Transcript of Question & Answer Session Panel participation at the ASIC Annual Forum 2018

James Eyers

I'm James Eyers, a reporter at the Financial Review, and I'd like to welcome you to the panel here on the technology and the future of markets. Let me briefly introduce the participants on stage. Sitting closest to me is Michele Bullock, she's the Assistant Governor for the financial system at the Reserve Bank of Australia, where she has responsibility for financial stability and the oversight of the payment system.

Then we have Scott Farrell, a partner at King & Wood Mallesons, who's worked in financial markets, law and infrastructure for the last couple of decades. In recent years, he's been working in blockchain and emerging technologies, including leading the government's review into open banking, which we'll talk about in a little more detail in this panel.

Emma Quinn is sitting next to Scott. Emma is the Head of Sales Trading and the Global Co-Head of Equity Trading at AllianceBernstein, where she's been a senior trader there for 17 years.

And at the end of the panel, legend gentleman is Ollie Williams, who's the CEO of DTCC Data Repository. He works up at the Singapore subsidiary. And DTCC, as you know, is the world's largest provider of OTC derivatives trade reporting services.

Just to put the context of this particular panel to you, we know that technology is a constant in financial markets, and that financial markets and exchanges have for decades been at the forefront of technological innovation. But what we wanted to explore this afternoon is, is there something different going on right at this point in time? We thought in scoping this panel that there were two forces that are combining that suggest potentially it is.

One is the rapid pace of technological change itself. We've seen that in how fast technologies like artificial intelligence have developed in only the last couple of years, the emergence of blockchain, the emergence of platform businesses, the internet of things, cryptocurrencies emerging last year, and all those sorts of technological developments.

Secondly, it seems like we've arrived at a time where is some significant policy developments that have appeared and are now coming into fruition, including the New Payments Platform that's been driven by the Reserve Bank, and also Open Banking. As well as the vesting of data rights to customers, and alongside that all of the collaboration with fintechs.

So we thought with those two dynamics in mind, it would be interesting to have a discussion about are we embarking on some sort of great leap forward in a technological sense at the moment and are there changes that are going on between the expectations of consumers and also the expectations of regulators? What I wanted to do is to get each of the participants on stage to set the scene. They all have their own deep experience in particular projects and applications of technologies at the moment. So we'll do that, and then I'll move into some questions about the appropriate legislative design of some of these schemes and standards and interoperability and the rise of platforms.

I might start with you, Michele. The Reserve Bank, as I just mentioned, has recently switched on the New Payments Platform: a real-time payments network. I would like to know how significant it is from the Bank's perspective, and what are your expectations as to how it might be able to foster innovation?

Michele Bullock

Sure. Let me just start by setting out what the New Payments Platform is. Many of you will know about it, but just so we're all on the same page. It is what is known as a fast payment system. It's not the first one in the world, there are other ones around. But these fast payment systems allow payments between people, even if you're not with the same bank, to occur pretty quick. So within seconds, or certainly under a minute.

And the New Payments Platform is a new infrastructure that's being built by 13 financial institutions, including the Reserve Bank. It was designed to fill what we saw as a gap in the payment system, which was real-time payments.

So this new platform has been designed in a way that it has a core, which is effectively a utility. It is a clearing and settlement facility between financial institutions, and it's been set up that way with a utility in the middle and then other commercial, what we might call overlay providers, can use that real-time infrastructure to provide services to customers. So the first service that's out there at the moment is a thing called Osko person-to-person payments. So, if I wanted to pay James, for example, within seconds I could use this service to do it. But there's some other ones coming on stream as well.

And so what I imagine is going to happen with this, is that as innovative fintechs or business people put their minds to the ways in which they might be able to embed payments within the services they offer their customers, those payments will be able to occur in real time. You can imagine applications; perhaps in superannuation, in government services, perhaps in motor vehicles or other asset transfers, things like that. These are all things that we'll be able to use this 24/7 infrastructure to make payments day in, day out, around the clock.

James Eyers

Maybe I should ask the regulator on the panel just to go into a little bit more detail there. I mean, do you, Michele, attempt to regulate new technologies or risks? And if it's the latter, are the risks changing a bit at the moment?

Michele Bullock

Well, I think that it's probably pretty obvious that we try to be technology-neutral in regulation, and I think there's a few reasons for that. Most obviously, you'd be constantly running to keep up if you were regulating particular technologies, it's very difficult. It also means you can enhance innovation if you adjust monitoring risks and you're not regulating technology. So we're very much risk-focused rather than technology-focused, and I think that aids to ensure innovation. And it ensures a bit of a level playing field. Because what we're seeing at the moment is new players coming in, and if you regulate technology you're more likely to get an un-level playing field than if you regulate risks.

On the issue of risks themselves, I believe that actually the risks aren't new, but I think what's happening is the profile's changing, the relevance of the risks is changing, and the materiality. So a very good example was the one of the cloud outsourcing risk. We've always been concerned about outsourcing risk, it's another form of outsourcing risk, it's something you might need to think a bit differently about.

In some of the things that we're doing, say the NPP, for example, when you've got settlement, which is in real-time, you're eliminating credit risk between banks in real-time, so that risk is different. But you've got other risks, say fraud, which is a real-time risk now rather than a sort of slower risk. So I think the risks are the same, and what you want to do is you want to focus on the risks in regulation rather than in particular technologies themselves.

James Eyers

And just on the real-time nature of the NPP, that you say that the risks are the same. I suppose from the perspective of an institution who moves the payment, clears and settles the payment within seconds, and that money's out the door. And aren't the risks a little bit different there? I don't have that 24-hour period or 12-hour period to batch process that payment and run my technology over the top of that. Either I've got to do that in real-time as well, or perhaps I am exposed to new risks.

Michele Bullock

I'd suggest again that they're not new risks, they're operational risks that have always been there, but they're heightened. So in real-time obviously it's much more important that you manage your operational risks so that you don't get downtime. The Reserve Bank, for example, our fast settlement service. It's a 24/7 service, it has an allowable tolerance of two minutes per month downtime. That's its allowance. Now, to run that sort of thing, I don't think it's a new risk that it might be down, but it means the risk mitigants are much firmer, and the way we manage that is a lot different.

James Eyers

Okay, and Michele, when you designed the NPP do you envisage a future that I might be able to put a real-time payment through to someone in Singapore, for example?

Michele Bullock

Well, that's sort of the pie there, I suppose, the vision. But at the moment the NPP was, in fact, built on international standards, so ISO 20022. So it does hold that prospect out there. But as I said earlier there are many fast payment systems around the world, they're all domestically based. And that's not a surprise really, because most payment transactions that occur are actually domestic transactions. The day-to-day business of people is domestic, it isn't international. So it's not surprising that that's where fast payments have focused, but I think being based on an international standard at least holds that prospect out there.

James Eyers

All right. With the rise of Alibaba and Tencent, and Facebook, and Apple, and Google, and Amazon these companies we're sort of reading about every day, do you think that they … This is a question for you, Michele. Are they changing the regulatory playing field in any way? We know that exchanges have kind of run ecosystems for many years, perhaps it's nothing different, but then again is there something different going on with these global tech companies …

Michele Bullock

So this is interesting. If we take a step back, payment systems are networks, and networks grow in value the larger they get. The classic example of the network people quote of course, is the telephone. There's no point in having a telephone if no one else has a telephone. And the more you get, the more value you get out of the network.

So payment systems have always had these networks. This is what credit card systems built themselves up on; having big acceptance networks and big use networks. What you're seeing with some of these new things, is that they're building their platforms based on some other use case. In Alibaba's case it was e-commerce, in WeChat it was basically chat and messaging, and Facebook, well, we all know what Facebook does. They've built their networks, and now the question is: do they use those networks already built to offer what is in effect an in-house payment system?

Again, this is a point where we have to be technology-neutral, but we do have to think about this. And I think there are challenges for regulators in this space. These ‘ecosystems’ I think, was a good word, they are proprietary. We have something in our regulatory kit bag at the moment, which is known as a purchase payment facility, which it starts to have a bit of a feel about, these are platforms potentially holding money of consumers. There are issues around this, and how we might think about it, and how we might regulate it, but I think this is something that's going to be occupying our minds at least, going forward, and possibly the minds of ASIC and APRA, I suspect over the next few years.

James Eyers

I mean we did a report last year that Facebook had applied for a patent for the payment functionality inside its messenger system. I think that's being rolled out in Ireland, maybe parts of the US, but not here yet. So I mean, how do you look at that? You might be keen to implement some kind of payments functionality within its own ecosystem. Is that okay? Do they need to be licensed? How do you assess that?

Michele Bullock

Well, it's an interesting question. So, if you think about PayPal, PayPal in fact, is sort of like this at the moment, it has its own native PayPal accounts. Most people, in fact, don't use that, what they use is the credit card rails to make their payments across PayPal. So PayPal ends up operating like a sort of layer over the top of the credit card systems rather than, which it was initially created as, using its own money, if you like.

I guess the way I would think about it is I would need to understand what they're doing, I would need to understand the risks of what they're doing. I think there's another fundamental point here, which is that if people are going to hold their funds with these platforms, that's quite different holding your money than it is uploading your photos. At least I would argue it is. So I think there are some interesting challenges here to think about. What exactly is it that they are holding? What are the risks associated with that? Are the consumers aware of those risks?

Because we have a perfectly good banking system with excellent payment functionality in Australia, do we need to use these third-party, single-source, if you like, systems and that remains to be seen, whether or not that takes off.

Michael Roddan, The Australian

I guess this one's just for Michele Bullock, and I'm sorry it's not very on-topic. With the Royal Commission, there's a lot of reports about loan fraud and mortgage broker fraud. I'm just wondering what the Reserve Bank's thinking about that, considering interest rates are rising in the US and are probably going to constrain bank funding here, resulting in higher rates.

Michele Bullock

What I'm going to do is suggest to you that I really can't provide an answer to that now. The focus I think, today, is technology and so on. We're watching obviously, the Royal Commission, we're interested in it, but that's really all I'm prepared to say.

James Eyers

I might come over to you, Michele, back to the NPP, if you don't mind. And I'm noticing Peter Harris is obviously about to speak after this panel, and sitting at the front table here, but in his recent report on banking competition, he made the point that it might be necessary to actually designate some kind of formal access to the NPP, pointing out that the governance arrangements of the network might favour the incumbent banks who might not necessarily be inclined to allow external outside parties to come and innovate at the overlay level of the infrastructure.

I saw you gave a speech on this topic quite recently, I just thought you might be able to respond to that here. Do you think it's going to be necessary to potentially use your powers to force the banks to open access to the NPP, and perhaps how long would you need to take to work out if that's necessary?

Michele Bullock

Look, it's a good question, and I absolutely understand where Peter and the Productivity Commission are coming from, because the history in some of this is not great. But I'm reasonably optimistic, a little more optimistic, I think, than Peter is. I think there's a couple of reasons for that.

One is that at its core, it's a clearing and settlement infrastructure and in that respect it's like the cheque clearing and settlement infrastructure, the direct entry clearing and settlement infrastructure. And you don't need to directly participate in those infrastructures to actually offer services, and many don't. So some banks do, in fact with the NPP I think we've got 50-odd really small institutions that are participating, which actually are not directly participating. They're participating through someone else.

And similarly, businesses that their business isn't actually payments, but they might want to use payments as part of the service offering, they can come in through different aggregators, if you like, and different banks.

That's one reason I'm a bit more optimistic. I think the issue that a lot of people focus on, though, as you pointed out is the governance structure was built by the banks and includes the four major banks. Again, I'm a little more optimistic on that, I think, because I've sort of seen the development of it. I've seen the way that the board has interacted. The Reserve Bank has a seat on that board, so we are very directly involved. If it becomes clear that things are not panning out as we would expect in terms of access, then we've got very direct information on that, and it's always within our option to consider whether designation and an access regime might be appropriate.

There's only one other point I'd make, and that is that because it's a utility, it's in the interests of the NPP to get as much volume through as it possibly can to defray the fixed costs. I personally would be surprised if they tried to discourage people coming in and using it, but again as I say, I'm slightly more optimistic, and we will be watching, you have no doubt about that.

James Eyers

And you can get access to it without needing to go through a major bank, anyway, I suppose because Cuscal and others will provide that.

Michele Bullock

There's three aggregators that are currently providing access to many smaller institutions, so there are other options.

James Eyers

Such a massive bitcoin bubble late last year that deflated, but I read with interest the Governor's speech about the potential for an eAUD, and I saw that the Bank of International Settlements in recent weeks has put out some quite detailed papers on central bank cryptocurrencies. Advocates for it in Australia seem to be saying that it will help them close the payments loop on private blockchains by being able to use a real, central bank-backed digital token of the Australian dollar rather than some other cryptocurrency, so they're appealing to that argument about stability and the like. But I'm very interested to hear your sort of views on the eAUD and the cryptocurrency wave, generally.

Michele Bullock

Point number one, I probably object to the term cryptocurrencies, it isn't a currency, they're not currencies, you can't use them, typically to make payments, they don't store value, and they're not a unit of account. The name's a misnomer to begin with.

In terms of an eAUD, I think the Governor in his speech last year really made the points very well. We actually have an eAUD in Australia, it's actually exchange settlement accounts at the Reserve Bank. That is electronic Australian dollars. But it's restricted to banks, which have to settle payments between them and I should add, that's not on a distributed ledger. So you can separate cryptocurrencies from distributed ledgers and blockchains, they are not the same thing.

So we have a particular digital currency in Australia, which is exchange settlement accounts, the question is: do we expand it out into retail use? Should everyone be able to have an account at the Reserve Bank of Australia or should the Reserve Bank of Australia issue digital tokens that people then pass around. And I think our conclusion there, and I'd have to say the conclusion of quite a few central banks around the world, is that there's actually no need for it. We've got a perfectly good payment system using commercial bank money. It's perfectly good, 97% of money out there is commercial bank money, the rest is the paper or the polymer stuff, in our case, cash.

So we don't really see there's a demand for it, and we really don't see there's a need for us to get into that business and there would be financial stability risks, potentially if we did anyway, because that would mean that people could just run to the Reserve Bank and get electronic Reserve Bank dollars if they felt that there was issues with a particular commercial bank.

The issue you raise about whether or not there's a need to close the loop on supply chain sort of blockchains, again I think we're slightly more open to that idea, and we're thinking about it. I think where we remain to be convinced is whether or not you can use the NPP in real-time perhaps to do these sorts of things. Do you really need the central bank money on the blockchain, or can you, in fact, just dip out and use another payment system to do it?

We haven't ruled it out, and we've said that we are thinking about it. But I think that's more our focus, and the case remains to be proven, rather than us leaping in there all feet.

James Eyers

Okay. Well look, on that note we have run out of time, so would everyone like to join me in thanking the panel.