to understand: Can tokenization help improve payments, from a central bank perspective (mostly wholesale payments), while maintaining the features of good money?

So yesterday, Gita Gopinath gave us a really beautiful "macro 101" perspective on global imbalances. Let me take one step back and do a much briefer, much more humble, but "monetary 101" perspective on money and how it works.

So, what creates trust in money? Linda, you said it already earlier; there are really three attributes. I mean, there are many; I'm taking it really from a central bank perspective. From a central bank perspective, there are really three attributes. You need to have trust in the value of money—that's what monetary policy does with price stability.

You need to have trust that you can save money intertemporally—that's really what financial stability does. But you also need to have trust that you can use your money for payments whenever you want to, and that's why payments have always been a very important part of a central bank's responsibility.

But today, we're talking about technology. But trust in money is really not about technology; it is really about governance—good policy. And I would argue that trust in money today very much reflects the hard-won, time-tested achievement that is in today's two-tiered architecture.

So, how does it work? Very simply—and we saw a beautiful graph yesterday, so I'm not bringing any slides today—the central bank anchors trust by issuing central bank reserves to regulated intermediaries. Building on these reserves, these regulated intermediaries can issue their own money. They issue private money, in the form of deposits.

Why? Because ultimately, it is the private financial institutions that are much better positioned to understand how much credit the economy needs, who should be allocated credit and how much, and also at what price. In other words, the private financial sector plays a critical role in today's trust in money.

But if there is private money issuance, what is it that you need? You need singleness of money; $1 should be $1, irrespective of who has issued that dollar, and in what form. This is the "no question asked" principle that we take for granted today. We don't need to know who issued the dollar, and we are willing to accept it, no questions asked.

So, there are many reasons why this works. There's, of course, good regulation; there's deposit insurance, a good legal system. But there is one mechanism that is absolutely core to making that singleness of money, making that "no question" principle uphold: that is the ability to settle transactions using central bank reserves.

Banks, among themselves, they don't exchange their deposits; they exchange central bank reserves. So, one bank provides exchanges—central bank reserves—to the other bank, that accepts the settlement asset that is risk-free. That is how you really uphold reduced settlement risk, reduce risk in the system, create really fundamental trust in money.

Money creation is also elastic in this system. Banks issue money, if they feel they can issue. Of course, there's good regulation in the background—and central banks also provide, whether it is collateralized intraday liquidity, or even backstop facilities. The important thing is, because ultimately payments are settled in central bank money, there is a close link between monetary policy—the policy setting of central banks—and money creation by the private sector. And it is really that, that creates this monetary policy transmission mechanism.

And this is what, if you have singleness, if you have elasticity, if you have the central banks that allow us to influence credit creation, that is really what creates these mutually reinforcing pillars that allow money to be the central coordination mechanism of the economy. All right. I'll stop with my "monetary 101."

What about tokenization? What is new about tokenization? We saw a lot of the features yesterday, so I'm only going to go very quickly through them, but I would bring down three very important new features that tokenization can bring to the financial system.

One is what is called atomic settlement. It's not instant settlement; it's the ability—as you know, transactions are very complex. They go through many different actors. They need to be checked at many different places. The idea is, you collect all of the information along the chain, you bring it up forward, and once you have all of the information, once you know the payment can go through, you then settle it on an all-or-nothing basis.

That is what we call atomic settlement. That really reduces risk. It reduces delay, and particularly it reduces the possibility that the transaction goes well until the very end, and at the very end something goes wrong and you have to start over again.

So, this is atomic settlement. The other thing is programmability with tokens, smart contracts—you can really create conditional payments, quite a number of different features—and the 24/7, which is increasingly important. But in the end, there's one thing that you need, and it is a cash leg. How do you bring money into that world?

So, currently there are really two types of digital money that have been considered. One is stablecoins. So stablecoins, as we know, they circulate on public permissionless ledgers. They're easy to access, everybody can access them, they're borderless, they're programmable, they're relatively fast, and they really can also play the back door to the crypto world.

At the same time, it's not exactly clear yet that they are really a money-like instrument. Why? It's not clear they have singleness. Redemption at par is not guaranteed, so as we know with private money, if there is stress, trust can disappear very quickly. They don't have elasticity by design; whether that's a good thing or not is a different thing, but it does change monetary policy transmission.

Integrity risks are rampant. We know, because, for instance, you can have unhosted wallets that are able to forego regulation or oversight. And also, we always say they're fast, but in fact, because they are on public permissionless ledgers, there is actually congestion because they have to go through validators, often anonymously; you can have congestion and fragmentation.

So, what is another type of money that you could put on the rail in the tokenized ecosystem? Tokenized deposits. So that's a big question that we've been looking at. Why can we not use tokenized deposit as the money leg, as the cash leg, to make transactions on a tokenized ecosystem?

The one issue so far has been the lack of interoperability. Because it's done on a ledger (tokenization always uses a ledger), a bank can create its tokenized deposit on its ledger, but what allows it to really make it interoperable across the bank? But then we're coming back to the principles, to the old principles. Why not allow central banks to issue tokenized reserves, central bank reserves, and allow them to create that interoperability across tokenized deposits?

If you do that, you can achieve singleness and you can achieve the same time-tested principles of trust in money in a tokenized ecosystem. And this is why the BIS has laid out a vision; we call it the unified ledger. It doesn't mean there's only one ledger, but it means you have a ledger (or a set of ledgers) that can combine tokenized deposits, tokenized reserves, but also possibly other assets—we've discussed yesterday tokenized government bonds—and really allow the settlement and everything to happen on these ledgers, maintaining trust in money.

All right. I'll stop here. Thank you very much.

Kingsley Obiora: Thank you, Linda—and good morning, everyone. Thank you to the organizers for inviting me to share my thoughts on this timely topic.

Let me start with an observation. I think most of the global conversation around central bank digital currencies is really conducted in the conditional terms. And what do I mean? The questions usually revolve around what a CBDC would do to bank intermediation, what it might mean for monetary transmission, what it could do to financial stability. That is understandable, because for most central banks, this question is genuinely prospective.

But it has produced a debate that is rich in theory, but still very thin in evidence, and Nigeria decided to change that for one country. And the case for a CBDC was unusually strong for us. By 2021, digital payment transactions value had grown 702 percent in a single year. Cryptocurrency adoption stood at 24.2 percent, and it was the highest of 22 countries surveyed globally at the time.

We at the central bank saw that the cost of managing fiscal cash, while falling, remained a material burden on the central bank, and roughly 36 percent of Nigeria's adult population remained unbanked. And so, we thought that it was right to give the burgeoning private payment system some rails to complement what they were designing.

And so, the eNaira was designed to address five objectives: to deepen financial inclusion, to reduce cash management costs, enable direct government-to-citizen transfers, facilitate cheaper diaspora remittances, and create a new monetary policy transmission channel. And architecturally, we chose Hyperledger Fabric (because it is a permissioned, distributed ledger) for its modularity, identity management, and privacy controls. The eNaira was non-interest bearing by design, convertible at par with physical naira, and structured with tiered KYC using our existing bank verification and national identification number systems.

I led the group that was charged with the technical work, and for writing the design paper; and in October 2021 we launched it, becoming the first—and, at the moment, still the only—central bank digital currency in Africa. Although the Bahamas and the Eastern Caribbean Central Banks had launched before us, Nigeria was the first place where a CBDC met an economy at scale, with a population of over 240 million people, a deep banking system, an active fintech ecosystem, and one of the highest crypto adoption rates in the world.

That experience produced data on adoption, on disintermediation, on operational risk, and on stakeholder behavior that I believe the rest of the world can now learn from rather than speculate about. So let me share four lessons that I learned whilst leading and launching the eNaira.

I think the first critical lesson, I would say, is that there must be a compelling value proposition that is visible to the user before launch, not after. Even though we launched the eNaira with five well-articulated policy objectives, while each of them was legitimate in their own right, it turned out that none of them was a compelling enough reason for a citizen with a working bank app to open a new CBDC wallet. I believe now that adoption is a consumer-driven choice, and by comparison, consumers must make sure that the CBDC is doing something that existing rails are not doing for them, or that the CBDC is doing it better.

The second lesson is that the fear of disintermediation by commercial banks is real, and it must be addressed collaboratively at the design stage, through careful calibration of CBDC features. When we built ours, we anticipated this and built mitigants from day one (and I'll discuss the mitigants later).

Now, these choices also mitigated the financial stability risk, but they also (predictably) dampened the policy upside. That trade-off is unavoidable, and pretending otherwise is one of the biggest sources of bad CBDC designs we see globally. The features that limit the disintermediation risk are the same features that limit the policy effectiveness; you cannot have both at full strength. And so, a central bank's job is to decide where on that curve the institution wants to sit, and to be honest about it.

A third critical lesson we learned is that central banks must invest early and heavily in developing strong in-house technical expertise and institutional capacity. While partnerships with private firms are often necessary, a CBDC ultimately sits at the core of a country's monetary and payment system, and therefore cannot be an outsourced technology product. Central banks must internally understand the architecture, cybersecurity implications, operational risks, data governance issues, and long-term upgrade requirements of the system they are introducing.

Without sufficient in-house expertise, the bank becomes overly dependent on third parties for critical functions, thereby reducing strategic flexibility and potentially weakening operational resilience and policy control over time. A successful CBDC therefore requires not only technological infrastructure, but deep institutional learning, continuous staff training, and the deliberate development of multidisciplinary teams that combine central banking knowledge with digital, cyber, legal, and data capabilities.

Finally, one of the most important lessons we learned is that in CBDC implementation, strategic patience is often more effective than rapid scale. Put differently, slow can become the new fast, and small can become the new big. CBDC adoption tends to be more successful when implementation begins at a manageable scale and focuses initially on specific segments of the economy, where the value proposition is clearest and strongest, rather than attempting an economy-wide transformation from the outset.

In practice, different sectors and user groups exhibit very different payment behaviors, levels of digital readiness, institutional capacities, and incentive structures. As a result, adoption is often more effective when anchored around targeted use cases, such as government transfers, remittances, transportation systems within university campuses, merchant ecosystems, or financial inclusion initiatives. Attempting to penetrate all segments of the economy simultaneously can dilute institutional focus, strain implementation capacity, and create unrealistic expectations regarding adoption speed.

Let me close by stating that perhaps the broader lesson for central banks is best reflected in an African proverb: You must build the barns before the harvest. As we know, digital finance is rapidly advancing, and the scale of change over the next decade could be far greater than many currently anticipate. So, the responsibility for central banks is therefore not to react after the system has already transformed, but to prepare the institutional, legal, technological, and supervisory foundations in advance.

If we build those foundations wisely now, we'll be far better positioned to ensure that the financial system of the future remains stable, trusted, inclusive, and firmly anchored on the public trust. Thank you.

David Andolfatto: Good morning, everyone. I thought I'd organize my opening remarks to build on Linda's framing. As Linda emphasized, technological change is nothing new in finance, nor is it new in central banking—although, as Linda also emphasized, the current pace of change appears to be happening at a pace that we're not accustomed to.

I think that's all correct, but I think that from the perspective of the evolution of central banking, how would I think about the phenomenon if I was at the central bank still? I think it's useful to step back and take a slightly broader perspective to see and understand what's happening.

Our session has "the digital era" in the title, and I think when one sees that phrase—"the digital era"—one thinks perhaps the main story here is technological, and has to do with digitalization. And of course, that's an important element of what's going on here, but it's not even the main story, I don't think.

I think the deeper story of what's happening here is potentially a complete, radical reorganization of the entire global money and payment system. Yes, indeed, we're witnessing new types of payment rails emerging; but at the same time, we're also seeing these new forms of money being created—these digital, almost bearer-like instruments, are appearing on the scene—and they're being issued by non-banks.

We're also seeing that the law is evolving very rapidly, not just domestically but abroad (so, here in the United States with the recent passage of the GENIUS Act, and the ongoing discussion and debate with regard to the CLARITY Act). So, the way I see it, if I was still at the central bank on an advising board, or something like that—I'd be sitting back and thinking, and viewing what's going on here as three distinct but related phenomenon.

One, which is obviously technological—these new database management systems, how are records verified, updated, kept secure, how are they communicated, whether this information is managed, say, on centralized databases or whether it's allocated to a distributed network. That's obviously an important phenomenon, but I think what's equally important are two other dimensions, one legal and one institutional.

And along the legal dimension, these questions arise as to who gets to issue these money-like instruments, and what sorts of rights and obligations should we attach to them? These objects—like, for example, USDC—if held as an unhosted wallet, kind of resemble digital bearer instruments. It's quite remarkable, actually, that the Act actually in some sense legalizes the issuance of these types of securities, given the efforts that have been in the past that discourage the practice.

A bearer instrument, a true bearer instrument, is something that, ownership and control is defined by possession. What's interesting here is the law actually kind of makes these objects not fully bearer. I think that's interesting that control, for example—the law expects Circle, for example, to potentially blacklist certain wallet addresses if the circumstances dictate. So, it's interesting to see that these are not fully bearer instruments. It's not like Bitcoin, which is fully bearer. The issuer—and the law—does reserve the right and the ability to blacklist certain addresses.

And then of course we have the institutional frameworks that are evolving around the world as well. These are the institutions that dictate who is going to control things, and determine the basis on which trust is generated. Is it going to be done through legislation, through regulation? Are we going to rely on the reputational mechanisms that Francesca highlighted in her talk yesterday? Or perhaps if we listen to the crypto bros, can we delegate this to the math and the computer code?

So, the way I see it, these three dimensions are evolving simultaneously, very rapidly, at the same time. When we're thinking about how should a central bank position itself, it's not in regard to just the digital era in a narrowly defined sense—and in a sense, central banks have been living in a digital era for many, many decades. The bigger question is, how should a central bank position itself in the context of what's happening along all these dimensions—the legal dimension, both domestically and abroad, and also how institutions are evolving both domestically and abroad?

So, for example, should a central bank view itself primarily as a regulator—perhaps offering certain backstops to private issuers? Or, should a central bank view itself as a provider of some core settlement infrastructure? Or should a central bank even go further, perhaps, and view itself as a competitor in the space? Should it be issuing a retail-level CBDC?

I think that the answers to these questions are likely to vary across the jurisdictions, and different jurisdictions are likely to adopt different models. But I do think this slightly broader framing is potentially a useful way to address the question for central banks, which is: How do we evolve in this changing environment?

Thank you.

Goldberg: So, thank you, everyone. My first question to all of you is on the topic of payments and settlement rails, and taking us beyond the "faster and cheaper" sense.

So, we actively consider ways that payments can be faster and cheaper, but also innovative, effective, and—importantly—low risk. So, there's moving from batch to real-time, "always on" settlement, and that changes intraday liquidity patterns, queuing and facility usage. Brought up, if private solutions and platforms move faster than central bank infrastructures, then you have the public rails that risk becoming a bottleneck, or they risk losing relevance.

And then you have new players—wallets, payment service providers, non-banks—that rely on the central bank's rails in different ways, and it's not always clear where the systemic risk lies. So, let's start with David.

David, has the move towards faster, more continuous payments and settlement already changed the way you think about liquidity management and the use of facilities?

Andolfatto: Personally, I'm not an expert, really, in the plumbing; but from my perspective, I think faster payments really haven't changed the underlying logic of liquidity management. I think commercial banks have been accustomed, especially in the past, to deal with large payment flows using intraday payment flows—using facilities like FedWire. I think in the pre-'08 days, they made extensive use of daylight overdraft as well.

I think what's a bit different this round is the proliferation of these non-bank money issuers, and the potential for these risks to emerge in places we are not accustomed to—both the liquidity risk (the source of it), and the possible propagation of it.

In terms of some lesson I think that regulators might take is, I really learned something from the Silicon Valley Bank episode, actually. Among the many problems that that bank had, one evidently was it was not well equipped to access the emergency facilities that it had access to, and it was just wasn't equipped to deal with the—it had access to the facility on paper, but when push came to shove, it wasn't prepared to operate at the speed and scale that was necessary.

So, I think that this is something that regulators should look at going forward for new players, to make sure that they're ready to access these in their liquidity management problems.

Goldberg: And there is quite a lot of focus in the central banking community, enhanced focus, on this operational readiness, and also on collateral prepositioning—not that it needs to be required, but just that institutions are ready to act if liquidity is needed.

So, Kingsley, if we take this question into the space of lessons from CBDCs: How does a world of instant cross-platform payments change how quickly liquidity can leave certain institutions or jurisdictions, and stress conditions? How does that feed into the way that you think about backstops, from the central banking side?

Obiora: Thank you, Linda. I think it does affect the movement of liquidity, certainly in the pre-digital era. Significant liquidity movements would have required you to physically go to the bank, issue checks (as you were alluding to in your opening remarks). It could need you to make phone calls; and all of that, I think, created what you might call natural circuit breakers that gave central banks time to respond, maybe days to respond.

But what we have found is, in the era that we're talking about now, the digital era, that response time has collapsed, maybe even to minutes. David was just mentioning SVB; that occurred in 2023. We recall that that whole run and collapse happened just in one single afternoon.

So, I do think that the digital convenience we have created for normal times has become digital acceleration in stressful times. Obviously, the design of a CBDC itself, and by its very nature, would tend to intensify that movement of significant liquidity.

What we did with the CBDC in Nigeria, recognizing this financial stability risk—which the IMF even talks about; they identified about six channels by which a CBDC can affect financial stability, and this potential for speedy liquidity movement was, I think, one of the most acute ones that was identified. So, in recognition of that, when we designed the eNaira, we made it much more valuable as a means of payment rather than a store of value. And what we did was to first make sure that it was non-interest bearing—and so for an average saver, you would rather keep your money in the banks than within a CBDC wallet.

We also capped the amounts that people could keep in their wallets, and there was a tiered system—three different tiers (the minimum tier was those who needed very little identification). And the last thing we did was that for merchant wallets, we ensured that there was a 24-hour sweep of all deposits back to the commercial banks. So of course, that's where the trade-off lies, because it makes it a little less attractive for people to adopt, whereas we had to focus on the financial stability risk involved in allowing people to just have quick runs to central bank money.

I think in terms of backstops, my thinking is that with the digital era, the speed of the run has to be matched with the speed of liquidity provision by central banks. Right now, the so-called standing facilities that we have, I believe are designed really around daily cycles, or periodic cycles, that have become obsolete, given the speed of the runs that can happen in the digital era.

And so, one of the things that we might have to think about as central banks is to think about standing guarantees rather than standing facilities—so, a facility that might be rapidly deployed, and may even have some automaticity once the bank meets certain predetermined conditions. The other thing, too, is that we may need to think about real-time monitoring of liquidity conditions in banks, rather than waiting until the end of the day for banks to send you their liquidity positions. As a central bank, you may have to have real-time information as to what's going on.

And obviously, given consumers and customers these days, a rumor can spark a run—social media, instant messaging, and things like that. I think the communication aspect, we as central banks also need to meet consumers in that space where they are operating, and so a robust communication toolkit is needed, too.

Goldberg: So, this really dynamic space raises questions about the roles of the public sector, which we just discussed, and also the private sector in payments and settlement infrastructures. Kingsley, do you see a risk that public payment and settlements infrastructures fall behind private sector solutions? And if that's the case, what's the most important thing that central banks can do to avoid becoming a bottleneck?

Obiora: Of course there's a risk, because obviously, private agents are more agile; they design things and it does appear that most of the time innovation is always ahead of supervision; technology moves faster than the public sector. But the risk is that if the central bank is not agile enough, you might be central legally but you will operate on the periphery if you don't move quickly.

So, I believe that the most important thing we need to do is, as Andréa was mentioning in her opening remarks, is really to make sure that we build the interoperable public rails that the private sector can innovate upon. I don't think that it is right to compete with them in customer-facing innovation, because that's just where they are better. But we have to keep pace and work on the public infrastructure, and make sure that we keep our eyes focused on financial stability and trust in the monetary system.

Goldberg: And so, let's turn to you, Andréa. You have, I believe, overseen and worked closely with the BIS Innovation Hub; what type of work is going on in the central banking community to have these public-private dialogues, and building together?

Maechler: Quite a bit is happening, but let me maybe focus—and this public-private partnership is actually very important in this field, and particularly in this area of tokenization. And for central banks, it is about payments; it is about, how do you maintain trust in money, and particularly, how do you bring in this old principle that systemic flows of transactions should really be settled in central bank money?

So, there's one project that is really our flagship project at the moment in the BIS Innovation Hub, and the hypothesis is very simple. Is it possible to implement the correspondent banking system on a programmable platform, and thereby can we really improve payments? Can we make them less costly, faster, and maintain the trust in the payment?

We know cross-border, particularly cross-border wholesale payments; you talked about speed. Well, they're not fast; they're very opaque, they're very costly. It often still takes T+2 to do cross-border payments, and you never know. And I think the difficulty is the delays, and not knowing when the payment goes through. So, talking about liquidity management that makes it very difficult, and Treasury management.

So, we have this one project; it's called Project Agorá—"Agorá" is Greek for marketplace—and it is a truly public-private initiative. It has seven central banks, from Mexico all the way to Japan, including the US, Europe—so, really all the large jurisdictions are part of this project, over forty financial institutions really working together and trying to figure out how we can make this work.

And we've made really very good progress. We're building a prototype to actually make it work, and see: What are the pain points? So, what we have brought are a couple of things that are quite important. So, it is a platform, a shared platform—I'll get into it—that brings together banks' tokenized deposits, as well as central banks' tokenized reserves.

That's one thing. It does allow this very important atomic settlement—not only atomic settlement (so this ability, and greater certainty that the payment will go through, and where are any problems), but also with settlement finality so that once you get into your atomic settlement, you also have guarantee that it does reach settlement finality. That has required a lot of legal work; much more legal rule is needed, but this is really one of these very important milestones.

The other thing was (and it's very important here), as you know, central banks need to have certainty that if they bring their tokenized reserves on a platform, they need to be able to maintain confidence that they have control over those reserves—control over who accesses those reserves, control about how these reserves are used and move around. So that's why there's a double architecture (so, the central banks bring their platform onto a broader platform), but it works; and so, it really incentivized central banks to bring tokenized reserves onto a platform where cross-border payments can take place.

And the last one is programmability. One of the big pain points it's going to particularly help is compliance checks. So, it is these kinds of things that we can—and also AI is being used on top of it: How can you better analyze data?

So, these things are really important to try to use technology to solve a very important pain point, bringing cash not only in one currency but in multiple currencies, in order to enable payments on a cross-border basis.

Goldberg: Thank you. So, let's switch gears a little bit and go to another part of the central bank's mandate, having to do with monetary policy effectiveness and implementation.

So, researchers—many of you here on the research side are actually the ones implementing monetary policy, and we've thought long and hard about the mechanisms through which our policy tools work, and those are often through funding and credit extension by traditional banks. So now, with digitalization and these technological changes, the mix of financial intermediaries is newer and much more diverse. So, it's not just the banks that have traditionally had access to these rails.

So, it could be that monetary policy effectiveness shifts, and the tools that we use may need adjusting. So, let me turn to you, David; due to new players and/or approaches like CBDCs, is digitalization changing the effectiveness of monetary policy? What's going on there?

Andolfatto: Yes; that's a great question. It's a question that people have asked for a long time, actually. The way I think about it, to me, monetary policy basically just boils down to interest rate policy, and it seems unlikely to me that changes in the underlying plumbing are going to affect the directional changes that we expect from interest rate policy. Higher interest rates are going to tighten financial conditions, lowering the policy rate is going to loosen them

The details of exactly how the policy is transmitted through the system are likely to depend on the structure. But ultimately, the ultimate end effect is not going to be different.

And I think a useful case study here is to remember what happened in the 1970s. For the young people in the audience, in the 1970s we saw the emergence of these money market funds; these were my generation's stablecoins. The commercial banks at the time were operating under Regulation Q: they were prohibited from paying interest on deposits.

So, what happened then was the proliferation of these funds; as money market rates rose above the regulated deposit rates, funds would be flowing out of banks into the money funds as rates were rising. But that's tightened financial conditions, and it had the desired effect that monetary policymakers were looking for.

So, I think the same thing is going to be true today. I don't think that policymakers are going to be able to, in advance, understand where the long and variable lags are going to be coming from. I think, in part, Friedman's use of that term "long and variable"—the "variable" part probably comes from the fact that the financial architecture is always evolving, and the transmission is kind of uncertain.

So, central bankers are just going to have to learn, the way they always have. They're going to experiment to see the effects of any given policy change, see how it works with the system, and calibrate their policy accordingly. And going forward, to achieve a particular goal, they might have to raise more or less aggressively. But the fundamental economics, I think, is invariant to the underlying plumbing.

Goldberg: Andréa, what's your view? What about the impact of stablecoin adoption on monetary policy implementation more broadly on financial conditions?

Maechler: Of course, it all will depend on the design choices on regulation around it, on user preferences; but there are some interesting mechanisms that might very well be different. The big issue is, where is money creation going to come from, and where is credit provision going to come from?

So, if you think of stablecoins, the big question is going to be: Does it mean that households and firms take out the bank deposit in order to buy large-scale stablecoins? Well, that would have to be the case in some form or another, or taking it out of a money market fund.

The point is, it could very well change the composition of funding; whether it's of the bank funding or other funding, it's going to change the cost. It's going to cause change. It's going to have an impact on credit provision. The big question is, to what extent is credit simply going to go away from the banks, and more to the non-banks?

Another open question is: Could it actually come out of the crypto world, and come back through stablecoins? We haven't seen that; it is an outstanding question. It will clearly have an impact on liquidity dynamics, as well as credit provision. The interesting thing is, it will also depend very much on regulation around the backing of the reserves. Will they go into bank deposits?

And then that means the money will come back into the banking system, but in the form of wholesale funding (which, as you know, can be flightier, may have different dynamics in terms of prices). Or the reserves will need to go into government bonds; that will have an impact on the yields, the yield curve, which can also have quite a big impact on financial condition, or it can even be put into bank reserves.

So, these are the issues that are going to happen on monetary policy. The transmission mechanism can quite change through these changes in the funding conditions.

The other one that I find interesting—and we've discussed it, I believe, yesterday—is the reserve composition is clearly also going to have an impact on fiscal policy, on fiscal space. If there's a high demand for government bonds as a backing for the stablecoins, it will have an impact on... it will increase the fiscal space of that country, very true, assuming the yields go down; but it will also mean less public seigniorage. The seigniorage will very much move into the private sector, which is an interesting concept.

And of course, you can also have capital flight or a greater tax evasion. So, these are things that will also have to be balanced. And the last thing is a market functioning issue. The question is, will you see big redemption waves, potentially even runs, that could also create more volatility in the market? And the big question here is, to what extent, under what conditions will central banks be willing to provide backstop liquidity to smooth out such volatility?

Goldberg: So, let's run with that. Kingsley, from your own experience—we have new players in the system, and when you look at your own institutions' toolkit and experience, what's the single biggest constraint on supervising these new players? Is it a legal perimeter? Is it data access? Is it something else?

Obiora: Thank you very much. I think data access is very important, because these new players generate a lot of data that does not sit with the central bank, and sometimes you don't actually fully know what they are doing, so that handicap is there. Obviously, the skills gap is also quite acute, because central banks are not technology experts, as you know; we don't have AI experts, or people who can write code.

But I think, for me, the single biggest constraint will be the regulatory perimeter, because most of these systemically-important digital players sit outside of your supervision purview. And so, if the law of setting up the central bank is narrowly defined, you see people who can affect financial stability but they are not under your supervision.

And in Nigeria we saw that acutely in 2021, when the crypto adoption rate was rising very rapidly. And what we did was to have several meetings with the Securities and Exchange Commission; it helped greatly, though, that the director general at the time was a former director in the central bank, so cooperation was quite easy.

And we had to sit down and decide what we needed to do to make sure that at least somebody was overseeing their activities. And it went through to the National Assembly to change some of our laws to cover for some of those very systemically important players.

So, for me, that regulatory perimeter is very important in the digital era. The central banks have to understand who is systemically important, and make sure that they are not falling through the cracks of supervision, either by the central bank or one of the leading agencies.

Goldberg: So, just keeping an eye on time; let me just ask one more big question. Andréa, you had mentioned the length of time that it takes on some cross-border settlements; international considerations are big ones in this space. You think about regular payments, you think about remittances; many small countries—emerging markets—see stablecoins as something that possibly will change the proliferation and speed of shock spillovers across borders, risk sensitivities, change the effectiveness of capital management instruments, allow more crypto activity.

So, the question I have is: From your perspective, what are the most important ways that international considerations have influenced your thinking on digitalization? Let me turn to Andréa on that.

Maechler: No, you're absolutely right. The international dimension of some of these developments—and if you think of stablecoins, which we saw yesterday in the graph, like 90-95 percent of all stablecoins currently are US dollar-denominated—adds a real layer of complexity for many central banks and countries, particularly emerging markets (but not only).

To some extent it's the old story of dollarization, or euroization, or basically currency substitution, in a different currency—which we know weakens the transmission of monetary policy, and it also makes capital controls much more difficult. But what is new about having this kind of dynamic through, let's say, US dollar stablecoin (I'm going to use the US dollar, but of course any foreign-denominated stablecoin)?

The main issue is, if you think about stablecoins and how they work, it will really ramp up the scale and the speed at which capital flight may happen, because we also know it would be very, very difficult to impose capital controls the way they are currently. And the other thing is that if you think about dollarization, often with many of the deposits what countries have done and central banks have done is enable FX—say, US dollar deposits—in the domestic country; but with stablecoins, the money really leaves the country, is held elsewhere.

So, there's really capital flights. The other thing is, which will, of course, impact on the FX, on the exchange rate—direct impact on inflation, direct impact on credit creation. The other thing is the very important wealth effect that it can have. So, you have capital flight; your exchange rate denominates, but the value of your stablecoins abroad, of course, rises. So, huge wealth effect that can go up and down, which for the central bank is going to be much more difficult to really address any demand shock it may face.

And the other thing, which is an interesting one—we've done some work—is you may even say there is a new spillover risk, which is a link between crypto and FX. But depending on what happens in the crypto world, if the crypto value really goes up, that may have an impact on the demand of stablecoins, because you want to take your gains out of the crypto world, put them into stablecoins.

That will really also mean that, suddenly your monetary policy will have to take into account how it is difficult, but will have an impact, or vice versa. You will have spillovers from what happens in the crypto world into the monetary policy. So, there's very fresh research, but clearly a very important area—and, again, much more complex than what we've had so far.

Goldberg: Thank you. And David, from your perspective—is internationalization influencing your thinking?

Andolfatto: Yes. On the international front, what's really struck me is highlighting the problems of regulating objects that are not issued by domestically incorporated companies. So, Kinsley mentioned the problem of regulating objects that are outside the regulatory perimeter; it's also a problem for the United States, in the context of these offshore, US-dollar stablecoins (and of course, we're talking about Tether here). I often ask myself, what could potentially go wrong with something like that?

And I try to imagine a world where Tether perhaps gets a bit bigger, or possibly quite a bit bigger, and more popular; and it begins to finance global trade, along the global supply chain. And players along this chain of trade come to depend on the dollar value of the US dollar Tether token.

And then, that something suddenly goes wrong; and so, why should we care here in the United States about caveat emptor or something like that? And here, I think I'll share with you a couple of crazy thoughts, because Tether is an interesting institution. As far as I can tell, it does not issue debt in the conventional sense; I think Dan Awrey mentioned yesterday about the problems of, what happens if one of these objects goes bankrupt, and an automatic stay will be imposed, and all of the disruptions that may impose.

But Dan's the expert. He's in the crowd, and perhaps he can opine on this; but I don't even think Tether has to go bankrupt, if it doesn't want to. It has no statutory obligation to maintain the peg; it has no contractual obligations, as far as I can tell, either. I think Tether actually maintains a high degree of flexibility of how it can redeem US dollars to perhaps some select preferred customers—but, really, there's nothing there.

So, in other words, one way a stress scenario could manifest itself with Tether is just a currency devaluation. They could just recalibrate the peg to 75 cents on the dollar, and then go on with business as usual. They'd take a reputational hit, but we have many examples of this happening in the fixed exchange rate regimes, and life goes on.

That's one possibility; it'd be disruptive. Alternatively, perhaps Tether would want to be jealous about guarding its reputation, of maintaining the par value. And in that case, presumably, it would have to start selling securities off of its portfolio. And as we know, Tether holds a large amount of US Treasuries, and would likely approach its US custodian and instruct it to start selling at scale. And this is obviously going to disrupt money markets and the Treasury markets in the US, and elsewhere; and then the Fed will be placed in this situation where the optics are going to be, here's the Fed bailing out an offshore shadow bank, where there's going to be a very awkward situation to be placed in.

And so, I've been thinking about, how could one potentially regulate these institutions, if they're domiciled outside the US? And one crazy thought I had was, why not go after the US custodians—in this case, Cantor Fitzgerald—and, perhaps insist that they take more of a fiduciary role in the enterprise, and that doing something like that might actually discourage even that activity, or make it either safer or discourage the activity entirely. Because I think it'd be very difficult; I wonder how a Tether would actually manage to credibly maintain the peg if it did not actually have direct access to a custodian, at least, of US Treasury securities.

So, that's a thought I have; and you might want to go indirectly, through that back door.

Goldberg: So, let me give one lightning round question, and then we'll move to the floor questions. What do each of you see as the (or a) key pending digital change over the next five years, and what is one critical thing you'd like central banks to do to prepare? So, let me start with Kingsley.

Obiora: It's a very good question. I think over the next five years—so, currently what we're seeing is certain individual innovations, like tokenized assets, programmable money, AI agents that might be able to perform transactions autonomously, stablecoin-based cross-border rails; I think all of them are individually very important, but over the next five years, I suspect that we might see a convergence of all of them. And that will be a big change for the financial system.

And for me, what central banks need to do is really, as I said before, build the barns before the harvest, and that will be two main things. It's making sure that you're not just hiring economists, finance experts, and lawyers. I think we might need to now start hiring coders, AI specialists, cryptographers, and things like that. So, prepare; have a very heavy dose of internal staff that can understand these innovations, because you can't supervise what you don't understand.

And secondly, to really build or modernize the public rails that these innovations will have to work on. So, for me, those would be the two things that central banks can do.

Goldberg: And David?

Andolfatto: Yes; just one thing? There are so many things. To me, over the next five years I think this tokenization phenomenon seems like it's got some legs, and I think the interesting thing to look at along that dimension is the extent to which the tokenization occurs on proprietary databases, like permissioned blockchains, or whether the activity's permitted to be on these public blockchain rails.

If in the latter case, this is going to open up a very interesting world, where you potentially have all sorts of securities effectively circulating globally as digital bearer securities. I think that's very interesting; kind of exciting.

In terms of what central banks could do, I think I would echo the sentiments of Kingsley. I think the main thing to prepare, I think, is to make sure that the core settlement infrastructure remains interoperable, that it remains resilient, and it remains broadly accessible to qualified counterparties.

Goldberg: Andréa?

Maechler: Well, central banks must harness all the technologies, and maintain trust in money—specifically in the world of tokenization. If the private sector wants to really develop a tokenized ecosystem, then central banks must be able to bring tokenized reserves in order to create safety, security, and settlement, including settlement finality.

Goldberg: Thank you. So, let's go to the questions from the audience. We just mentioned interoperability, so I'm going to take a question from Nate Wuerffel; he asks: Interoperability is often described as necessary to realize the benefits of digital technology, but what does this actually mean? How does it solve intraday credit on- and off-ramps for traditional cash and securities?

Does anyone want to take that? What is interoperability?

Obiora: Let me just attempt to answer the question, and I will be very basic. I think the way to understand interoperability is just imagine that you have a road that only Mercedes-Benz cars can use. That's not a very useful road for everybody, right? So, interoperability simply means you're creating a platform that can work for many different innovative designs in the financial system, and essentially that's what it means. And it's very important that you build that kind of foundation, that gives everybody an equal playing field for their innovations.

Goldberg: Andréa, there's a question from Sai Srinivasan: Are tokenized reserves the same as wholesale CBDC? If so, given the anti-CBDC stance in the US, are there alternative approaches to implementing interoperability of tokenized bank deposits?

Maechler: That's a great question. I think it's more of a taxonomy question; so, typically—at least, more recently—so, CBDC is central bank digital currency. Someone said digital; we've been digital for many years, electronic. But the point is, CBDC currently is often associated with retail central bank money, whether it's cash—well, no longer cash, but in a digital form—or what domestic payment systems do.

The way I think about it is, you and me, when we go to a cash machine, when we pay—this is retail money, and retail CBDC is really the cash part, or instant payments. When you have a system, a domestic payment that does instant payment, then it can also be settled in central bank money, this is CBDC; this is retail payment that you and I may have access to.

What I'm talking about is central bank reserves, the reserves that central banks have that the banks hold and with which they do the transactions. And this is a very different, different world, so this is not usually considered under the anti-CBDC laws in the US. It's really part of the central bank plumbing, how the whole two-tiered system works.

So, is there an alternative? No, there is no alternative—and this is very different from retail CBDC. This is why I use the term central bank reserves, and no longer use the term CBDC to make that reference.

Goldberg: We have a question from Patrick Harker: One of the sayings in the real-time payments area is, "faster payments equal faster fraud." How worried are you that a significant episode of fraud will cause mistrust and a lack of adoption?

Andolfatto: That's a very good observation. I've often, and others have, remarked about the desirability of some latency in the system, precisely to address those types of issues. I think at the end of the day, the extent to which a fraudulent act can be reversed is going to depend on how the technology is designed. Obviously, in some platforms—like in blockchain, for example—that's impossible; but that doesn't mean we can't design those properties in the technologies that we're going to implement.

Ultimately, it's going to depend on those types of design issues, as far as I can tell.

Goldberg: Did this come up in Nigeria?

Obiora: Yes, it did. One of the things that we did is that, before you design the CBDC or launch it, you have to have clear digital identification, so that everybody that is transacting can be seen at certain points. And what we did was to use what we call the bank verification number. Every Nigerian that opens an account anywhere in the world, if it's a Nigerian-based bank, has to have that bank verification number.

And even if you have ten accounts in ten different banks, you can only use that single bank verification number. So, every transaction that you make, that bank verification number can "see" it—and within the central bank, we have the dashboard that sees everything. So that's the way we handled it.

Andolfatto: If I may, what happens if somebody shakes you down for that bank verification number?

Obiora: Well, it's very difficult to do, because when you go to the bank to transact, most ATMs have cameras. You go to banking halls, they have cameras on 24 hours, so you still see who transacted.

Maechler: But this is where technology can help, and I think there's been a lot of advances with machine learning and AI, and trying to understand—because the point is about identifying, really quickly, cases of fraud or possible fraud. And for instance, it's also something we've been doing with other central banks (different projects), and one of them is—and on top of it, you have data privacy, so you can't just exchange data to your competitors, or even more difficult, on a cross-border basis.

So, for instance, there's one project we do where instead of exchanging the data, you exchange the structure of the data, to allow your machines to actually learn on that data, to experiment on that data, and be able to be even better at identifying fraud. So, I really do think that as we get faster, we also need to use different technologies to make sure that the pain points are also adjusted.

Goldberg: And does anyone have a perspective on this in the cross-border space?

Maechler: So, this is where it's particularly important, because you cannot share data on a cross-border basis—even anonymized data. So, this is what is making it so much more difficult. But the banks have been doing tremendous improvement in that area, and I think this is where tokenized, atomic settlement can help—because it's not just about speed. It's about making sure you have time to do the checks. And only once the checks are done, then you can really move forward.

So, these are kind of these trade-offs. I think it's also not all about speed. And if you're going to be full speed, you also need to make sure you have the tools to allow you to navigate in that context.

Goldberg: So, maybe in some context, you want to keep a bit of friction in the system.

Maechler: Absolutely; absolutely.

Goldberg: Okay. We have a question from François Haas, for all panelists; this is, I think, going to be our last question: In this endeavor, can the central bank be technology neutral?

Andolfatto: Well... what does that mean, exactly? Institutions have to choose a particular technological infrastructure, and I guess—depending on what you mean by that, I actually don't know for sure. You're going to have to pick something, and that's unlikely to be neutral in almost any sense I can think of. Perhaps Kingsley might have a different view.

Obiora: So, for me, I'm not even sure if neutrality itself imposes any advantages. The important thing is, what does the technology do for your goal of financial system stability, removing risk and fraud, and things like that. And I think it's better to keep your eyes focused on those goals and go for the technology that gets you there, rather than thinking about neutrality.

Maechler: My view is simple: absolutely we should be technology neutral. But it requires us to understand how each technology works. It's the private sector who should really drive this kind of technology, but ultimately, we should be principle-based.

Central banks should be principle based. It is about trust in money; it means singleness. It shouldn't matter whether a dollar is in cash form, whether it's in electronic form, it comes through credit cards, or it is in a digital or tokenized form—and I think that's where central banks do a lot of work, but ultimately, we should be technology neutral.

Goldberg: I just want to add to the comments that were made about hiring different types of expertise: I think central banks do have to change. I think it's possibly not another layer of not very good news for the economists who are out here, but, in terms of direction of staffing in central banks, if you could also just give one set of perspectives on that.

Go ahead, Andréa.

Maechler: I'll be happy to start. So, it is about skills. What I find really interesting, and you see it now also with AI and cyber risk, is it's not just the skill sets that we need to broaden and bring together, but it's also the operational—all the way to the high analytical and theoretical. We need to understand the monetary policy transmission mechanism, but ultimately you need to be able to go all the way to the technology. Again, you want to be tech neutral, but you need to understand it.

And think about cyber risk; you need to understand the mechanism, the transmission mechanism, all the way to the more theoretical conceptual view, which is the principles that you need to maintain. So, I think that is really where central banks still have a lot of work to do to bring these different worlds together.

Obiora: I'm not worried for the economists; good economists will always find good jobs. But I think, for me, you cannot supervise what you don't understand. So, as we're going deeper and deeper into digitalization, it's just important that the central bank has the staff that understands what's going on, because without that you will only be called "central" legally, but you will operate peripherally.

Andolfatto: Yes. And so, echoing the sentiments expressed by Andréa and Kingsley, I don't think the job of economists is going to go away anytime soon in this space. If you look at the space, if you look at blockchain, if you look at the organizational structure, the computational understanding is obviously very important, and very few people understand how blockchain actually works.

But what's true is game theory; incentives. What motivates people to act the way they do, given the infrastructure as it evolves? We still need economists—and social scientists, more generally—to understand how individuals behave in the context of this new technology. So, I don't think our jobs are going to go away anytime soon.

Goldberg: So, we're out of time. Please, join me in thanking our wonderful panelists for their insights. We have a ten-minute break, and please come back at 10:30. Thank you.