The opening of the financial market technology hub on Tuesday has thrust the Swiss central bank into a role few would have expected it to assume.
The launch of the innovation hub by the Bank for International Settlements (BIS) and the Swiss National Bank (SNB) on Tuesday shows how important the authorities believe it is to provide a safe infrastructure to an ever more digital financial market.
The SNB for years was fairly reluctant in the way it dealt with the new technologies, at least in public. This contrasted with for instance the Swedish central bank, which caught the headlines with a study on the issuance of an electronic currency.
Switzerland in Cooperation With Hong Kong and Singapore
Taking the role as partner of the BIS in operating one of three innovation hubs (the other two are based in Hong Kong and Singapore), the SNB has assumed a responsibility that few would have thought possible – always seen from an outsider’s perspective of course.
But the general manager of the BIS, Agustín Carstens, said in his speech in Zurich yesterday that the organization had put the European hub in Basel because Switzerland was a hotbed of innovation. Of course, much of this innovative spirit is generated by the universities in Zurich and Lausanne and also by startups based in the Cryptovalley around the city of Zug. But if the spin-offs and fintechs are to succeed with their ideas, they need a suitable environment that fosters innovation.
New Central Bank Money
The Basel hub will focus on two projects first. Together with stock exchange operator SIX, the researchers will look into the use of digital central bank money into a distributed ledger technology (DLT). Such new central bank money may eventually enable the settlement of tokenized assets between financial institutions.
The project comes as SIX is working on its SDX digital exchange platform, said Thomas Jordan, the head of the SNB, at the launch in Zurich. SIX will go live with its SDX project in the near future, he added.
The second project of the hub will focus on requirements placed on central banks to track and monitor fast-paced electronic markets. These requirements are arising in particular from the greater automation and fragmentation of the financial markets, but also from the increased use of new technologies.
Risks Underestimated
The two projects show that the SNB sees its role as provider of a secure infrastructure that allows the financial market participants to launch new products. The safety aspect is key to this development, according to Ueli Maurer, professor of cryptology at ETH Zurich. He said that the danger of having codes broken with help of advanced computing was bigger than commonly thought.
But without secure codes there will no secure digital payment system. Which goes to show why the SNB keeps pointing out that cash will remain important as a back-up system even in our digital world.
