As part of Sibos’ “View from the Top” series, being run throughout this year’s Sibos and consisting of addresses from multiple CEOs of global banks, Citi’s Jane Fraser spoke yesterday afternoon to offer a message of change. She is, of course, a figure that – as the first woman to run a major bank – many would naturally associate with the industry’s transformation. How, then, does she believe the industry should navigate what she called “the winds of change?”
Back in 2008 many believed that the profession was facing a once in a generation crisis that would remould the industry – how it operated, how it was regulated, and how it serviced its clients – in a fundamental way. This was true to an extent, but barely a decade later it is facing another pivotal moment. As Fraser suggested, the sudden outbreak of the coronavirus pandemic, and all the consequences which have resulted, has sparked a sudden need for change which could have long-lasting results. Perhaps primary amongst these is digitalisation:
“Our industry needs to reach a meeting of minds like never before. Of course, none of us are strangers to change over the course of our long careers but it does feel like we’re in the midst of a once in a lifetime shift. The architecture of finance – and by that I mean global currencies, all the way down to payments lending and deposits – it’s unbundling, bit by bit. And it’s really bundling around a new largely digital architecture. And this happened in trading over the last few decades and it was an evolution. But what we’re seeing now is more of a revolution with new architectures supplanting old ones, and the way our industry has operated for decades.”
Interestingly, much of what Fraser said was driven by a kind of fear: a fear that traditional banks, like Citi, could be supplanted by what she branded “unregulated financial activity” – the DeFi and crypto space. She pointed particularly to payments activity as an example of where digital transformation is required. Citi processes over $4 trillion of payments globally each day, whilst operating in 144 different currencies and more than 160 different countries. Despite this scale, the structures underpinning payments still remain, in Fraser’s words, “slow and comparatively clunky.” This, she believes, is a big problem:
“We’re reshaping our firm, and our exceptional assets, so that we maintain our relevancy, and we continue to deliver for clients. SWIFT, as the community that underpins global flows, must make the same journey – not just talk about it, but actually accelerate action. Because if traditional payments remain slow and comparatively clunky, as they are today, then it’s a huge incentive for others to develop alternative large scale global payment systems that could be cheaper and much faster.”
Many in the traditional banking space have predicted a future convergence between their activity and that of DeFi. Indeed, back in May, Citi itself announced that trading, custody and financing activities with cryptos was being considered. Fraser was keen to emphasise her caution, stating it was Citi’s “responsibility to ensure we have clear governance and controls in place,” but nonetheless it seemed to be a significant moment.
However, at Sibos, Fraser seemed to be more sceptical of, and perhaps less generous about, the DeFi space. At times she outlined what almost seemed to be a winner-takes-all battle between the decentralised and established finance industries. She was still offering a message of change, but it appeared to be a message of change within the industry rather than embracing the many changes that are going on outside of it:
“Already the convergence between new technology and shadow banking risks derailing years of our progress. [There] has always been unregulated financial activity, but the new technology has the potential to scale that globally to the detriment of the regulated sector, and the clients and the consumers we serve. We simply can’t afford the regulated sector to be perceived as technologically deficient to the unregulated sector and that’s why we must relentlessly modernise our regulated financial system through public private partnerships and through communities that bring our industry together, such as SWIFT. At the same time, we must make sure to work with our regulators in every single jurisdiction. So we all move forward on this journey together.”
Fraser argued that the economic challenges of the past eighteen months or so have proved the value that traditional banking can offer, owing to a resiliency built up over decades or centuries. This in contrast to DeFi, which has only emerged in the last few years and therefore arguably does not have the same structural depth:
“I don’t think the pandemic has weakened our resolve or forces, of course, for one moment. I think it has given us a moment of reflection from which clarity comes. We can be proud that our industry demonstrated resilience and was able to serve as a source of strength for so many during this crisis, and it’s been no accident. It’s the result of years of investing in operational resiliency, digitising often cumbersome processes, and always striving to be there and be the best for our clients, [as well as] banking regulations enacted in the wake of the last global financial crisis. Well, they helped put us on a stronger footing. So when the market shut down, when the supply chains were disrupted, and the usual order of business was thrown into complete chaos, we sprang into action: tapping into our ingenuity to devise solutions on the fly.”
That said, Fraser did accept the need for change and innovation when it comes to cryptocurrencies, and argued that “the large section of the crypto community that embraces regulations” will have a role to play in the future digital payments system. Of course, with the emergence of Bitcoin as an increasingly popular store of value, as well as the development of CBDCs in many major economies, innovation in this space is probably inevitable. Fraser called for “the regulated sector” to work amongst itself to create a tokenised form of money – something that would meet consumer demands for digital currencies whilst still keeping this new form of finance within the remit of the traditional banks:
“ […] That is the possible and probable emergence of central bank digital currencies. So-called stable coins may be on the horizon as mass market methods of payment. Some believe that cryptocurrencies such as Bitcoin will cross the Rubicon and will become very useful for payments.
“So what’s the bank to do? Well, we thought long and hard about developing a Citi coin. But what’s the market structure if every single firm goes off in their own direction – you know, we’re 11,000 banks in this virtual room. So we believe the answer isn’t me, but it’s we, and it’s why we’ve worked with partners to suggest an innovative model for digital currency, as part of the global competitions being run by the Monetary Authority of Singapore to develop retail CBDC solutions.
“We think there’s a way for the regulated sector to move forward with tokenised money in a joined up way, as it’s a pretty simple idea, the notion of a DLT [distributed ledger technology] that contains the liabilities of central banks, commercial banks and e-money institutions, i.e., the regulated entities that make up the formal financial system. And as our work has progressed, we’ve caught some glimpses of an answer to the “So what?” questions that bedevil so many DLT projects, and we’d love you to join us in this exploration.”
Fraser was keen throughout her address to promote a message of change. Her speech focused on using the challenges forced upon us by the pandemic to transform banking activities for the better, including digitising services to make the “architecture of finance” more efficient and more robust. Yet it was, at the same time, also a defensive speech: one that sought to defend the role of the formal financial sector and to emphasise (what she believes are) the qualities that make it superior to the decentralised form of finance which has emerged. A message of change, then – but change within the traditional banking system, and amongst its established players.
Author: Harry Clynch
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