Central Banking at the Frontier:
Creating a Digital Financial Landscape
The book
The book aims to be a guide into the emerging digital financial landscape from the lens of central banking, providing a comprehensive examination into the challenges that the central banks are facing, and how the central banks might respond to those challenges.
Synthesizing lessons learnt and experiences from around the world, this comprehensive book explores new technologies, new types of players, new types of business models, and the challenges they pose to monetary stability and financial stability, the two key mandates of most central banks. The book then takes a close look at various tools and initiatives that central banks can embrace in efforts to mitigate those challenges.
Unlike the strategy and operations in relatively well understood territories of monetary policy and banking supervision, central bank strategy and operations to mitigate risks from digital disruption in the financial sector will be in a relatively unfamiliar new terrain, a new frontier of central banking. To successfully fulfill their tasks, central banks will need to be intimately familiar with a new and disparate set of concepts and issues and understand how they could together be affecting monetary and financial stability.
The contents of this book are drawn from the author’s real-world knowledge, practical experiences, and insights as a central banker with extensive involvements in issues and initiatives that are at the frontier of central banking in which FinTech and BigTech firms have been very active in financial services, and where the central banks try to respond quickly to emerging challenges through various means. The initiatives taken by the central banks range from regulatory updates to meet the challenges associated with emerging new players and cryptoassets, to the introduction of new products such as digital ID, domestic faster payments systems, cross-border faster payment linkages, as well as central bank digital currency (CBDC).
From 2021-2024, the author was posted by the Bank of Thailand as Chief Representative of its London Office. Through his active participation in numerous open and Chatham House rule conferences, seminars, meetings, and one-on-one interactions with fellow central bankers, leading global thinkers, and private sector players on various digital-related topics, the author drew valuable lessons and practical insights that are instrumental in designing policies to address the emerging challenges of the digital financial landscape.
This book will be a valuable guide that helps central bankers, researchers, interested public, students of economics and finance, and people who are interested in the workings and roles of central banks which are instrumental in maintaining monetary and financial stability in all of the jurisdictions.
Table of contents
Introduction
Part I The emerging digital financial landscape
- Chapter 1 The driving forces of the emerging digital financial landscape
- Chapter 2 The emerging digital financial landscape
- Chapter 3 Challenges in the emerging digital financial landscape
- Chapter 4 Implications of the challenges on the central banks
Part II Regulatory responses
- Chapter 5 Walled gardens and shadow banking
- Chapter 6 Monetary sovereignty and singleness of money
- Chapter 7 Customers’ data rights, AI ethics, cybersecurity, and financial exclusion
Part III Promotion of open digital infrastructures for financial services
- Chapter 8 Open digital financial infrastructures for financial services: Concepts and practices
- Chapter 9 Open digital financial infrastructures for financial services: A technical overview
- Chapter 10 Digital ID: the foundation for safe and secure digital financial services
- Chapter 11 Digital payments: Real-time, 24/7, with lower costs
- Chapter 12 Data sharing: Open banking, open finance, smart data
- Chapter 13 Central bank digital currency (CBDC): Concepts, wholesale, and cross-border CBDC
- Chapter 14 Retail CBDC: Digital banknotes and a platform for innovation
Part IV Central banks’ capabilities upgrade
- Chapter 15 A shift in mindset, new mode of operations, and digital transformation
- Chapter 16 Embracing innovation: Tools and governance
What benefits will readers get from the book?
Understand the big picture from the ground up. Explore how new technologies are changing financial services, understand how new players and new business models operate and the challenges they pose to monetary and financial stability. Examine the implications of the emerging digital financial landscape and how they affect the central banks’ remits. Compare policy tradeoffs and examine various initiatives that central banks may consider in order to ensure that the benefits of digital financial services could be reaped while the risks to monetary and financial stability are minimized.
Deep dive into the following topics
01
Digital disruption
How new technologies are giving rise to new types of players, and new business models. Examine how smartphones, cloud computing, biometric authentication, application programming interface (API), artificial intelligence (AI), and distributed ledger technology (DLT) are transforming financial services.
02
The emerging digital financial landscape
Examine how new business models including embedded finance, virtual banking, BigTech super apps, bank super apps, and decentralized finance (DeFi) are upending financial services. How new types of players including FinTech, BigTech, virtual banks, and digitally transformed incumbents are competing and collaborating.
03
Emerging challenges of the digital financial landscape
New business models, new types of players, and new types of products are bringing in new challenges. The challenges include (1) walled gardens, (2) shadow banking, (3) monetary sovereignty, (4) singleness of money, (5) customers’ data rights, (6) AI ethics, (7) cybersecurity, and (8) financial exclusion.
04
What central banks can do to address the challenges?
Examine how the emerging challenges are threatening monetary stability and financial stability, and what central banks can do to address them. Broadly, regulatory updates will need to be made, open digital infrastructures introduced, and the way of working of the central bank itself transformed. Various tools (e.g. trust-based and law-based) that the central banks can used will also be explored.
05
Regulatory responses for the digital era
Examine various regulatory approaches taken by global regulators, from market-driven approach in the US, rights-driven approach in the EU, state-driven approach in China, to innovation-driven approach in global financial centres such as the UK, Singapore, and Hong Kong. Explore various regulations that fit for the emerging digital financial landscape, including those on competition, data protection, AI ethics, cybersecurity, and financial exclusion.
06
Open digital infrastructures for financial services
Open digital structures for financial services such as digital ID, faster payment systems, open banking infrastructure, and central bank digital currencies can help mitigate overreliance on closed loop platforms, improve efficiency and inclusion, as well as encourage innovation and competition. Explore key technical concepts and architectural models that will make successful open digital infrastructures.
07
Digital ID
Digital ID is the entry point towards the digital economy. They are essential to ensure that user can access financial services that are safe and secure. Explore the different types of ID, customer’s journey based on digital ID as well as different architecture of digital ID systems, from centralized, decentralized (e.g. federated and market driven), to distributed (e.g. self-sovereign) models. Examine their advantages and disadvantages, benefits and challenges.
08
Digital payments
Digital payments are fundamental to the digital economy. Examine closed loop to open look payment systems. Examine how faster payments, the instant payment systems being implemented global work. Examine various update to real-time gross settlement (RTGS) systems, the backbone of payment systems in most jurisdictions. Explore various cross-border payments initiatives that will make cross-border payments faster, cheaper, and more transparent.
09
Data sharing: Open banking & open finance
Currently, more than 50 jurisdictions are pursuing various forms of open banking initiative. Open banking works on the premise that customers are the owners of their own transaction data, even if those data reside with financial services providers. Explore various approaches that central banks and regulators in different jurisdictions have been pursuing open banking, their tradeoffs, open banking infrastructures, and key success factors.
10
Central bank digital currencies (CBDCs)
Explore different types of CBDCs: wholesale, cross-border, and retail CBDCs. Understand the technologies behind CBDC (distributed ledger technology (DLT), as well as non-DLT), key design characteristics, and their tradeoffs. Explore various CBDC initiatives and key use cases. Examine different architectural models, designs, and policy implications of wholesale, cross-border and retail CBDCs.
11
Central bank transformation
Explore why the central banks need to shift their mindset from stability at all costs to resilience, and how to achieve them. Examine the importance of a new mode of operations that are more collaborative rather than prescriptive. Examine digital transformation initiatives, from data collection to data management lifecycle at leading central banks.
12
Tools and governance for embracing innovation
Examine various tools such as sandboxes (multiple types), innovation hubs, innovation labs, and TechSprints that central banks can use to promote innovation with external stakeholders while mitigating possible risks. Examine various ways central banks can embrace innovation internally. Explore governance issues to encourage innovation.
Reviews
Highly acclaimed by central bankers, distinguished scholars, and policy makers
“Technology is not only changing the way we do finance but also the way we regulate it. As a central bank, we have a dual responsibility: to protect consumers and the financial system and to foster innovation and competition in the financial sector. This is a delicate balance that requires careful judgement and constant adaptation. We are living in an exciting time, where technology is reshaping the finance industry. Technology is also transforming the role and functions of central banks, creating new opportunities and challenges for us….
…..This timely book provides a big picture view together with the necessary practical details that will put policymakers, practitioners, academics and students right at the exciting new frontier of central banking.”
— Excerpt From Foreword by Dr. Sethaput Suthiwartnarueput
Governor of the Bank of Thailand
“No better introduction to the frontiers of digital finance.”
— Professor Darrell Duffie
Adams Distinguished Professor of Management and Professor of Finance at the Graduate School of Business, Stanford University
“An invaluable guide for policy makers, regulators, practitioners and researchers.”
— Professor David R. Skeie
Gillmore Centre for Financial Technology and Warwick Business School, University of Warwick
“Should be a required reading for senior staff at the World’s Central Banks.”
— Dr. Bill Roberts
Fellow, Cambridge Centre for Alternative Finance, Judge Business School, University of Cambridge, Former Head of Open Banking at Competition and Markets Authority, the UK
“This book shows, compares, and illustrates the evolving developments on which central banks might choose to tackle current and future challenges from digital disruption.”
— Dr. Vachira Arromdee
Former Deputy Governor and Executive Advisor to Digital Currency Unit, Bank of Thailand
“The book goes beyond merely providing a list of the challenges that the central banks are facing. Importantly, it focuses in detail on how the central banks might respond to those challenges to ensure that risks posed to monetary and financial stability are mitigated.”
— Dr. Robert Dixon
Professorial Fellow, Faculty of Economics and Commerce, Department of Economics, University of Melbourne
“Of undoubted huge benefit to Central Bank readers, this book will also help policy makers, financial services practitioners and academics understand the challenges faced by Central Banks and the role they will need to play in the evolution of the digital financial landscape.”
— Keith Bear
Fellow, Cambridge Centre for Alternative Finance, Judge Business School, University of Cambridge
“Thammarak has identified and described some of the most critical areas for central banking in the next decade.”
— Tim Richards
Principal Consultant, and Digital Payments Subject Matter Expert, Consult Hyperion
“A comprehensive analysis of the role of central banks in a rapidly evolving financial landscape driven by digitalisation of payments, financial services, regulation and even money itself.”
— Professor Hans Genberg
Professor of Economics and Senior Director of Monetary and Financial Programs, Asia School of Business, Kuala Lumpur, Malaysia
“Thammarak’s survey of digital identity will be invaluable to central bankers as they seek to understand the role digital identity should play in financial services and the digital economy.”
— Steve Pannifer
Managing Director, and Digital Identity Subject Matter Expert, Consult Hyperion
“Thammarak’s insights drawn from around the globe makes this book an essential read for anyone interested in the topic.”
— Tim Allen
Sales Director, Europe, Middle East, and Asia (EMEA), Consult Hyperion