The SWIFT International Banking Operations Seminar (SIBOS) is a banking & finance conference, hosted by the Society for Worldwide Interbank Financial Telecommunication. First hosted in 1978, it has been running annually ever since and has been hosted in a variety of global locations. This year’s event was due to be held in Boston, until it became yet another victim of the global COVID-19 pandemic, and was forced to move online.
Running from 5th – 8th October, Sibos will feature a mix of sessions, including talks hosted by SWIFT themselves, panel discussions on the most pressing current issues, and keynotes from industry leaders. The speakers at the event are from across the global banking sector, and also include representatives from regulatory groups, governmental bodies, and banking & finance institutions.
On Monday 5th October, Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co gave the opening keynote. This was then followed by the SWIFT plenary that included Chairman of the Board, Yawar Shah, and SWIFT’s CEO, Javier Perez Tasso who shared their perspectives on the last 12 months, the industry challenges ahead, and SWIFT’s role in addressing them.
Other highlights from the day included panels on trade digitisation and central bank digital currencies.
Trade digitisation: Journeying beyond POCs and beyond financing
The digitisation of Trade Finance has long been a hotly discussed topic. Interest in this area has only grown due to the advent of new technologies, and the emergence of innovative Fintech startups. Indeed, the World Trade Organization identified over 30 digital projects seeking to digitise Trade Finance.
Yet this digitisation has not yet seen widespread adoption with uncertainty surrounding the regulatory situation, and a lack of comprehensive industry stands holding the entire process back. In this session, panel members were discussing the progress that has been made in overcoming these hurdles, and what are the most likely next steps. This, of course, was all discussed with regards to the backdrop of COVID-19, and the influence that this ongoing pandemic will have on these developments.
The panel was made up of Wai Yee Choo, Director, Singapore Government; Oswald Kuyler, Managing Director, The International Chamber of Commerce; Ebru Pakcan, Global Head of Trade, Citi and Daniel Schmand, Global Head Trade Finance, DEUTSCHE BANK A.G. Sanne Wass, Banking Reporter, S&P Global, was moderating the session.
Solving the Problem
Full-scale digitisation of the Trade Finance Sector was never going to be a simple issue to solve. Ebru Pakcan made this point early on the discussion, that “one of the things that we really need to remember is this size and the complexity of the ecosystem that we’re working with […] with various degrees of regulations and policies and guidelines around it as well.” Oswald Kuyler agreed with Ebru, noting that just the process of digitisation and automation of the back-end within individual companies “took two to three decades.”
Looking at how to potentially go about solving this problem, Ebru illustrated 3 key areas that need to be fixed, in terms of digitisation and standardisation: 1) The back offices of companies 2) The interface between a bank and their clients 3) Inter-connectivity across the wider industry. She used an example to illustrate her point, that “technology like OCR solves the first point, but does not address the wider problems of the [subsequent] points.” In order to address this, Ebru believes that we don’t necessarily need to invent new technology, but that can we adapt and utilise existing tech, and apply it to these challenges.
And how close are we to solving these problems? Despite illustrating the scale of the issue, Oswald felt that we are now starting to see the light at the end of the tunnel, stating that “I’m excited […] I think that investment [in this area] has really helped, so that we are in a better position today than we were three years ago.”
Covid-19: the great accelerator?
Whilst there have been many negative impacts resulting from the Covid-19 pandemic, one of the unexpected positive consequences has been the acceleration of innovation in digital solutions. During the pandemic, people have been realising the shortfalls of a non-digitised system, and are now eagerly considering alternatives. As Ebru put it, “By forcing people to leverage what is available, this has led to the sudden realisation that this (digitisation) might actually be a viable option”
Daniel Schmand agreed with this point, sharing his opinion that “the shock caused by the fallout from COVID-19 has the potential to accelerate trade digitisation initiatives that are out there.” This is, of course, a well-known phenomenon, that necessity is the mother of invention. The next question we must ask, according to Ebru, is “how do we [take these developments and] get this to a tipping point?”
The Next Steps
Oswald drew upon his experience with working for the ICC to offer his view on what the future is like for digitisation in the Trade sector, and the next steps moving forward. In order for this to work, he explains, we need to mobilise the global community, work with platform owners, implement proper communication protocols, and ask ourselves “what do we need to standardise as a bare minimum before we can move to the next stage?” This can only take place, as he points out, “once the legal framework and legal platform are fully in place”.
Defining central bank digital currencies (CBDCs)
For this discussion, the panel was focusing on a smaller section of the wider conversation surrounding digital finance, regarding Central Bank Digital Currencies (CBDCs). The prospect of a CBDC being unveiled by a major central banking authority grows more likely day-by-day, the implications of which are far-ranging and uncertain.
On a basic level, any proposed CBDC revolves around the idea of a fiat currency, in digital form, and controlled by a central entity. The idea of a CBDC was partly inspired by Bitcoin, but the end result is likely to look a lot different. For instance, a CBDC could utilise a digital ledger that is distributed, like Blockchain, or something more traditional & centralised.
It was a lively debate, moderated by Aaron Klein, Fellow in Economic Studies at the Brookings Institution. Approaching the discussion from a variety of viewpoints, the panelists attempted to define what a CBDC actually is, and the variance in its implementation in different systems & economies globally. The panel consisted of Alistair Milne, Professor of Financial Economics at the School of Business and Economics, Loughborough University; Harish Nataraja,n Global Lead Payments at World Bank; Arwen Smit, Author & Senior Advisor at MintBit; and Markos Zachariadis, Greensill Professor in FinTech at the Alliance Manchester Business School, University of Manchester.
How a CBDC could be implemented
When defining what exactly a CBDC is, Arwen gave examples of three different approaches to implementation. Firstly, you could have ‘Direct Issuance’, which is where there would be a direct claim on the central bank who would handle everything, including retail payments, digital identity, KYC etc. This option would potentially bring with it a high operational cost.
Secondly, you can have a ‘Token-based’ CBDC, which would be a system whereby you would have a claim on the central bank, who records retail balances, and intermediaries handle the retail payments. This system is one that could easily incorporate cryptocurrency, within one of the banking layers.
Finally, there is the option of ‘Two-tiered issuance’, where you would have a claim on an intermediary – who also handles the retail payments, and then the central bank handles wholesale payments. It is this system that is the closest to our current one.
What are the benefits of a CBDC?
Next, the panel wrestled with the question of why a DBDC would be needed, and indeed beneficial. For Arwen, on a general basis, the recent decline in the usage of cash is a major factor in accelerating conversations around a new, digital form of currency. In addition, a CBDC may be useful in fending off the development of private currency systems, such as Libra from Facebook, and some of the larger cryptocurrencies. On a geopolitical level, countries such as China may be eyeing a CBDC as a way to protect their own monetary sovereignty, and to compete with the ‘dollarisiation’ of global currency.
For Markos, the key characteristic of a CBDC is that it has the potential to provide a greater and wider access to banking money & centrally-backed bank accounts. Alongside this, the digital tools that are supplied with such a system would become more powerful and useful.
CBDC vs. current solutions
Implementing a CBDC may provide a country or region with multiple benefits, but would it represent an improvement over the current system? The inspiration for CBDC came from Bitcoin and the Blockchain network, largely because of the advantages that institutions were seeing in a peer-to-peer system.
The panelists therefore went on to debate if CBDC is a fully peer-to-peer system or not, and if anything that is currently on the market can offer similar. Some of the panelists, such as Alistair, suggested that payment networks such as PayPal, AliPay, or WePay provide a peer-to-peer-based evolution on the traditional banking model. Others, such as Harish, argued that these systems are merely a ‘veneer’ on the current system, using an improved UI, because they are still acting as an intermediary.
Arwen explained that in order to come up with a working CBDC, you would need to “focus on the architecture that sits behind it [a traditional banking system].” In Harish’s opinion, if you wanted to take things even further you could “implement Blockchain in order to bypass the need for a Central Bank” thus developing a fully peer-to-peer system.
What they could all agree on, though, was that in order for this new system to really catch on, it would need to be properly integrated within retail banking & finance solutions. By this, they meant that it would need to be compatible and present on people’s phones, be suitable for retail purchases and everyday finance & banking.
This is clearly a topic that has a far-from certain future. As this panel shows, there are a variety of questions surrounding how, why and when this could be implemented. But, it’s an extremely interesting area that is only going to increase in relevance and potential, as alternative solutions such as Blockchain, cryptocurrency & stablecoins continue their own growth and adoption.