CHRISTOPHE BOSSET/BLOOMBERG NEWS

The Bank for International Settlements, or BIS, held its fourth innovation summit in Basel Switzerland. An invitation-only audience representing central banks, regulators, policymakers and industry leaders gathered over three days to discuss ways of navigating rapid innovation in the global financial system. BIS General Manager Agustin Carstens, formerly the governor of Mexico’s central bank, opened the summit by calling for both measured steps and giant leaps as central banks rise to the occasion of meeting technology risks and opportunities head on — under the long shadow of Big Tech digital currency projects and the ceaseless rise of crypto.

Since 2019, the sentiment among central bankers for so-called central bank digital currencies shifted from negative to positive — spurred in no small measure by the failed Facebook-backed Libra project. Today, more than 134 countries representing 98% of global GDP are in some degree of experimentation with publicly issued digital money. The challenge, however, especially in democratic societies from which central banks derive their trust and authority, is that people are not so quick to sanction potentially privacy-eroding forms of money. There are certainly other considerations in the case against CBDCs, but one thing is often overlooked, which is that CBDC development and sound digital asset policies may advance in lockstep. For example, winning a fierce digital currency space race hinges on unleashing a rules-based free market, rather than constraining it. Indeed, in the U.S., the political fault lines have grown thornier, with a number of anti-CBDC bills making the rounds, and Republican presidential candidates vowing to stop these innovations outright. Central bankers, however, like their banking and payment system peers in the private sector, are adaptive. This adaptation was on display in Basel and includes a broad focus on what Mr. Carstens and Indian tech titan Nandan Nilekani have called a “finternet,” which borrows from earlier analogies of an internet of value powered by open blockchain networks.

In calling for a “finternet” (a contraction of the words financial and internet), much of the conversation in Basel, along with a round of new BIS Innovation Hub projects, has been about prototyping unified shared ledgers. It is important to note that a blockchain by any other name is still a blockchain and a Google spreadsheet on Amazon’s cloud is not the same thing as ethereum-based open networks, which promote universal access, competition, composability, programmability and resilience — presumably all features of said finternet. This idea of financial shareware borrows heavily from existing global scale blockchain-based financial services, which have seen trillions of dollars of economic activity supported around a host of conventional banking, payments and capital markets use cases — many of which have been traditionally enshrined in analog or “brick-and-mortar” systems. In short, the internet of value is already here, even if the transition from dial-up to broadband has not been linear.

One of the challenges banks have in particular, hence the notion of a unified shared ledger, is how their primary regulators have forced them to take a permission versus forgiveness approach in leveraging existing open blockchains and related novel technologies. This is a miss for both banks and central banks, who under the guise of prudential risk management have forced banks to refrain from using open technologies that can not only level the competitive field, but are in line with many broad central banking objectives such as open banking, faster payments or cyber resilience. Moreover, unified shared ledgers as a concept labor under two primary risks — namely geopolitics, in which you do not weaponize a currency, but rather the rails upon which it rides, and fierce competition in banking and payments, for which “coopetition” is unlikely to gain scale.

Thus, for the finternet to gain any real traction, important policy questions have to be asked and answered. Foremost among them is the question of broadening the definition of what it means to be a bank. Today, it is nearly impossible to discern the boundary where “fin” ends and “tech” begins in modern banking. This is so because consumers, businesses, markets and the economy writ large demand that banks go well beyond their traditional confines. There are few viable ways of modernizing banking unless prudential regulators and ultimately central banks, whose usually steady and invisible hands promote more open, rules-based competition that is truly risk-adjusted, activity-based and technology-neutral. All too often, however, incumbent protection in the spirit of financial stability has the insidious effect of blocking potentially useful challenger innovations, while creating disadvantages for smaller or midsize players — all of whom face the moral hazard in banking that if any bank fails, all banks face an erosion of confidence requiring a taxpayer-borne backstop. Meanwhile, penurious capital charges even related to the cash corresponding to digital assets on a bank’s balance sheet, are narrowing the core role for banks to be the underwriters of innovation and critical counterparties to technology competitiveness.

The work carried out by the BIS Innovation Hub under the leadership of the stoic pro-innovation Cecilia Skingsley, formerly the deputy governor of the Sveriges Riksbank (the world’s oldest continuously running central bank), should be encouraged — especially if banks and nonbanks are invited into the laboratory. Soon there will be seven BIS-sponsored innovation centers around the world, serving as a veritable skunk works for rapid prototyping and analysis of emerging technologies impacting the financial system. From AI to quantum computing to the inevitable rationalization of crypto assets into the regulatory perimeter, evolving the BIS into a center of excellence for responsible innovation may be a tall order, but the commitment to innovation appears sincere. The BIS, perhaps more so than any other global organization, is well placed to mend often acrimonious relationships between banks and nonbanks. After all, completing unfinished work in the financial system is a shared objective.