Commonwealth Finance
Ministers Meeting
CPTM
Washington, D.C., 6 October 2016
Commonwealth Partnership for
Technology Management (CPTM)
Brief
on
Adaptive Flexibility Approaches
to Financial Inclusion
in a Digital Age
- Recommendations and Proposals –
CPTM Smart Partners’ Hub
63 Catherine Place
London SW1E 6DY
September 2016
CONTENTS

Foreword
3

Recommendations and Proposals
5

Overview - A Strategy for Adaptive Flexibility Approaches
to Financial Inclusion in a Digital Age
7



Part I - Financial Inclusion and Interoperability
Sharing Experiences: National Contexts of Financial Inclusion
Part II - Strategic Interdependencies for Financial Inclusion:
Statistics, Data & Standards in a Digital Landscape
Part III - Special Focus on Blockchain:
A New Digital Disrupter and the effect on Financial Services
11
15
23
ANNEXES



Annex I: Definitions of Key Terms
Annex II: Smart Reading Tips
Annex III:
o About CPTM
o CPTM Smart Partnership Financial Inclusion Initiative
o The CPTM Smart Partnership Approach
to Socio-Economic Transformation
2
33
35
39
40
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CPTM
Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
CFMM, 6 October 2016, Washington, D.C.
Foreword
On behalf of the CPTM Chairman, Tan Sri Datuk Dr Omar A. Rahman, and the CPTM
Board of Directors, I am pleased to forward, for your consideration, a CPTM Brief,
including recommendations and proposals, on adaptive flexibility approaches to Financial
Inclusion in the digital age. The Brief forms part of the CPTM annual submission to the
Commonwealth Finance Ministers Meeting, which have been provided each year since the
establishment of CPTM at the 1995 CHOGM in Auckland, New Zealand.
Commonwealth Central Bank Governors are invited to also consider the issues derived
from the 5th CPTM Central Bank Governors Think Tanking, which took place in London in
June 2016. We would like to thank and congratulate Central Bank Governors and Smart
Partners for this year’s Think Tanking session, which couldn’t have been more timely and
relevant considering today’s challenges and opportunities, as articulated so well by Mark
Carney in a speech he gave earlier this year (see speech extracts overleaf).
The Brief begins by outlining why it matters that a strategy for adaptive flexibility
approaches to Financial Inclusion in the current digital age should emerge and be
monitored for specific national contexts. The Brief then continues by sharing country
experiences of financial inclusion and interoperability, followed by elucidating the
relevance of statistics, data and standards to financial inclusion.
With special insights from CPTM Smart Partner Mike Brookbanks, this year’s Brief also
includes a special focus on blockchain technology as a new disruptive technology, and its
effect on the financial services industry. The Brief is based on highly relevant and up-todate sources of information, including webcasts recorded at the CPTM Smart Partners’
London Hub.
The CPTM Chairman and Board of Directors, as well as CPTM Smart Partners, look
forward to supporting Commonwealth Finance Ministers and Central Bank Governors in
their efforts to develop adaptive flexibility approaches to Financial Inclusion in the digital
age.
Dr Mihaela Smith
CEO, CPTM
September 2016
CPTM Smart Partners’ Hub
London
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Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
CFMM, 6 October 2016, Washington, D.C.
Extracts from Speech entitled “Enabling the FinTech transformation: Revolution, Restoration, or
Reformation?”, given by Mark Carney, Governor of the Bank of England, at the Lord Mayor’s Banquet
for Bankers and Merchants of the City of London at the Mansion House, London. 16 June 2016
The Promise of FinTech
‘FinTech’ heralds the dawn of narrow banking and portfolio optimisation. It will
change the nature of money, shake the foundations of central banking and deliver nothing
less than a democratic revolution for all who use financial services.
Money and credit, the universal instruments of commerce, could not exist without
this most fundamental of financial technologies, which allows debits and credits to be
netted off; debt to circulate as currency; money to replace memory; and with it, trade to
expand exponentially.
The emergence of mobile telephony, the ubiquity of the internet, availability of highspeed computing, advances in cryptography, and innovations in machine learning could
combine to enable rapid changes in finance – just as they have in other areas of the
economy.
The ledger, once stone, wood, or paper – and always centralised – is now digital and
may become distributed. FinTech has the potential to deliver more resilient financial
infrastructure, more effective trade and settlement, and new ways to encode, share and
analyse data. For the financial sector, these could offer shorter, speedier transaction chains;
greater capital efficiency; and stronger operational resilience. For consumers, they could
mean more choice; better-targeted services; and keener pricing. For everyone, FinTech
may deliver a more inclusive financial system, domestically and globally; with people
better connected, more informed and increasingly empowered.
The Potential impact of FinTech on financial and monetary stability
Already, FinTech is spurring new entrants including payments providers, peer-topeer lenders, robo-advisors, innovative trading platforms, and foreign exchange agents.
This could, with time, unbundle traditional banking models and deny banks their
traditional economies of scale and scope. The systemic consequences of FinTech are even
more complex. More diverse business models and alternative providers are positives for
financial stability.
By allowing better credit screening and less adverse selection, FinTech could
improve risk assessment, credit allocation, and capital efficiency. But if it encourages
herding on common information, trading positions could become more correlated. And if
switching costs in funding markets fall, liquidity risk could rise and systemic risks grow.
FinTech could also affect the conduct of monetary policy. Unbundled banking would
change the roles of bank capital and funding costs in the credit channel of monetary policy.
If FinTech enhances participation in financial markets, the wealth channel of monetary
policy could strengthen. More broadly, Big Data techniques could tell us about the state of
the economy more accurately and promptly. Forecast performance could improve, akin to
the forecast improvements that better measurement of atmospheric conditions has, over
time, delivered for meteorologists.
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Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
CFMM, 6 October 2016, Washington, D.C.
Recommendations and Proposals
Overall
1.
Central Bank Governors will continue to share their experiences of Financial
Inclusion Initiatives with CFMM and their insights on the evolving functions of
Central Banks as a result of the impact of Digital Technology.
2.
The CPTM Central Bank Governors’ Think Tanking showed the need, at a National
Level, to adopt the CPTM Strategic Framework based on the interconnected
CPTM Inclusion Initiatives, namely National Visioning for Inclusive Security,
Financial Inclusion, Quality & Standards Inclusion, Science & Technology
Inclusion, Data & Statistics Inclusion and the Emerging Digital Technology
Landscape, supported by relevant National Smart Partnership Hubs and
Frameworks.
3.
Central Banks will continue to engage with and research the potential advantages
provided by FinTech developments, including Blockchain and Distributed Ledger
Technology (DLT). However, Technology providers need to be aware that Central
Banks have a duty to minimise the risks involved for their citizens;
o Blockchain’s emergence as a New Digital Disrupter and the effects it has on
Financial Services need to be closely monitored, in particular regarding issues
related to risk, regulation and governance for Central Banks.
o In this context, De-Risking Strategies could be investigated further in future
interactions.
4.
The connection and interaction between the CPTM Financial Inclusion Initiative and
the CPTM Quality & Standards Inclusion Initiative should be strengthened on the
issues of Digital Financial Services and the emerging Standards surrounding
Digital Technology, Digital Financial Services, Blockchain and DLT:
o National Standards Bodies (NSB’s), as members of ISO’s Developing
Countries (DEVCO) group, should consider working closely with ISO on the
development of the proposed new Standards for Blockchain, thus monitoring
developments for Central Bank Governors.
5.
Further new interactions between the CPTM Financial Inclusion Initiative and the
new CPTM Smart Partners’ Inclusion Initiative on Data and Statistics, should
enhance the role of National Statistics Offices (NSO’s) for the best interests of the
people.
o There is a need for closer working relationships to be forged between Central
Banks and NSO’s especially considering the rapid penetration of society by
digital technology.
o Central Banks could reflect on the impact of new economic activities on
traditional statistics, with the potential to employ enhanced Data Science
methodologies to assist this process through the work of Data Centres.
o Data Visualisation can be used for increased statistical literacy and to provide a
better understanding of FinTech processes.
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Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
CFMM, 6 October 2016, Washington, D.C.
Specific
6.
The following activities and considerations should be acted upon:
o Sharing experiences of the evolving functions of Central Banks as a result of
the acceleration of the impact of digital technology;
o The strategic function of Central Banks in balancing and bridging consumer
needs and the solutions of FinTech providers for National Frameworks;
o Importance of Data, in particular Economic Statistics and the Impact of Digital
Technology such as Blockchain, and associated Standards, for Central Banks;
o De-risking strategies, a new dimension of Financial Inclusion, proposed by
Dr DeLisle Worrell, Governor of the Bank of Barbados;
o Underlining the importance of Financial Inclusion and Emerging Digital
Technology and associated Standards for the implementation of National
Visions.
o An Executive Brief for Commonwealth Heads of Government proposing a
Smart Partnership Dialogue will be produced by CPTM Members.
CPTM Central Bank Governors’ Think Tanking Participants – London, June 2016
Central Bank Governors: Professor Benno Ndulu, Governor, Bank of Tanzania, CPTM Companion;
Professor Emmanuel Tumusiime-Mutebile, Governor, Bank of Uganda CPTM Companion; Mr Majozi
V Sithole, Governor, Central Bank of Swaziland; Dr Retšelitsoe Adelaide Matlanyane, Executive
Director and Chairperson (Governor), Central Bank of Lesotho; Dr Patrick Ngugi Njoroge, Governor &
Chairman, Central Bank of Kenya; Dr Denny Kalyalya, Governor, Bank of Zambia; Dr Caleb Fundanga,
Executive Director, Macroeconomic and Financial Management Institute of Eastern and Southern Africa
(MEFMI); Dr Waldemar Fernando de Sousa, Executive Director and Board Member, Bank of
Mozambique; Dr Grant Peter Kabango, Deputy Governor, Reserve Bank of Malawi
Special Guests: Professor Sir Charles Bean (former Deputy Governor, BoE), London School of
Economics and Political Science, UK; Professor David Hand OBE, Data Science Institute (Imperial
College London)
CPTM Smart Partners: Ambassador Godfrey Magwenzi, Ambassador of Zimbabwe to Italy, CPTM
Companion; Dr Albina Chuwa, Director General, National Bureau of Statistics, Tanzania; Dr Adam
Mugume, Executive Director, Research and Policy, Bank of Uganda; Mrs Mpho Makhema, Vision 2016
Council Secretary, Botswana, CPTM Companion; Mr Silas Mosuhli, Director, Lesotho Smart Partnership
Hub, Lesotho; Mr Moses Zungu, Head of Smart Partnership Secretariat, Prime Minister’s Office,
Swaziland; Mr Nkundwe Moses Mwasaga, Lecturer, Dar es Salaam Institute of Technology, Tanzania;
Mr Shelton Kanyanda, OECD Statistics, France; Mr Chimwemwe Mlaviwa, Reserve Bank of Malawi;
Mr Jacob Mkandawire, Economist, Bank of Zambia; Mr Vijay Mauree, Digital Finance Service,
International Telecommunication Union (ITU), Switzerland; Dr Bronwyn Evans, CEO, Standards
Australia and Mr Varant Meguerditchian (video message); Mr Andreas Tsindos, Dr Rajiv Mathur and
Mr Oliver Oram, ChainVine, UK; Mr Kartik Natarajan, Applied Blockchain, Level 39, UK; Professor
Michael Mainelli, Z/Yen, UK; Dr Phil Godsiff, Centre for the Digital Economy, University of Surrey,
UK; Mr Carl Miller, Centre for Analyses of Social Media (CASM), DEMOS, UK; Ms Mary Eboka,
Ministry of Planning & Regional Development (MINEPAT), Cameroon; Dr Mohsin Ullah Khan, Zaheer
Science Foundation, India; Mr Tony Colman, UK; Dr Juliet Colman, UK; Mr Robert Smith, UK;
Dr Andrew Taussig, CPTM Director, UK; Lt General (Ret’d) Ihsan Shurdom, CPTM Director, Jordan;
Dr Mihaela Y Smith, Chief Executive, CPTM
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Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
CFMM, 6 October 2016, Washington, D.C.
Overview
A Strategy for Adaptive Flexibility Approaches
to Financial Inclusion in a Digital Age
1. The 2016 CPTM Central Bank Governors’ Think Tanking at the Smart Partners’ Hub
focused on the following issues:
 The CPTM Financial Inclusion Initiative;
 Financial Inclusion, Data and Statistics;
 FinTech for Central Banking, including De-risking Strategies and the Importance of
Standards;
 New Dimensions and Way Forward.
Why it Matters?
2. A number of recent publications and events have explored the role of Digital Financial Services
in Financial Inclusion processes. One example is The 2016 Brookings Financial and Digital
Inclusion Project Report: Advancing Equitable Financial Ecosystems, which explored the
need to establish measurable financial inclusion targets and outlined why this mattered:
“Central Banks, ministries of finance, ministries of communications, banks, non-bank financial
service providers, and mobile network operators have major roles in achieving greater financial
inclusion and should coordinate closely with respect to policy, regulatory, and technological
advances.(…) Among the SDGs closely connected to financial inclusion are objectives to: end
poverty; achieve gender equality; “promote inclusive and sustainable economic growth,
employment, and decent work for all” (a goal that is particularly germane to financial inclusion);
and reduce inequality within and among countries.(…) While there is no single path to facilitating
financial inclusion, engagement in multinational knowledge-sharing networks and investing in
digital financial services can help countries develop successful and sustainable approaches to
making progress towards inclusive finance (…) Quantifiable goals can drive country commitments
and policy changes with respect to financial inclusion”1
3. The G20, alongside the Global Partnership for Financial Inclusion (GPFI) has also made this
a focal point of their recent work, notably in the G20 Principles for Innovative Financial
Inclusion2 The World Bank recently released a Global Findex Database Measuring Financial
Inclusion around the World, which gave a very good summary of global trends surrounding
Financial Inclusion. 3
Emerging Debates on the Impact of Distributed Ledger Technology and Blockchain
4. In line with all of this, one of the major focal points of the 2016 CPTM Central Bank
Governors’ Think Tanking at the Smart Partners’ Hub was the impact of FinTech and
Blockchain on Financial Inclusion. Since there has recently been a rapid increase in the attention
afforded to technological developments by financial institutions (both Central and Commercial
1
https://www.brookings.edu/wp-content/uploads/2016/08/fdip_20160816_project_report.pdf
http://www.gpfi.org/publications/g20-principles-innovative-financial-inclusion-executive-brief
3 http://pubdocs.worldbank.org/en/681361466184854434/2014-Global-Findex-Report-DKSV.pdf
2
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Banks), this brief has looks closely at issues surrounding FinTech, for the benefit of Finance
Ministers across the Commonwealth. In particular, this brief contains an excellent introduction,
courtesy of Mr Mike Brookbanks of the University of Surrey, to Blockchain and Disruptive
Ledger Technology (DLT) as well as an analysis of the potential disruptive impact this could have
in the coming years.
5. Currently there is a lively debate on this topic amongst many financial experts and economists,
including Smart Partner and Chairman of Intelligence Capital Ltd, Professor Avinash Persaud.
“I see FinTech and Blockchain as part of the long progress of improvements in information
technology that will impact banking. However, it is customary for FinTech revolutionaries to
overstate their impact. Technology hubris is the seed of almost all financial booms and busts from
the advent of the railway, motor car, electrification, telephony, internet etc. Banking is part of the
information industry, but money is a social construct centred at government for a reason. Many of
the technology revolutionaries have little background in monetary theory – they will argue, just as
the dotcom revolutionaries did, that they have no need for monetary theory because they are
disrupting it all. However, it is governments who issue money – again for fundamental reasons
that cannot be replaced. Governments have the power of taxation, of determining what is legal
tender, as well as defining what is safe and acceptable in return for government-sanctioned
liquidity.
An example of this is the recent case of correspondent banking relationships. While technology
and private trust mechanisms should be improving the flow of money and remittances and
lowering its cost, banks and money wire services in developing countries, especially in small
states are rapidly losing all of their correspondent banking relationships making it impossible for
them to transfer money abroad. This is particularly so for the Caribbean where countries like
Belize have no correspondent banks. This recent trend is alarming and will have major adverse
consequences for financial inclusion. The reason is that the correspondent banks in the developed
countries fear that these countries in the developing countries will be placed on “unapproved and
sanction lists” for money laundering. The costs of being on these lists or being seen to have
flouted regulation has risen dramatically. In recent year’s over $300bn of fines have been paid by
bank shareholders. Because this process relates to who has political clout and not whether there is
indeed any real risks attached to the flows, and the costs of getting it wrong have become higher,
developed country banks have just closed down their risks and relationships. M-pensa would not
have succeeded if started today. The main solution to developing countries will not be found in
global private trust mechanisms dependent on government sanction lists, but forming alternative
networks, such as with Chinese banks hiding behind their greater political clout.
It is also interesting to note Thomas Philippon’s interesting work that suggests that despite all of
the technological advances in information technology since the early 1900s – the age of steam
trains – the average cost of financial intermediation to the non-financial sector has not fallen and
remains around 1.75%.4 Think your buying costs have gone down with all the “algotrading”–
check for all the new charges and costs elsewhere. This suggests that in finance they key lynchpin
4
Abstract of the FinTech Opportunity by Thomas Philippon: Financial services remain surprisingly expensive, which
explains the emergence of new entrants. The current regulatory approach is subject to significant political economy and
coordination costs, and therefore unlikely to deliver much structural change. FinTech can improve both financial stability
and access to services, but this requires significant changes in the focus of regulations.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2819862
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CFMM, 6 October 2016, Washington, D.C.
for the consumer is not technology, but how the financial system is organized and to whose benefit
which has more to do with regulation. Technology can play a powerful role in improving the
effectiveness of regulation, enabling regulators to support new forms of organisation of the
industry that would benefit consumers and once we have a sector more attuned to the benefits of
consumers, amplifying those benefits.
A useful analogy is renewable energy. Recent advances in solar technology will be transformative
for energy and the world, but this technological revolution would not have taken place if left to
energy entrepreneurs and was only possible, Telsa was only possible, through large fiscal
disincentives and incentives and in some cases direct regulation banning emissions. For the real
revolution to happen in finance, we need to set the right incentives first, otherwise it is
merely a fight over who gets the spoils, without real benefit to the consumer, masquerading
as a revolution to save us all.”
6. These concerns regarding the rate and manner in which Blockchain and DLT are affecting
everyday financial transactions were echoed by a number of Governors during the CPTM
Central Bank Governors’ Think Tanking.
“If we, as Central Bankers, were conservative in our approach we wouldn’t be doing mobile
money. Adaptive flexibility isn’t a joke to us, we are doing a lot. But we want to see how things
progress. We don’t want to overregulate these developments before they have time to blossom, but
you do have to assess how much risk you are willing to go with. Each CPTM Central Bank
Governors’ Think Tanking meeting takes us closer to appreciating what technology can do.
There’s no better way than putting in a serious fight before jumping on board. We don’t gamble.
We seek assurance, and get a good sense of what works.
(…) One bit of clarity that was important is that blockchain is a method rather than a
solution. It is a means to an end, not an end in itself. As long as we remember there is some
flexibility here, we will be in the right frame of mind.” (Governor of the Bank of Tanzania)
“We don’t want to appear like Luddites, but we aren’t going to suddenly jump into a large project.
We want to see a product that does the basic transfer from A to B and then we can go from there.
Our worries around security are very high, understandably.
(…) Frankly, we have been thinking about this issue for some time, but we ask for patience. We
have our own process. We want technology and we know that technology helps us. But we have
concerns that can’t be blown away.” (Governor of the Central Bank of Kenya)
The Bank of England holds similar feelings regarding Blockchain and DLT developments. While
stressing that the Bank is ‘technologically agnostic’, considering the stability of the system as a
whole its priority, it created a FinTech Accelerator unit in 2016 to explore possible uses for the
technology.5
5
For more on the FinTech Accelerator, see: http://www.bankofengland.co.uk/publications/Pages/speeches/2016/914.aspx
and: http://www.bankofengland.co.uk/Documents/fintech/fintechpocdlt.pdf and
http://www.bankofengland.co.uk/Pages/fintech/default.aspx
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Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
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Mitigating Systemic Risk
7. Understandably the Central Bank Governors were keen to minimise the systemic risk that can
be triggered by potentially revolutionary developments in Financial Technology. The technology
is appealing, but at the same time the risks must not be ignored. In order to truly understand what
is involved it is important to be familiar with the wider context of Systemic Risk. Willke, Becker
and Rostasy’s book Systemic Risk: The Myth of Rational Finance and the Crisis of Democracy
provides an excellent introduction to the topic.6
8. With this in mind, it is useful to note recent work on the concept of De-risking, used to protect
banks and financial institutions from fraud and money laundering. However, as Dr DeLisle
Worrell, Governor of the Central Bank of Barbados, has pointed out, this can have dramatic
effects on the individual customers and clients of banks employing de-risking strategies.7
Statistics, Data and Standards in the Digital Age
9. Standards are another key element for mitigating the risks mentioned above and to help
ensure that cutting-edge Financial Technology has a positive effect on Financial Inclusion.
The CPTM Smart Partnership Approach to Financial Inclusion has long emphasised the need
for cooperative interaction between Central Banks and National Standards Bodies. By
working together, they can develop the necessary Standards for FinTech. Data, based on a new
approach to Statistics and Data Visualisation, is also crucial to this process. CPTM’s
Technology and Innovation Inclusion Initiative also plays a key role in this process, including
research on the impact of Supercomputers on Data Infrastructures to increase Financial
Inclusion.8 When taken together, the above creates an Adaptive Flexibility Approach to
Financial Inclusion in a Digital Age.
6
https://www.sugarsync.com/pf/D667256_92_7332823972
For more, see for example Governor Reports on De-risking at Financial Stability Board Meeting
http://www.centralbank.org.bb/Portals/0/Governor%20Worrell%20Reports%20on%20Derisking%20at%20FSB%20Meeting.pdf
8The Emerging Digital Landscape and Supercomputing Dr Nkundwe Moses Mawasaga, Dar es Salaam Institute of
Technology https://www.sugarsync.com/pf/D667256_92_7457390525?_ga=1.57518307.810161049.1463494416
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Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
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Part I - Financial Inclusion and Interoperability
Sharing Experiences: National Contexts of Financial Inclusion9
10. The 2016 Central Bank Governors’ Think Tanking marked a significant turning point in the
history of the Smart Partnership Movement and CPTM as a whole by providing new impetus for
the interaction between the CPTM Smart Partners’ Inclusion Initiatives. The Think Tanking
demonstrated the need for the promotion of active interconnection between the Inclusion
Initiatives (see Annex III for more information on the CPTM Strategic Framework of Inclusion
Initiatives) and their strategic value in the context of achieving National Visions. The timing
of the event could not have been better, with the issues of FinTech and Blockchain really
capturing the imagination of the global financial sector (e.g. Bank of International Settlement
(BIS)) and beyond, and Blockchain technology being applied for governance and other uses.
(Dr Mihaela Smith, CPTM CEO and Joint Dialogue Convener)
11. “At the 2015 CPTM Central Bank Governors’ Think Tanking, we looked closely at the
influence of mobile money and the importance of being able to access and use it, because access
without use is not useful. Interoperability is important for this, so we should bear that in mind.
Interoperability is the frontier at the moment and a key concern of ours. (Our discussions this year)
could be a broader update (on Financial Inclusion initiatives in each of our respective countries),
before becoming more specific as we progress the discussions later on.” (Governor of the Bank
of Tanzania)
12. Tanzania - Access to mobile money in Tanzania now at ~80%. Usage of mobile money is
at 67%, 17.2 million adults use it once every 30 days (which is the definition of ‘active
usage’). Vodacom and Airtel are both very active. We have five mobile network operators
(hereafter MNOs) in Tanzania, so it’s very competitive in Tanzania these days.
Mobile wallet (cash in/cash out) interoperability is also very widespread. Person-to-person (P2P)
transactions across networks are now also possible, whereas before all sorts of charges were
involved in order to cross networks. It can now be done directly, cutting the transaction time and
the cost of using an agent to cash out and send across. We in Tanzania are among the first ones to
have achieved this, I believe. Rwanda are also doing this, I believe. In some countries there is a
very dominant player, which makes interoperability less likely as they have a near monopoly on
the customers. They are understandably keen to maintain this dominance. (Governor of the Bank
of Tanzania)
13. Kenya - Kenya has certain historical specificities. We were the first to start with mobile
payments. Now we have first-mover problems or challenges. We need to clean up an untidy
field. Those who have come after us have benefited from our experience though I don’t think that
we would do anything different if we had to do it all again. We have benefited from Financial
Inclusion – indeed, the benefits are humungous.
The Governor of Tanzania set out interoperability very well. Safaricom had a lot of agents out
there and they want to keep it that way rather than allowing others to piggy back on their
work. This is understandable. However, they don’t necessarily have the best technology but they
Extracts from the 2016 CPTM Central Bank Governors’ Think Tanking at the Hub, full document ‘CPTM Highlights
& Insights on Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age’:
https://www.sugarsync.com/pf/D667256_92_7266421300
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have the control. Superior technology does not always win out (e.g. Betamax vs VHS). We have
to look to where we will be in 5 or 10 years, with benefits coming to the population using the
services. We have to break the dominance of institutions and avoid monopolies. Negotiation is
crucial, of course. These negotiations are long, there is no shortcut. You may wish to read
Clausewitz’ ‘On War’ for insights on how to negotiate with big players.
National Payments law is relevant, but these laws need to be developed progressively. We
want to avoid laws that “make a mess”. The big players see the need for interoperability but
getting agreement is challenging. We have a solution that is about to be launched. Maybe
Tanzania is not entirely ahead on this one! They remain at the cutting edge of technology. We
have a bit of a sibling rivalry with them. We have a system similar to SWIFT coming, which will
facilitate the partnership of operators. Greater interoperability will bring the benefits of technology
to the customer. Members, i.e. banks, will maintain the SWIFT technology. Other service
providers can be Aggregators exist but there is still competition, and technology is being advanced
way beyond what banks can develop.
There are some issues which are barriers to new technologies, such as cost. On the non-exclusivity
of agents, we are working on telephone towers, which is a big thing. This would allow multiple
providers to use them, you can think of the towers as being like a kiosk. This approach is not
necessarily a solution forever, but for the next 10-15 years.
Security is our number one concern as bankers. Whatever solution we come up with has to be safe,
not just cutting edge. Consumer protection needs to be paramount in our work. Consumers are not
always that knowledgeable and so we need to provide the security. Some people have accounts but
can’t read, they have to rely on the honesty of others. There is a lot of potential for fraud in these
cases. The volume of fraud is not large but nuisance cost can be considerable.
In Kenya we have the example of a local fruit seller borrowing the money in the morning. While
waiting for the lights to change she can apply and receive the loan before setting off, therefore
having near instant service and access to working capital. This is a huge development for socioeconomic movement. This also generates information about herself, giving her a credit rating and
opening possibility of future larger loans.
Our view is that we are moving to Financial Inclusion 2.0. We are experiencing diminishing
returns so we need to change it up a bit. The pressure is on society to provide services for the
lowest segment of our population. This democratising process needs to continue and accelerate.
The only limiting factor is our innovation. (Governor of the Central Bank of Kenya)
14. Lesotho - In Lesotho the experience of mobile money is nowhere near the two giants who
have spoken. We are just introducing it as part of a broader FI agenda. Our financial sector is
much less developed. We started at a good time, when we needed to provide competition for the
banking sector in our countries. Mobile money is especially important in our mountainous
land, where banks were unwilling to travel across the country. We didn’t have legal
structures in place but the telcos came and did their work. People are now using mobile
money in even the most remote parts of country.
We are still at a basic stage, transferring cash person-to-person (P2P) and for paying services and
goods. We have only four commercial banks, and three of these are big South African banks who
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are unwilling to go into the mountains to serve people there. Therefore, technology has come at a
good time.
Lesotho is also very dependent on remittances, so we are aiming to make this possible for
Basotho people working in South Africa. Progress is being made and the next step is
interoperability between the two providers in Lesotho, but also between MNOs and banking
institutions. Technology is working for us and has helped bring phenomenal transformation in
how people view the banking and the financial sector.
Loans and savings are still to come. However, we are now number one for using their balance
to buy airtime (normal), but you can now also transform airtime back into cash, which is
unusual! We have achieved much but have a long road ahead of us as well. Consumer
education and literacy is key. Many people don’t yet understand the implication of the contracts
they are signing. Financial education will be integrated into the curriculum at primary schools
from next year. Consumer protection needs to be increased as well. The influence of South
Africa’s advanced market is not entirely beneficial. They have advanced dubious players
who cross our porous borders and prey on our less sophisticated consumers. SA laws are not
the same as in Lesotho, so signing with SA providers can leave them very vulnerable.
Cybersecurity is a concern of ours as well. We want to digitise and so forth but we are
concerned by the security implications of this. We have used development partners a lot to
overcome our shortcoming in technological knowledge. One of the other things that keeps me
awake at night is looking into what can be done to prevent people from falling into debt. We have
put in place the Credit Reference Bureau, which is a registry for credit rating information. Many
of our partners are very much in synch with us in this regard. Our staff are not necessarily familiar
with payment systems, we need to work in partnership to rectify this. We are bringing in partners
such as the World Bank/IMF to produce an implementation strategy/plan.
Legislation needs to be modified to accommodate debts. Our Central Bank is in a constant state of
catch-up with what consumers are doing. The biggest problem in the South, as elsewhere, is
pyramid schemes. We are consolidating a number of sectors and strengthening regulation to help
us catch up with others. (Executive Director of the Central Bank of Lesotho)
15. Zambia - Leapfrogging is certainly useful for us in Zambia. We are early in our Internet life
and have been a bit slow to use the available platforms, but we are progressing. In 2002-3 we had
a financial sector assessment by World Bank and IMF, to look at shortcomings, such as outdated
laws, and potential solutions to these shortcomings. A financial sector working plan was
developed in 2004 to help these issues, through which we established a baseline, and this plan
continued for five years. In 2009, access was still only 6-7%.
We then went into phase 2. Consumer Education is a really important aspect; democratisation of
financial services is a very important goal, and laws are now being modernised post-2009. We
established a non-profit clearing house, with surpluses ploughed back into system. A national
SWIFT (switch) system has been established, and we said up front that institutions need to be
working together. We remind them of this constantly. Whatever systems emerge must be able
to talk to one another.
One other challenge is consumers not repaying debts, but we are dealing with this. We have also
established a credit reference system. Procurement issues have also occurred as well, and in
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addition there have been further challenges as a result of the financial crisis, with few people
able to access services due to fears over lending. Relevant legislative proposals have gone
before Parliament but several are stuck there.
Zambia has three MNOs, with a fourth coming. These MNOs have been brought in, with
the regulator on board. Memorandums of Understanding (MOUs) have been used and we
are really trying to work together. They jealously guard their platforms and are reluctant to
work together at times. While MOUs are not binding, they help to clarify what is expected of the
signatories. We convinced the Government to use an e-voucher system for inputs for agriculture.
This lowered transaction costs and reduced exclusion rates for many people, although there have
been negative reactions from those now left out of the process.
Financial services and big retail outlets such as Shoprite are also now able to provide money
transfers for people. Airtime is also convertible into money, like in Lesotho. Cardless services
using the mobile enables you to withdraw money from cash machines without a card. We are
encouraging the use of card over cash for security reasons. Support from our colleagues is also
invaluable. Some people think we’re moving too fast, but our colleagues with experience and
know-how enable us to avoid the mistakes they made in the process. (Governor of the Bank of
Zambia)
16. Uganda - Financial Inclusion is going well for us, although at a slower rate than our
neighbours. We have slowly developed a number of services, including Islamic banking. We have
done similar work to Kenya, although every mobile transaction in Uganda is taxed unlike in
Kenya. This hinders transactions. The roles of the various institutions have also been clarified, and
we are also attempting to bring the key players under one umbrella.
Financial education is also very important to us. The financial committee is working hard on
financial education and awareness across the country. Interoperability is an issue as we have
a dominant player who does not want to alter how it works. They say: “You gave us a
licence. Who are you to now start telling me what to do?” Negotiations have begun to change
this. Uganda, Tanzania and Rwanda have also developed an East Africa Payment System to
facilitate movements across the borders, and cross-border transactions are now beginning.
(Governor of the Bank of Uganda)
17. Malawi - A number of initiatives in Malawi have been championed. We have a number of
new regulations in place, and we started by enhancing financial rules and regulations to enable
mobile money, for example. We have a national SWITCH for interoperability, and all financial
institutions have to disclose their charges. Resistance exists but we are determined. We also
have introduced a mobile securities register to assist with FI for the ‘rural masses’. A
consumer protection initiative has also been introduced to create an avenue for people to complain
and seek help in financial inclusion matters.
A Financial Inclusion strategy agenda is being developed by the Central Bank. There are
also tax benefits/breaks for people importing ATMs and other such items that facilitate FI.
We are now at 40+% of people in the financial system, compared with 20% previously.
Financial literacy is also on curriculum. We used to do a full week but it was very expensive,
although effective. We rely now on radio and TV to help spread the information related to this.
(Deputy Governor, Reserve Bank of Malawi)
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Part II - Strategic Interdependencies for Financial Inclusion: Statistics, Data &
Standards in a Digital Landscape
Economic Statistics for Central Bank Governors
An intervention on Special Insights on National Statistics from Professor Sir Charles Bean,
former Deputy Governor of the Bank of England, and author of The Independent Review of UK
Economic Statistics
18. Digital developments raise questions regarding GDP and GDP growth rates, and by extension
the nature of conventional statistics. Conventional statistics need to be expanded to properly
measure digital products. Digital products have zero, or near zero, marginal costs. These goods
can be consumed by all. If I use it, you can still also use it, unlike a sandwich, say. How do they
make money though? Sometimes they are financed by selling consumer information, and a
monopoly makes this far more valuable. Are these services/products picked up by traditional
statistics or monitors such as GDP?
We are seeing disintermediation for market activities into the household sector. For
example, travel agents are being sidelined by products such as Airbnb and online providers.
You don’t need to be an expert to book a room. Travel guides have also been put aside for
smartphone’s free services. This is registered as a fall in activity on national accounts, when really
the consumer is benefiting.
19. The Internet and digital developments have made it possible for people to utilise skills and
harness assets, for example through Uber or Airbnb. The household production and market
production boundary is blurred - people can be both consumers and producers. Yet home
production is normally ignored in compiling statistics. As Paul Samuelson observed: “If a man
marries his housekeeper, GDP falls.” This feeds into the wider conversation about why
productivity growth in big industrial economies has fallen [Hub note: traditional
methodologies for estimating GDP do not account for many of the transactions that take place
within the ‘sharing/collaborative economy’. Therefore, the current inability to capture such
economic activities within traditional GDP figures may account, albeit only marginally, for what
economists refer to as the ‘productivity puzzle’ – the gap between a country’s theoretical capacity
to produce, and its actual sub-capacity production level. (See Chapter 3 in “The Independent
Review of UK Economic Statistics”10).
20. We also have difficulties foreseeing the future, and there is doubt as to whether technological
change has been widely adopted across all sections of society. Another reason it is hard to capture
such income generation is that households may occasionally not declare this income… Official
statistics are being challenged by digital developments. So one question would be, are
conventional indicators such as GDP still relevant, and do they need redefining? This is possibly
too extreme. It is better to think about how existing statistics are being distorted by these new
factors.
10https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/507081/2904936_Bean_Review_Web_Acc
essible.pdf
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21. The exploitation of Big Data is a key new development. The digital economy means that a
huge amount of information is now available both in the public and private sector, for example
scanner data from supermarkets on what consumers purchase, when and how. This is highly
useful to statisticians, of course, but how best to do so? Stratification and disaggregation come
into play. The Bank of England has a pretty poor view on transactions, despite being at the heart
of one of the world’s financial capitals. We need to be using this vast flow of information better.
The UK is behind Scandinavia, Holland and Canada on using a lot of this information. We rely
on surveys and this is not enough; we cannot rely on surveys alone. 1.5 million paper forms
processed a year is hugely inefficient. The legal framework in the UK is not very conducive to
accessing this data. Data holders don’t have any obligation to hand over the data. Civil servants
are also naturally cautious and don’t want to release data out of fears of it being leaked. One needs
to have the correct skills and understanding to get an accurate picture from the data, as well as
using it creatively. Access is not enough; you need to be able to process it. There is a huge
amount of potential out there.
22. What about private sector information and data? One needs to be wary about using this
information for regular statistics, as you can’t always rely on it being available. One-off studies
can be done with this, but you need to be careful. How do we get hold of this data? Here, we think
friendly persuasion is best. One could create a legal right of access, but businesses are not keen on
being told to hand over their data and information. It is therefore wise to use whatever powers the
Government might have with discretion. (…) It’s not that we necessarily want to redefine
statistics, but rather to consider how they are being distorted by new developments. We are
not very good at imagining the future, so it is hard to say what the next big developments will be.
Data ownership and data security are indeed huge issues.
Data Science and Central Banks as Data Users
An intervention on Data Science from Professor David Hand, Data Science Institute Imperial
College London
23. I would like to make three general points regarding Data:
Point one is speed of movement. Things are moving fast with data science and banking. But one
mistake is that people think data science has plateaued. Computer infrastructure is still
improving, so in fact we are on the foothills of a mountain, rather than a plateau.
The second point is the issue of data quality, and this is very important to what we’re talking
about. It can be important at a low level, such as problems with missing datasets, badly recorded
data, missing data, and so on – but at least these are “known unknowns”, to paraphrase Donald
Rumsfeld. But at the higher level, you can have distorted samples, and the significance of this is
that machine learning, for example, can go wrong. People who work in data mining and machine
learning are not desensitised to this.
The third point relates to ethical issues on data, such as privacy, confidentiality, security, and
the question of ownership – does an individual own their data?
24. I’ve spent a long time working in the private sector advising on whether credit cards should be
given to customers, etc. Credit scoring models are now highly developed and very good. In retail,
you have millions of customers – it’s a great playground for a statistician. The world of big data is
not new.
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Earlier we mentioned the emergence of new business models and products that can be built on
new data technologies. Within this context scientists refer to the ‘Three Vs.’


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The first V is Volume, for example how many customers there are, how many
transactions, and so on.
The second V is Variety; modern datasets now come in the forms of images and words,
as well as traditional forms. These modern datasets are sometimes called ‘unstructured
datasets’.
The third V is Velocity; data just keeps on coming and coming – there are around a
billion transactions a year per bank. Statisticians used to get datasets and spend three
months analysing them before coming up with an answer. But with anti-corruption
efforts, for example, the answer has to come now, not in three months.
There could also be a fourth V, which is veracity. How good is the data, and how trustworthy is
it for helping you answer your question? I believe the term ‘Big Data’ is inaccurate. My guess is
that most discoveries will be made using small datasets – taking a big dataset and chopping it up!
The Role of National Statistics and the Benefits for Central Banks
25. In National Statistics Offices [hereafter NSOs], we have to change the way we do things. We
concentrate more on data generation. NSOs divert attention to provide services for users. Who is
poor, for example? Normally, data is for evidence-based planning. After implementing a plan, you
need to show what you have achieved. Governors want to see that financial inclusion efforts are
working, and the economy is working. Mobile data – is this really being used? What is the role of
NSOs? There is a paradigm shift from using traditional sources of data to modern sources. Now,
we measure the economy with more data, using more data sources. This is what the data
revolution is. But do the NSOs have the capacity for this?
26. The SDGs are saying ‘leave nobody behind, leverage technology’. Is the same happening
with NSOs? Embracing rather than resisting technology? Of course, there are limitations;
GDP measurements have a lot of limitations, for example. Financial Services measuring is very
difficult, it’s not like manufacturing. NSOs can’t work in isolation; we need to work with
stakeholders, but what about the misuse of statistics? Measurement is important, we need
standards and principles. In Tanzania, we have a National Statistics Act – one can’t just provide
incorrect facts. We have to adhere to the legal framework before you say anything. Even in the
open data arena, this is important. There is still a need to hold people accountable.
27. The next issue is technology and innovations. In our NSO we are saying that the data
revolution is our saviour – it will fill gaps in our knowledge. But we need to ensure we are using
technologies that will cut down costs. We are now heading towards a paperless world. In
Tanzania, we are trying to come up with an e-population system. This will be administered from
house to house. We’ll be able to capture transfers of money. Once we have this, the Governor will
be able to know who is benefitting from financial services, and the Minister for Education will
know about truancy. We think we will be able to publish data on a monthly basis rather than
quarterly, if the cost can be lowered.
Another issue is that of the financial crisis of 2008. No single country had data that was able to
predict this. In 2014, we said that Big Data will assist policy makers to capture what is happening,
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so capacity-building is important for this. (Dr Albina Chuwa, Tanzania National Bureau of
Statistics)
28. There is a saying that “behind disaggregated data, there is a person.” If we delete some
data, we are in effect deleting a person. Somehow, there has been collaboration between NSOs
and central banks in some areas. But there still needs to be more collaboration with Ministries
of Finance, Central Banks and NSOs. FinScope surveys suggest that NSDSs [National
Strategies for the Development of Statistics] need to be developed. (Mr Shelton Kanyanda,
OECD, Paris 21)
29. Also, there is a problem of prioritisation in the context of the Sustainable Development Goals
– countries are overwhelmed by the SGDs. So we need to prioritise – what do we want to achieve
in the next 5 years? A month ago, we had a workshop on sub-national statistics systems. We need
to work with sectors on the ground, for example with minister of health, mobile phone
networks and so on, to get them integrated into the statistics framework. With the current
inconsistent approach, we don’t generate the knowledge that we need. Looking at Charlie Bean’s
report and the issue of technology, most NSOs are looking to use technology. In our 2010 census,
a good number of NSOs used scanning, but the data collection was manned. So in 2020, we are
hoping to have tablets for data collection, and therefore you don’t need scanning – it’s a
direct feed. But econ statistics aren’t using technology, either because they are in different
formats, or other reasons. So this is becoming a challenge. How can we help institutions move
towards technology?
30. Also on the issue of GDP, this figure is not accurate because things such as military costs are
not accessible to NSOs. Other NSOs may do it, but this means there is therefore a lack of
consistency across countries by which to compare progress towards SDG indicators.
At the March 2015 SDG meeting, 213 indicators were established. Every country was talking
about national ownership and the need for a clear indicator framework. With 169 targets, there are
some targets that link with others, and there are some indicators that link with others. The 213
indicators were classified into groups: where methodology is known and metadata is available,
and where methodology not well known and work needs to be done. The World Bank is helping
with this. These are grey indicators – goals 15 and 17, in particular [#15: sustainably manage
forests, combat desertification, halt and reverse land degradation, and halt biodiversity loss. #17:
revitalize the global partnership for sustainable development.]
Now this is about integrating, for example, natural resources into GDP. What we want to see is if
Governors will continue to put money into statistics. Luckily for Tanzania, Benno is a champion
of our NSO. So you find a lot of politics, but essentially the main driver is the country itself, and
the need to get people on-board in the country. (Dr Chuwa)
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Moving Forward within a new CPTM Inclusion Initiative
involving National Statistics Offices



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We should promote bottom-up approaches in the aggregation of data, and we should
promote top-down approaches in the disaggregation of data. This is how we are going
to find the value of data;
Data visualisation should be encouraged, as that is the methods that enables the
ordinary citizen or individuals to understand the meaning of available statistics. We
should encourage the presentation of data and statistics in a way that is understandable
to ordinary people – the “re-humanising of data and statistics”;
We should avoid a mismatch of statistics between government entities, which cause
data inconsistencies;
For statistics to be used within government in a consistent manner, we should
encourage greater interconnectivity across government entities;
For the purpose of accurate and timely data provision, the independence of National
Statistics Offices should be enshrined within an enforceable legal framework;
In pursuing a development agenda, there should be proactive use of data in the process
of creating development roadmaps;
Countries should create baseline data in order to improve the usage of data;
There should be an emphasis on the usefulness of statistics at the national level;
There should be new entities included in the national statistics framework, for example
a Parliamentary Committee on Statistics that can assist the process of improving the
utilisation of statistics.
Standards, FinTech and Emerging ISO Standards for Blockchain Technology
31. Central Banking is now more and more dependent on Quality and Standards related to
Financial Services, National Statistics and new FinTech developments. Alan Bryden, former
Secretary-General of the International Standards Organisation (ISO) and Joint Convener of the
CPTM Quality & Standards Inclusion Initiative, wanted to remind you about the strategic value of
National Standards Bureaus for the Financial Inclusion sector, particularly in relation to the
following three current developments:
 The development of the ISO 12812 series on mobile financial services
 The soon to be finalized ISO 37001 standard on anti-bribery management systems
 The proposal by Standards Australia currently under discussion to create an ISO TC on
blockchain standards
ISO/TC 68 has published to date 51 International Standards addressing challenges in the field of
interoperability, straight-through processing (STP), security of financial messaging and
transactions, including cryptogrammic key management practices. The PIN code concept (ISO
9564 series), the IBAN code (ISO 13616), the BIC code (ISO 9362), the currency codes (ISO
4217), the ISIN code (ISO 6166) and the most recent and the fast growing ISO 20022 (universal
messaging scheme for the financial industry) are emblematic examples. ISO 17442 (Legal Entity
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Identifier (LEI) code) is one recent example of an ISO standard of particular relevance to Central
Banks.
32. Smart Partner Daniele Gerundino, Director of Research and Education at the International
Organization for Standardization (ISO), added that ISO is actually developing a standard – ISO
37001 – for anti-bribery management systems, which should be published later this year. The
experience of ISO/TC 68, the LEI (Legal Entity Identifier) standard is particularly interesting and
important, as an exemplary case of cooperation between standardizers and regulators, in a field
(financial services) where diffidence and misunderstandings have not been uncommon.”
“Just consider that the two communities use the word “standard” in a rather different way. For
example, the Financial Stability Board (FSB) defines "standards" as something that "set out what
are widely accepted as good principles, practices, or guidelines in a given area". The FSB has
identified, inter alia, a list of “Key Standards for Sound Financial Systems" which cover areas
such as: Financial Regulation and Supervision, Macroeconomic Policy and Data Transparency,
Institutional and Market Infrastructure. Something very different from the “standards” published
by ISO – consensus-based documents of a voluntary nature!”
33. Over the past two years, the British Standards Institution (BSI) have been heavily involved
with both our Quality & Standards, and Financial Inclusion, Initiatives, through regular updates on
FinTech and blockchain technology, for example the newly-published PAS 212: Automatic
Resource Discovery for the Internet of Things – A Specification, which was jointly
published/launched at the June 2016 Hypercat Summit.
34. Since Central Banks worldwide have recently been focusing on understanding the application
of blockchain technology, CPTM, on behalf of the Quality & Standards Inclusion Initiative,
approached Standards Australia in relation to their announced intention to lead, under the auspices
of ISO, a new field of technical activity on ‘Blockchain and Electronic Distributed Ledger
Technology’, with a view to producing a standard for these technologies in the future.
35. Standards Australia’s CEO, Dr Bronwyn Evans, forwarded a dedicated Message for CPTM’s
Central Bank Governors’ Think Tanking and for the CPTM Quality & Standards Inclusion
Initiative, inviting them to follow closely these developments, and participate in the making of this
standard. This is an opportunity for developing countries to be standard makers, not standard
takers. The transcript of the message follows below.
“On behalf of Standards Australia I would like to thank the Commonwealth Partnership for
Technology Management and Chief Executive Dr Mihaela Smith for the opportunity to
deliver this video message on Standards Australia’s Blockchain standards initiative.
Today, Blockchain technology represents one of the big opportunities for asset movement
and transaction efficiencies. Globally, the interest in blockchain is increasing with both
governments and industry exploring means to adopt and use blockchain systems. Blockchain
is a digital platform that records and verifies transactions in a public and secure manner.
This decentralised, cryptography-based solution has the potential to redefine transactions by
removing the need for intermediaries
Whilst the technology is still an emerging one, its applications can already be foreseen
across the financial services sector; consumer products and services; health; government;
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minerals and precious stones; real estate; internet of things; and business - and our industry
as well – technical publishing.
In March 2016, Australian Treasurer Scott Morrison published an opinion on how fintech
will enable the successful transition of the Australian economy. Referring to the role of
blockchain technology, Treasurer Morrison wrote: “The frictionless operation of fintech
innovations such as blockchain and digital currencies are generating new value streams not
just in financial services but across the economy.”
In light of strong government and industry interest, Standards Australia has already
consulted with the Reserve Bank of Australia as well as a number of other key financial
regulators including the Australian Securities and Investment Commission, the Australian
Prudential Regulatory Authority, the Treasury and the Commonwealth Department of
Industry Innovation and Science. Our discussions with these key agencies have focussed on
the role of international blockchain standards in complementing regulation to support a
changing economy. As with any emerging technology, the freedom for blockchain
developers to be innovative and for vendors to be competitive, is critical! And Standards are
an appropriate element of the innovation ecosystem.
For this reason Standards Australia recently submitted a proposal for the International
Organization for Standardization - ISO - to consider developing standards to support
blockchain technology. This proposal for a New Field of Technical Activity at ISO seeks to
support both innovation and competition. Blockchain standards would potentially cover
topics including interoperability, terminology, privacy, security and auditing.
Together with regulation, these standards have a critical role to play in establishing market
confidence to support the roll out of blockchain technology. The proposal as well as a
Standards Australia information sheet on the applications of blockchain technology are
available to you through the Commonwealth Partnership for Technology Management
secretariat.
You may ask why ISO should be interested in blockchain technology. ISO is one of three
International Standards development organisations. It is an independent, non-governmental
international organisation with a membership of 161 national standards bodies. Critically, at
ISO every member nation has an equal opportunity to participate and contribute to
developing blockchain standards.
Through this model of inclusion, ISO brings together experts to share knowledge and
develop voluntary, consensus-based, market relevant International Standards. The ISO
‘Blockchain and electronic distributed ledger technologies’ proposal is currently in a period
of consultation where all 161 members of the ISO are considering the merits of the proposal
and whether they are in a position to support and participate in the work if it is approved.
As stakeholders of blockchain technology, each of you has an opportunity to work with the
National Standards Bodies in your respective countries and lend your support to the ISO
Blockchain standards initiative. Your interest and support for the proposal through your
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National Standards Body will be a critical component in the ISO’s assessment and decision
on the blockchain standard proposal which is expected in July 2016.
We have passed on further information regarding the blockchain standards initiative as well
as Standards Australia contact details to the Commonwealth Partnership for Technology
Management secretariat, so contact us if you’d like to find out more.
Conclusion - With so much happening around blockchain there is a lot to be excited about.
But let me be clear there is still much to do for the ISO. We understand that the work we do,
and indeed all National Standards Bodies, is critical to improving global efficiencies and we
are committed to playing our part in establishing market confidence for blockchain
technology. At the same time, our blockchain standards initiative will only be more effective
and impactful with your participation. We hope that you will bring your knowledge,
influence and capabilities to our international blockchain standards initiative. Thank you.”
(Dr Bronwyn Evans, CEO Standards Australia )
https://www.dropbox.com/s/h8lq9954kt7hgyb/StandardsAus-blockchain-message.mp4.zip?dl=0
36. This is a most urgent area. Without standards we are groping around in the dark.
Blockchain is everywhere and there is a lot of potentially, but not much understanding. We
have to be careful to really understand what we are dealing with and how it can be applied in
different contexts. Security is a great concern. Technology can’t be the only thing, no one wants
to get stuck as the first mover and then be overtaken by better technology. The technology
should be upgradeable. (Governor of the Central Bank of Kenya)
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Part III - Special Focus on Blockchain:
A New Digital Disrupter and the effect on Financial Services
37. Following the 2016 CPTM Central Bank Governors’ Think Tanking, there was a great
deal of interest in Blockchain and Distributed Ledger Technology (DLT). In order to help clarify
a number of questions surrounding Blockchain and DLT, CPTM have worked closely with
Mr Mike Brookbanks, FBCS, FIET, CENG, Visiting Fellow Surrey Centre for the Digital
Economy, University of Surrey11, on the following piece covering the key issues of:
 What is Blockchain?
 What can Blockchain do? What are the problems?
 Risk, Regulation and Governance;
 Systemic Risk;
 Standards (Technical and Legal) and Governance of Blockchain
 Know Your Client (KYC);
 What is the role of Central Banks and Regulators?
What is Blockchain?
38. Over the past seven years, Blockchain and DLT, in numerous forms including Bitcoin, have
acted as a new disrupter to Financial Services. These in turn have an impact on the Central
Bankers in terms of risk and associated benefits. This brief considers the impact of the Blockchain
environments and technology on Financial Services and related Institutions, as well as the
business value and systemic and operational risk changes this may generate. The brief will
highlight the areas that the Central Banks should consider as these Financial Institutions drive
the implementation of Blockchain environments/technology over the next few years, using
permissioned Blockchain as a new financial market infrastructure. (For Definitions of key
terms please see Annex I)
Central Banks have developed in different ways and there are a number of varying roles built up
from their origins. The Central Banks are primarily an agency for monetary policy. They have
important financial stability functions, driving financial momentum, and these become more
prominent during times of financial turmoil or major change. The structure of these roles, the
responsibilities given, and the range of other functions and objectives allocated vary between
countries12. Central Banks will also provide a mix of banking supervision functions to oversee
banks (through required balance sheet ratios and other directives) and underpinning
payment/settlement system. In most countries they also control, drive, or influence the regulatory
policy locally and internationally; for example, providing links to the Bank of International
Settlement (BIS), the Prudential Standards Authority and a number of Financial Services
Regulatory bodies.
11
Mike Brookbanks is a Visiting Fellow with the Centre for the Digital Economy based at the University of Surrey. He
has 26 years’ experience of developing, leading and delivering predominately Business, IT Re-engineering and IT Service
Delivery Transformation engagements. The majority of his experience has been spent advising clients across the Financial
Services sector; although he has recent experience in the Public Sector (Central Government, Education, Local Government
and Health); whilst working with IBM.
Mike is a Fellow of Institute of Engineering and of the British Computing Society. Mike is published, having co-authored a
book on Operational Risk, and has presented at conferences in the UK on IT Optimisation, Operational Risk, IT Service
Management and Cloud Sourcing; and has had a number of patents published. Contact: [email protected]
12. For more info on the roles and objectives of modern Central Banks see http://www.bis.org/publ/othp04_2.pdf
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What can Blockchain do? What are the problems?
39. Currently Financial Institutions are realizing that Blockchain and DLT represents a powerful
combination of financial and technological innovation and a potent disrupter that will change
today's financial world and could make huge swathes of the current industry redundant.
Blockchain and DLT is a unique combination of protocols and technologies, evolving rapidly
along divergent paths. It potentially has the transformative ability to provide a 'data backbone' or
information layer for many financial applications13 Blockchain combines several technologies
to create a distributed, consensus driven database with four key technical features. It is the
combination of these features – rather than any of the individual elements – that is novel.
These are:
 Distribution - Blockchain does not rely on a single centralised record. It is a shared
ledger, visible to every node or participant;
 Security - the use of public/private key cryptography or asymmetric cryptography makes
it possible for Blockchain data to be public, yet secure;
 Immutability - the process by which data is added to Blockchains prevents subsequent
tampering or amendment;
 Trust - a consensus mechanism means that Blockchain data is a trusted, mutually agreed
record.
Current applications demonstrate how Blockchains can already perform such a wide variety of
functions (for example; Payments, Registers of ownership and the ability to execute rulesbased transactions using 'smart contracts'). In addition, the way Blockchain has developed
makes it highly adaptable. Variations on the core concept are multiplying fast at the hands of Fin
Techs, financial institutions and other organisations.
Blockchain will drive a revolution within Financial Services operating models and client
services. Industry-wide transformation is very possible, although identifying optimal use cases is
vital, but challenging given Blockchain’s rapid evolution. Practicality poses a real obstacle to
scaling Blockchain; there could be cultural, financial, regulatory and reputational hurdles too.
40. The Central Banks and Regulators need to consider that Blockchain and DLT is more than a
technology, it will disrupt business processes, governance and regulation (legal and technical). It
has the potential to introduce new ‘black swans’ that can have a dramatic impact on Systemic
Risk.
As stated below much of the application of Blockchain today is based on improving the
efficiency of current established process within Financial Services. It is clear that a different
approach needs to be considered by the Central Banks and their associated regulators. Foresight
exercises are potential options for this. A series of “Visionarios” could be run, using the
premise that Blockchain and DLT will become a technical and legal standard and then to
consider how the business process would be built around the DLT. So for example, build up
the business process for foreign exchange based on the standard of the DLT; review who will
be the counterparties; review the intermediaries/aggregators required; who will need to view
the state or the DLT? What reporting/intervention/control is required by the Central
13
See http://www.euromoneyseminars.com/articles/3562064/getting-value-from-blockchain.html
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Banks? What would be the role of central regulators? What should the business process be,
given the desire for instantaneous exchange? How will the DLT scale?14
There is the opportunity for the Central Banks to become the aggregator of Blockchains and
DLT’s for Financial Services. Collaboration between Central Banks would create a network
of aggregated Blockchains.
41. While Financial institutions have a hugely valuable opportunity to leverage this new and
distinctive technology for their clients' and their own benefits, understanding what Blockchain
can do is much more important than understanding how it works. For Financial institutions, the
DLT delivers the following "outcome characteristics":
 Single version of the truth - Blockchain provides a tamperproof, mutually agreed record
that is visible to all participants, without the bottlenecks of centralised networks;
 Resilience - Distribution, cryptography and consensus mean that Blockchains can be
secured against infrastructure failure, cyber-attack and data corruption;
 Reliability - Immutability and the consensus mechanism mean that Blockchain data can
be trusted by all users
It is these characteristics, not the technology itself, which gives Blockchain so many
compelling applications across Financial Services.
The strengths of Blockchain – trust, security, reliability, accuracy – are all areas where financial
institutions have been on the defensive over the past decade. So for banks and other
intermediaries, Blockchain offers Financial Institutions a chance to reclaim their central position
in the financial infrastructure. At the same time, Blockchain gives non-financial challengers a
chance to circumvent barriers to entry and attack incumbents.
42. The Blockchain environments/technology are being developed internationally, across country
borders and, therefore, the impact/effect will be seen by all economies.
The current
implementations are predominately focused on improving the Financial Services value chain and
operational efficiencies by: reducing intermediaries, (disintermediation) simplifying payments,
reducing counterparty risk, removing complexity, improving transparency. (For further
background information click here and see chapter on Reducing intermediaries, simplifying
payments, reducing counterparty risk, removing complexity, improving transparency )
The DLT environment provides simplification and transparency for the Financial Services
within a country and across borders. The transparency of transactions and reporting will also be
improved through real-time visualisation of the “current state”, providing Central Banks with a
current view of the state of the financial systems. This transparency and reporting will also
provide insight and reduce the threat from fraud and money laundering internally and externally.
By design, in a DLT environment, the information recorded on the ledgers is made public to the
participants of the network, or at least to ‘permissioned’ participants. This information typically
comprises the history of the transactions and the balance of cash and assets held on accounts. The
14
For more information on Foresight and Visionarios, please see the recent Briefing on The CPTM Smart Partnership
Think Tanking on National Visioning and Foresight: Sharing Experiences with Professor Sheila Ronis
https://www.sugarsync.com/pf/D667256_92_7306435792
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very nature of the development of DLT environment’s and the way they are implemented will also
mean that the barriers to entry would be reduced.
This would therefore mean that the Central Banking function would need to consider how to
manage the monetary policy and financial stability where the ‘deposits’ would be in the form
of virtual currency. This will pose a number of challenges for Central Banks, including how to
control money supply when the country’s currency is outside the border “within a virtual
economy” potentially controlled by a third party, as well as how to link back to Fiat currency.
43. Aligned to this is clearly the opportunity to expand the Financial Systems (banking) across the
economies with new models of peer to peer financing. This will generate in-country lending and
intra country lending scheme.
The deployment of the DLT could raise fair competition issues. For example, the supporters of a
DLT network could prevent new ‘participants’ from joining or impose such conditions that it
becomes economically unviable for new members to join the network. A monopoly-like situation
could emerge, with possible negative consequences on the cost and the quality of the services. It
might be difficult to establish competitive ledgers or to ensure the interoperability between
ledgers, thus negatively impacting the competitive nature of markets.
As articulated, common settlement systems will be changed. For example, foreign exchange will
transform DTCC (The Depository Trust & Clearing Corporation), CLS (Continuous Linked
Settlement) and SWIFT (Society for Worldwide Interbank Financial Telecommunication). The
introduction of DLT technology will shorten the settlement cycle of the transactions, which
means that each party would be exposed for a shorter period of time to the risk of default of the
other party. It is even argued that the DLT may eliminate the counterparty risk of certain
transactions and remove the need for Central Counterparty (CCP) clearing because the
settlement could be almost instantaneous.
44. It has become clear through the research that the current focus is on improving the supply
chain, automating process and removing manual gaps, using the technology to reduce
operational risk, improve transparency and reporting. Today, the truly innovative application
of DLT has not become openly available; it is currently making things better rather than providing
truly disruptive change.
The disruptive change to Financial Services will not come directly from the originators of the
technology – it will come from mass adoption of the use of the DLT environment by users. As
seen in the development of the Internet, major disruptive business process and models took a
number of years to become established and profitable. So there is the opportunity for the CCP to
become, alongside Central Banks and Regulators, the Central Aggregators of Blockchains.
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Risk, Regulation and Governance
45. The nature of the development of DLT environment suggests that while the Operational Risk
will reduce locally, the Systemic Risk will be enhanced or changed. There are benefits in
reducing Operational Risk15 within the Financial System for the permissioned Blockchain DLT. (For further background information click here and see chapter on Systemic and
Operational Risk)
The DLTs are built around high availability, integrity and view consistency – with complex
consensus protocols that are employed to ensure that every ‘permissioned’ participant has a
consistent view. The very nature of the distributed, networked Blockchain ensures there
would be a continuously available view of the Distributed Ledger, that points of failure are
removed and a ‘single view of the truth’ is always available.
This also ensures that there is the ability to ‘recover’ to a point in time; to see the history of the
transactions within the Blockchain. The shared nature of the Distributed Ledgers may mitigate the
risk that a cyber-attack directed to a single point brings down the entire network as might be the
case with the current systems. Having said this, a flaw in the system could have wider
consequences; in that an error or attack can easily cause complete failure.
Therefore, there is a need for a common view or vision across the Central Banks, considering the
benefits, reducing operational risk, but also recognising the change in systemic risk.
46. The Central Banks and country regulators need to consider how the Blockchain - DLT
would fit into the existing regulatory framework. This regulatory framework needs to cover
legal, process and technical standard for both Operations and Systemic Risk. The current
regulatory framework for Operational Risk as detailed in the Bank of International Settlements Principles for the Sound Management of Operational Risk16 would need to be extended to
consider the full effect of Blockchain - DLT.
Supervising a DLT ‘network’ might be more complex than supervising current central
market infrastructures, in particular considering that different nodes might be established in
different jurisdictions and subject to different privacy, insolvency and other requirements.
47. The key common Financial Services regulations likely to apply, and how these would reflect
in terms of requirements for the participants to the DLT network, need to be considered. Legal
issues, such as the legality and enforceability of the records kept on the DLT, also need to be
carefully considered. Differences in laws across countries may also interfere with a wide
deployment of the DLT across Financial Services. Therefore, Central Banks and Regulators need
to collaborate and consider how the legal, process and technical standards will need to change and
adapt with regard to Systemic Risk, Operational Risk and the associated standards and
governance.
15
Operational Risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or
from external events. This definition includes legal risk, but excludes strategic and reputational risk.
16 Principles for the Sound Management of Operational Risk http://www.bis.org/publ/bcbs195.pdf
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Systemic Risk
48. The Systemic Risk17 will be changed - improved in some areas, affected in others. For
example, with the unique reference system and more automated and harmonised processes across
participants, asset classes, the DLT could contribute to herding behaviour and increase market
volatility in times of stress. It could also increase the interconnectedness between market
participants, by making it easier for them to interact with one another, which could increase the
spreading of shocks. The DLT could also lead to risk accumulating in less regulated segments of
the markets. Finally, it could boost certain market segments where the activity is currently
hindered by cumbersome post-trading processes and create new pockets of risks in financial
markets. Some of the risks, which may exist in the current market infrastructure already, could
potentially be heightened if the DLT was to be deployed widely.
49. Implementation of DLT would help mitigate Operational risks, by increasing the
automation of back office processes and reducing the potential for human errors. However,
a glitch or a failure in the system could have far-reaching consequences with regards Systemic
Risk. Indeed, because market participants would rely on the same system and the same processes,
which would be largely automated, the need for checks and balances might be reduced. While this
would be largely beneficial, it could leave the system unduly exposed in case of anomaly and the
potential for increased Systemic Risk.
Similarly, the use of smart contracts should in principle reduce the likelihood of errors, e.g.,
by automating the processing of corporate actions, but could also create additional risks in the
absence of adequate controls, e.g., if the coding is erroneous. In other words, the occurrence of
errors might be lower, but their impact could be higher. Unless adequate controls are in place,
some participants to the network could also unduly exploit the information recorded on the
network, e.g., recent trades made by competitors or the level of their inventories, to front-run them
or manipulate the market. The lower the privacy level of the network or the lower the safeguards
attached to it, the higher the risks would be.
Standards and Governance of Blockchain
50. Common standards (legal and technical) are required to ensure that the DLT does not add
another layer of complexity to Financial Services markets, because of the use of complex
encryption techniques. The latter could have negative implications from a risk management or
oversight perspective. Indeed, while the DLT should in principle enhance the traceability of
transactions and transparency, the encryption of the information could make it harder to
disentangle it and to process it, at least in the short term. This could effectively render supervisory
work more challenging. DLT standards and governance need to be introduced in each country to
control and manage the adoption within the country and between countries.18
17
Systemic Risk is defined as the risk of collapse of an entire financial system or entire market, as opposed
to risk associated with any one individual entity, group or component of a system, that can be contained therein without
harming the entire system.
18 In the context of standards, it is worth noting the additional information from Professor Michael Mainelli (Z/Yen)
Between July and October 2015, Z/Yen led a research consortium (including PwC, a global accountancy firm, Suncorp, an
Australian insurance company, and DueDil, a UK corporate credit referencing company) to build and evaluate a set of
distributed ledgers de novo. We were delighted that the States of Alderney participated in that project as a regulatory
observer. InterChainZ demonstrated it was indeed possible to build distributed ledgers that can store, exchange, and keep
records of any kind. We have demonstrated an interface for tasks including selection & storage of documents, document
encryption, sharing keys, viewing the InterChainZ transactions, and viewing the InterChainZ contents subject to encrypted
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Technical Standards
51. During the 2016 CPTM Think Tanking of Central Bank Governors, Standards Australia
informed the Governors that they had submitted a proposal for a first Blockchain standard to the
International Organization for Standardization (ISO) 19 with reference to leveraging pre-existing
standards such as ISO 20022. This would be a technical standard, rather than a
governance/regulatory standard. (For further background information click here and see
chapter on Systemic and Operational Risk)
As noted in the Financial Times, regulators have been wary of the technology, warning of its
potential vulnerability to fraud or to undermining financial stability. The UK Financial
Conduct Authority (FCA), stated that “Blockchain has got some potentially interesting
applications and we are talking to firms thinking about how to apply that to financial services
and how it could benefit consumers or indeed make the business of compliance easier ” said
Chris Woolard, the FCA’s director of strategy and competition. 20
Legal Standards
52. The Central Banks need to consider developing a permission-based framework for
Blockchain - DLT. This would require rules to approve/reject authorised participants. Factors that
may be worth considering when designing these rules may include minimum capital requirements,
conduct of business rules and risk management processes. Also, there may be a trade-off between
accepting many participants at the risk of making the system unduly complex and being
excessively selective at the risk of limiting the scope of the network. In addition to the legal and
technical aspects of Standards, we should also take into account the need for Standards to cover
business processes.21
limits. The interface was deliberately simple, and served the purpose of demonstrating how distributed ledgers work in
practice.
Z/Yen believe this is an appropriate time to engage further with regulators from the Jersey, Isle of Man, Ireland, and other
jurisdictions, as well as PwC and other private sector organisations, to evaluate the feasibility of building standards for
financial and other services that will be supported by MDLs. Such services already include timestamping, archiving,
regulatory reporting, deal rooms, asset transfer, asset maintenance, identity, wholesale payments, contract execution, and,
of course, cryptocurrencies.
Several jurisdictions aspire to be the “standards regulators” for mutual distributed ledgers in future and require standards
to underpin such a role. This regulation would be on a federal basis, especially where it is determined that certain
standards are mandatory, and that certain standards require some mandatory form of accreditation or certification. Such a
federal basis may well involve the ISO accreditation/certification system, i.e. a voluntary standards market. Private sector
participants may, in future, be ‘standards certifiers’, but that is beyond the scope of this study. Standards are likely to be of
two types (a) governance, and (b) technical fit for purpose and performance standards (as opposed to technical ‘how to’
standards). External resources, i.e. Z/Yen, are being used to accelerate this aspiration and help increase the skills of the
jurisdiction to deliver this aspiration. We recognised that the medium to long-term objective is for the islands to deliver
regulation themselves on a federal basis. The project should promote jurisdictions equally throughout. The current project
is due to report October.
19 See http://www.standards.org.au/OurOrganisation/News/Documents/Media%20Release%20%20International%20Blockchain%20Standard%20-%2014%20April%202016.pdf and the Video Message from Standards
Australia on Blockchain https://www.dropbox.com/s/h8lq9954kt7hgyb/StandardsAus-blockchain-message.mp4.zip?dl=0
20 See http://www.ft.com/cms/s/0/8ab3c696-6634-11e6-8310-ecf0bddad227.html#ixzz4I8xseJTG
21 It should be noted that not everyone is convinced of the pressing need to develop standards for blockchain. See for
example, William Mougayar’s recent article for the CoinDesk website.
Let's start by stating the obvious – Warnings about the need for blockchain standards are premature and alarmist.
It's too early to claim that a lack of standards is hurting blockchain technology adoption, or to call for standards bodies like
the International Standards Organization (ISO) to get involved and define what they should be. (Though, there are already
groups doing this). The topic of blockchain standards is complicated, and it extends beyond just seeing it as an
interoperability challenge. This is because blockchain standards can be divided into three interrelated vectors, comprised of
technical, business and legal considerations.
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The rules to govern the interactions between participants, both ‘permissioned’ and ‘nonpermissioned’ will be necessary. These rules would need to address many and potentially complex
issues. Examples include the liabilities of the respective participants, including in case of fraud or
error, correction mechanisms and penalties in case of infringement to the rules, the intellectual
property attached to the technology or the territoriality of the law likely to apply to the network.
(For further background information click here and see chapter on Benefits relating to
Reduced Fraud, Improved KYC and Replicated/Permissioned Data) An agreement between
the participants on their remuneration model would also be needed. Furthermore, the
governance framework should provide clarity on the entity or group of entities that would be
held liable for the activities of the network vis-à-vis third parties, in particular local regulators and
customers.
Know Your Client (KYC)
53. It seems that the DLT could be used to store and share private information on clients, e.g. for
KYC procedure purposes. The question then arises as to how the public nature of the ledger,
which is embedded in the technology, might combine with the need to preserve the anonymity and
privacy of some of the information recorded in the ledger. The use of encryption identifiers (i.e.
private keys) instead of names could provide some level of privacy, e.g. the exact identity of a
party to a transaction or the name of an account holder could remain unknown to most
participants. Yet, the operation of those private keys would need to be carefully designed and
controlled. Different levels of access to the network, depending on the exact nature and scope of
the participant, might also be needed. There are associated risks in that Private/public keys might
be lost or stolen and used fraudulently to record fictitious transactions. In the absence of a
sufficiently robust governance framework, dishonest nodes might also take control of the network,
even temporarily, and alter the consensus process. The use of these keys could make it easier to
conceal identities and to hide the history of transactions, thereby increasing the risk of money
laundering and terrorist financing activities.
What is the role of Central Banks and Regulators?
54. Currently Financial Institutions are realizing that Blockchain itself represents a powerful
combination of financial and technological innovation; a disrupter that will change today's
financial world and make huge swathes of the current industry redundant. Central Banks need to
understand that Blockchain as a disrupter will not disappear, that while there is much market hype
around this, the final uses will develop in time. The risk is that a use is taken up by the population,
without institutional control or oversight.
55. This transformation/adaptation process cannot be driven by the Financial Institution, third
party technology providers, new entrants and collaborations. What is clear is that Central Banks
and regulators need to consider Blockchain more than a technology, it will disrupt business
process, governance, regulation (legal and technical). It has the potential to introduce new ‘black
swans’ that can dramatically impact on Systemic Risk.
If you perceive the blockchain as a technology, then you will implement it as a technology. If you see it as a business change
enabler, then you will think about business processes. If you discern the legal implications, you will be emboldened by its
new governance characteristics. http://www.coindesk.com/blockchain-standards-alarmist/
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56. Current emerging applications demonstrate how Blockchains can already perform a wide
variety of functions (for example; Payments, Registers of ownership and the ability to execute
rules-based transactions using 'smart contracts').
In addition, the Open-source nature of
Blockchain makes it highly adaptable; although the very nature of this introduces additional
Operational Risk, when considered by Central Banks and Regulators. Applications are diverging
rapidly as developers modify one or more elements of previous versions.
57. Financial institutions see a number of "outcome characteristics" as being: a single version
of the truth, resilience and reliability. The Central Banks need to consider these outcome
characteristics and determine how they can be used – to improve governance, supervision
and regulation.
There is an opportunity for the Central Banks to become the aggregator of Blockchains and
DLT’s for Financial Services. Collaboration between Central Banks would create a network
of aggregated Blockchains.
58. Central Banks and Regulators need to consider the various uses-cases that are being proposed
for Blockchains within Financial Institutions. Blockchain is providing a long overdue stimulus for
industry-wide co-operation on technology. Without the management by the Central Banks and
Regulators, co-operation between suppliers, clients and peers will be a challenge as each are
traditionally reluctant to share intellectual property, agreeing interoperability protocols.
Creativity and imagination will be vital to developing the best use-cases for Blockchain and the
drive from the Central Banks will be crucial in achieving commercial success.
59. As yet, there is no consensus over the optimal use-cases for Blockchain. This is
understandable, given the novelty of the technology and Financial Institutions' uncertainty over
how to harness its potential.
The disruptive change to Financial Services will not come directly from the originators of the
technology – it will come from mass adoption of the use of the DLT environment by users. As
seen in the development of the Internet, major disruptive business process and models took a
number of years to become established and profitable. The risk for the Central Banks is, as
mentioned, that the mass adoption could occur through a development of a Central Payment
System on an un-regulated social media site.
60. Central Banking functions would need to consider how to manage the monetary policy and
financial stability where the ‘deposits’ would be in the form of virtual currency. There would also
be questions regarding how to control money supply, when the country’s currency is outside the
border “within a virtual economy” potentially controlled by a third party, which is not regulated in
the country, as well as how to link back to Fiat currency.
61. The impact of Blockchain will vary across different geographies. In particular, the
greatest impact of Blockchain may not be felt in Europe and North America, where financial
infrastructures are at their most complicated, but in Africa or Asia where technology is less
mature.
62. Central Banks will need to work collaboratively, in a Smart Partnership Way, and accept
Blockchain as a given, analyse how the ‘in-country’ and ‘cross border’ Banking/Financial
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Services would develop, what are the new business models and processes that would develop
based on Blockchain.
Blockchain’s ability to provide reassurance and certainty on a shared, decentralised basis carries
huge significance for financial institutions - and their would-be challengers. Blockchain will not
entirely 'replace' any aspect of financial services, but expect it to reshape or even revolutionise
business models in many sectors of the industry.
63. The Central Banks and country regulators need to consider how the Blockchain - DLT
would fit into the existing regulatory framework. This regulatory framework needs to cover
legal, process and technical standards for both Operational and Systemic Risk. The challenge
relating to Systemic Risk is higher that the benefits associated with Operational Risk.
64. Central Banks and the regulators need to consider how to move from the standard associated
with Technical Code to the Legal/Process and Regulations. This would entail controlling the
Technical Code and regulating the developing and re-engineered business process through legal
means - a code. The implementation of Blockchains and DLT will significantly change business
process. The Central Banks need to use their power with the regulator to manage the
transformation of business process.
Further detailed background mentioned above is available by clicking here.
https://www.sugarsync.com/pf/D667256_92_7329639464
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ANNEXES
Annex I
Definitions of Key Terms
Extract from Distributed Ledger Technology: beyond block chain
A report by the UK Chief Scientific Adviser 22
Blockchain is a type of database that takes a number of records and puts them in a block
(rather like collating them on to a single sheet of paper). Each block is then ‘chained’ to the
next block, using a cryptographic signature. It is analogous to a database that shows all
changes made since its creation. This allows Blockchain to be used like a Distributed
ledger, which can be shared and corroborated by anyone with the appropriate permissions.
The real novelty of Blockchain technology is that it is more than just a database — it can also set
rules about a transaction (business logic) that are tied to the transaction itself. This contrasts with
conventional databases, in which rules are often set at the entire database level, or in the
application, but not in the transaction.
Major players in the financial industry have seized on the technology that maintains the
Blockchain (or common ledger) as a significant innovation.23 It is seen by many as a way to
achieve a reliable shared list without having a central party to maintain it.24
There are many ways to corroborate the accuracy of a ledger, but they are broadly known as
consensus, the process of solving complex mathematical equations as part of verifying
changes made to the ledger.25
 If participants in that process are preselected, the ledger is Private – permissioned – see
below
o Permissioned where all group members maintain integrity
o Double Permissioned - only a privileged group member maintain integrity
o Un-permissioned ledgers - operate by decentralized competition reduces availability
and resilience
 If the process is open to everyone, the ledger is Public – unpermissioned see below
o Double permissionless or integrity maintained through a ledger reward
o Permissionless integrity maintained through off ledger incentives
Permissioned ledgers may have one or many owners. When a new record is added, the ledger’s
integrity is checked by a limited consensus process. This is carried out by trusted actors:
government departments or banks, for example, which makes maintaining a shared record much
simpler that the consensus process used by unpermissioned ledgers. Permissioned block chains
22
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1-distributed-ledgertechnology.pdf
23 Nathaniel Popper, Wall Street Takes a Keen Interest in Bitcoin’s Latest Technology; Bitcoin’s Blockchain Tech Is Being
Examined to See if It Can Be Used to Create a New Way of Transacting Online, IRISH TIMES (Sept. 14, 2015), http:/
/www.irishtimes.com/business/wall-street-takes-a-keen-interest-in-bitcoin-s-technolo gy-1.2340274 (reporting on the
interest in Blockchain technology by numerous major banks across the globe)
24 Robinson & Leising, supra note 16; The Great Chain of Being Sure About Things, ECONOMIST, Oct. 31, 2015, at 21.
25 See ANDREAS M. ANTONOPOULOS, MASTERING BITCOIN: UNLOCKING DIGITAL CRYPTOCURRENCIES 18
(2014).
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provide highly-verifiable data sets because the consensus process creates a digital signature,
which can be seen by all parties. Requiring many government departments to validate a record
could give a high degree of confidence in the record’s security, for example, in contrast to the
current situation where departments often have to share data using pieces of paper. A
permissioned ledger is usually faster than an unpermissioned ledger.
Unpermissioned ledgers such as Bitcoin have no single owner—indeed, they cannot be owned.
The purpose of an unpermissioned ledger is to allow anyone to contribute data to the ledger and
for everyone in possession of the ledger to have identical copies. This creates censorship
resistance, which means that no actor can prevent a transaction from being added to the ledger.
Participants maintain the integrity of the ledger by reaching a consensus about its state.
Unpermissioned ledgers can be used as a global record that cannot be edited: for declaring a last
will and testament, for example, or assigning property ownership. But they also pose a challenge
to institutional power structures and existing industries, and this may warrant a policy response.
Distributed ledgers are a type of database that is spread across multiple sites, countries or
institutions, and is typically public. Records are stored one after the other in a continuous ledger,
rather than sorted into blocks, but they can only be added when the participants reach a quorum.
A distributed ledger requires greater trust in the validators or operators of the ledger. For
example, the global financial transactions system Ripple selects a list of validators (known as
Unique Node Validators) from up to 200 known, unknown or partially known validators who are
trusted not to collude in defrauding the actors in a transaction. This process provides a digital
signature that is considered less censorship resistant than Bitcoin’s, but is significantly faster.
Shared ledger is a term coined by Richard Brown, formerly of IBM and now Chief Technology
Officer of the Distributed Ledger Group, which typically refers to any database and application
that is shared by an industry or private consortium, or that is open to the public. It is the most
generic and catch-all term for this group of technologies.
A shared ledger may use a distributed ledger or block chain as its underlying database, but will
often layer on permissions for different types of users. As such, ‘shared ledger’ represents a
spectrum of possible ledger or database designs that are permissioned at some level. An
industry’s shared ledger may have a limited number of fixed validators who are trusted to
maintain the ledger, which can offer significant benefits.
Smart contracts are contracts whose terms are recorded in a computer language instead of legal
language. Smart contracts can be automatically executed by a computing system, such as a
suitable distributed ledger system. The potential benefits of smart contracts include low
contracting, enforcement, and compliance costs; consequently, it becomes economically viable
to form contracts over numerous low-value transactions. The potential risks include a reliance on
the computing system that executes the contract. At this stage, the risks and benefits are largely
theoretical because the technology of smart contracts is still in its infancy, and some time away
from widespread deployment.
Smart contracts are self-executing codes meant to replicate the terms of a given contract. They
effectively translate contractual terms (e.g., payment terms and conditions, confidentiality
agreements) into computational material.
34
Annex II
Selected Smart Reading Tips
General CPTM Documents
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CPTM Limitless Opportunities through Smart Partnership
https://www.sugarsync.com/pf/D667256_92_6401235714
The CPTM Way
https://www.sugarsync.com/pf/D667256_92_7605984471
CPTM 2015 Executive Brief to Commonwealth Heads of Government Meeting (CHOGM)
https://www.sugarsync.com/pf/D667256_92_7689663522
Central Bank Governors’ Think Tanking 2016, ‘CPTM Highlights & Insights on Adaptive
Flexibility Approaches to Financial Inclusion in a Digital Age’
https://www.sugarsync.com/pf/D667256_92_7266421300
CPTM Smart Partnership Inclusion Initiative on the Emerging Digital Landscape –
Challenges and Opportunities https://www.sugarsync.com/pf/D667256_92_7654664001
CPTM Brief on the Africa Open Data Conference, Dar es Salaam, 2015
https://www.sugarsync.com/pf/D667256_92_7691617399
Part I - Adaptive Flexibility Approaches to Financial Inclusion in a Digital Age
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The 2016 Brookings Financial and Digital Inclusion Project Report: Advancing Equitable
Financial Ecosystems https://www.brookings.edu/wpcontent/uploads/2016/08/fdip_20160816_project_report.pdf
GPFI and G20 Principles for Innovative Financial Inclusion
http://www.gpfi.org/publications/g20-principles-innovative-financial-inclusion-executive-brief
World Bank Global Findex Database Measuring Financial Inclusion around the World
http://pubdocs.worldbank.org/en/681361466184854434/2014-Global-Findex-Report-DKSV.pdf
Bank of England, Finance Version 2.0?
http://www.bankofengland.co.uk/publications/Documents/speeches/2016/slides891.pdf
Bank of England FinTech Accelerator ‘Proof of Concept’
http://www.bankofengland.co.uk/Pages/fintech/default.aspx
Emerging Digital Landscape and Supercomputing, Mr Nkundwe Moses Mwasaga
presentation
https://www.sugarsync.com/pf/D667256_92_7052702605
De-risking Strategies of Canadian and American Banks (Montreal Meeting of the Regional
Consultative Group for the Americas)
https://www.sugarsync.com/pf/D667256_92_7159431206
De-Risking and its Impact: The Caribbean Perspective
https://www.sugarsync.com/pf/D667256_92_7159431931
Understanding Bank De-Risking and its Effects on Financial Inclusion
http://www.globalcenter.org/wp-content/uploads/2015/11/rr-bank-de-risking-181115-en.pdf
Willke, Becker and Rostasy, Systemic Risk: The Myth of Rational Finance and the Crisis of
Democracy https://www.sugarsync.com/pf/D667256_92_7332823972
Thomas Philippon, The FinTech Opportunity
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2819862
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Part II - Sharing Experiences: National Contexts of Financial Inclusion
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Tanzania Narrows the Financial Inclusion Gender Gap
http://www.afi-global.org/countries/tanzania
Swaziland Financial Inclusion Country Report 2014
http://www.uncdf.org/sites/default/files//Documents/swazi_synthesis_report_repro.pdf
Dr Caleb Fundanga on the origins of the CPTM Financial Inclusion group
https://www.sugarsync.com/pf/D667256_92_7176137631
7th Annual Global Policy Forum 2015, Maputo, Mozambique
http://www.afi-global.org/global-policy-forum/2015
Part III - Strategic Interdependencies for Financial Inclusion: Statistics, Data & Standards
in a Digital Landscape
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Standards Australia and Blockchain
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Australia proposes International Blockchain Standards
http://www.standards.org.au/OurOrganisation/News/Documents/Media%20Release%
20-%20International%20Blockchain%20Standard%20-%2014%20April%202016.pdf
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Australia pushes ISO for blockchain standards
http://www.theaustralian.com.au/business/markets/australia-pushes-iso-forblockchain-standards/news-story/514516e87f4ff244a8e81e41f6fe7ef0
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Reserve Bank of Australia on Blockchain: The Ongoing Evolution of the Australian
Payments System http://www.rba.gov.au/speeches/2016/sp-so-2016-02-23.html
ISO 37001- Anti-Bribery Management Systems http://www.iso.org/iso/iso_37001_antibribery_management_systems_standard_brochure.pdf
ITU - Digital Financial Services
http://www.itu.int/net/pressoffice/press_releases/2016/26.aspx#.V2uj66L0_yM
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The Digital Financial Services Ecosystem
http://www.itu.int/en/ITUT/focusgroups/dfs/Documents/09_2016/FINAL%20ENDORSED%20ITU%20DFS%2
0Introduction%20Ecosystem%2028%20April%202016_formatted%20AM.pdf
Mr Alan Bryden, Information on ISO international standards and financial services
https://www.sugarsync.com/pf/D667256_92_7180418492
Carl Miller (CASM), ‘A Question of Trust’
http://www.demos.co.uk/files/Question_of_Trust_-_web.pdf
Demos Quarterly: Technology Edition – Issue 8, Spring 2016
http://quarterly.demos.co.uk/issue/issue-8/
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Foreword by Carl Miller and Jamie Bartlett
http://quarterly.demos.co.uk/article/issue-8/introduction/
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Dr Amirudin Abdul Wahab, ‘Demos Quarterly: Tapping Social Media for Social
Good’
http://quarterly.demos.co.uk/article/issue-8/tapping-social-media-for-social-goodthree-inspirational-initiatives-to-promote-social-wellbeing/
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Mr Nkundwe Moses Mwasaga, ‘Demos Quarterly: Sub-Saharan Africa’s Digital
Sphere’
http://quarterly.demos.co.uk/article/issue-8/status-mobile-networks-and-social-mediain-sub-saharan-africa/
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Part IV - Blockchain: A New Digital Disrupter and the effect on Financial Services
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Euromoney Seminars: Getting Value from Blockchain
http://www.euromoneyseminars.com/articles/3562064/getting-value-from-blockchain.html
Briefing on The CPTM Smart Partnership Think Tanking on National Visioning and
Foresight: Sharing Experiences with Professor Sheila Ronis
https://www.sugarsync.com/pf/D667256_92_7306435792
Financial Times: FCA considers approving blockchain businesses
http://www.ft.com/cms/s/0/8ab3c696-6634-11e6-8310-ecf0bddad227.html#ixzz4I8xseJTG
Finance and Beyond: An Infographic Map of Bitcoin and the Emerging Blockchain
Ecosystem https://bitcoinmagazine.com/articles/finance-and-beyond-an-infographic-map-ofbitcoin-and-the-emerging-blockchain-ecosystem-1461789453
Enabling the FinTech transformation: Revolution, Restoration, or Reformation? - speech by
Mark Carney http://www.bankofengland.co.uk/publications/Pages/speeches/2016/914.aspx
Alex Tapscott, Don Tapscott, Blockchain Revolution (Penguin, 2016)
https://www.sugarsync.com/pf/D667256_92_7177800040
Blockchain Predictions for 2016
http://www.the-blockchain.com/2015/12/14/adi-ben-ari-blockchain-predictions-for-2016/
Distributed Ledger Technology: beyond block chain, UK Government Chief Scientific Adviser
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/492972/gs-16-1distributed-ledger-technology.pdf
FinTech Futures, UK Government Chief Scientific Adviser
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/413095/gs15-3-fintech-futures.pdf
ChainVine http://chainvine.com/
The DAO attack & its implications by Mr Kartik Natarajan
https://www.linkedin.com/pulse/dao-attack-its-implications-kartik-natarajan?trk=prof-post
William Mougayar, ‘What We Can Learn From The DAO’, Coindesk, (June 21, 2016)
http://www.coindesk.com/can-learn-dao/ and http://www.coindesk.com/blockchainstandards-alarmist/
Bank of International Settlements, ‘Digital Currencies’
http://www.bis.org/cpmi/publ/d137.pdf
Bank of International Settlements, ‘86th Annual Report (FY 2015-16)’
https://www.bis.org/publ/arpdf/ar2016e_ec.pdf
For further webcasts and Smart Partnership videos, please visit the CPTM Smart
Partnership YouTube Channel:
https://www.youtube.com/channel/UCb7YTOXGwEomiFAdVqiK-ww
37
For more detailed insights please follow the link:
‘CPTM Highlights & Insights on Adaptive Flexibility Approaches to Financial
Inclusion in a Digital Age’
https://www.sugarsync.com/pf/D667256_92_7266421300
38
Annex III
About CPTM
CPTM has a clearly defined mandate to provide advisory services to Governments on
matters related to science & technology, to economic development and wealth creation
through sound management of technology, using Public/Private Sector Partnerships. This is
achieved primarily in two ways: through International Smart Partnership Dialogues and
other co-operative interactions and through Networking and Partnership Development.
CPTM was established by Commonwealth Heads of Government at CHOGM 1995, New
Zealand, as a distinct cooperative framework of Commonwealth Governments, Private and
Public Sector organisations and Networking Professionals. Its Mission is to apply Smart
Partnership approach to development and transformation, continuing the work of the
Commonwealth Science Council’s Science Management Organisation (CSCSMO), initiated
in 1984 through the Kendrew Report on Science for Technology for Development. The
CSCSMO network went through various transformations - as reflected in the communiques
from the Commonwealth Heads of Government meetings - such as COMMANSAT,
Commonwealth Management for Science Technology (1989), CCGTM, Commonwealth
Consultative Group on Technology Management (1992) and finally CPTM, Commonwealth
Partnership for Technology Management (1995) and the emerging Smart Partnership
Movement.
The inclusive nature of the CPTM Smart Partnership Financial Inclusion Initiative is
reflected in the broad spectrum of participants and invitees to recent interactions. These
included Central Bank Governors (and representatives), Ministers of Finance as well as
practitioners and representatives from the various Smart Partners’ Networking Webs:

Southern, East & West Africa, including Botswana, Kenya, Lesotho, Malawi,
Mauritius, Mozambique, Namibia, Rwanda, Seychelles, Swaziland, Tanzania, Uganda,
Zambia, Zimbabwe

Caribbean & North America including Barbados

South East Asia/Pacific, including Bangladesh, India and Malaysia

West Asia/Mediterranean & Europe, including Cyprus and Malta
International Organisations such as African Development Bank (ABD), BSI, Centre for
the Analysis of Social Media (CASM) at Demos, International Standards Organisation
(ISO), International Telecommunication Union (ITU), The Institute of Chartered
Secretaries and Administrators (ICSA), Macroeconomic and Financial Management
Institute of Eastern and Southern Africa (MEFMI), Overseas Development Institute
(ODI) among others.
39
The CPTM Smart Partnership Financial Inclusion Initiative
The CPTM Smart Partnership Movement promotes inclusive approaches, meaning that
all members of society have access to, or benefit from, technology and innovation,
quality of goods and services and financial facilities.
The 2015 CPTM Brief for CFMM is a summary of the latest developments of the CPTM
Financial Inclusion Initiative during the year. CPTM Financial Inclusion Initiative exists
within the context of CPTM Smart Partnership Movement’s strategic initiatives: innovative
tools for achieving socio-economic transformation. Financial Inclusion in terms of Smart
Partnership lies within an integrated framework which includes Standards Inclusion and
Technology Inclusion. These provide a specialist multi-pronged approach which is over
arched by achieving National Visions in order for nations to succeed rather than fail. This
is part of a new adaptive flexibility approach, which is needed in order to manage
uncertainty, particularly at time of financial crisis in an interconnected world.
CPTM Smart Partners’ Financial Inclusion Initiative was launched during the Langkawi
International Dialogue (LID) in 2007 by the Governor of Bank Negara Malaysia. The
initiative was carried forward to the Mulungushi International Smart Partnership
Dialogue in Zambia in 2008, Global 2009 Smart Partnership Dialogue in Uganda,
Global 2011 LID Smart Partnership Dialogue, Global 2013 Smart Partnership in
Tanzania and developed further until present.
Leading Central Banks involved in CPTM Financial Inclusion Advisers’ (FIA) Initiative
include: Barbados; Botswana; Cyprus; Kenya; Lesotho; Malawi; Malaysia; Mauritius;
Mozambique; Namibia; Seychelles; Swaziland; Tanzania; Uganda; Zambia;
Zimbabwe (among others).
The purpose of the CPTM Smart Partners’ Financial Inclusion initiative is to provide
practitioners and regulators in the area of financial inclusion with practical ideas via the
sharing of knowledge and experiences on developing institutional structures, creating an
enabling environment and enhancing financial literacy. The ideas and experiences shared
could then be contextualised to the prevailing local conditions to enhance financial
inclusion. This initial phase was followed a second stage whereby developments within
Mobile Banking advanced and were incorporated into many countries across the world.
Such mobile banking networks include Mpesa in Eastern Africa among others. The third and
latest phase sees the emergence of evolving flexible approaches for managing uncertainty
and interconnectedness.
Since 2012, a core group of Central Bank Governors have met annually at the CPTM
Smart Partners’ Hub for Think Tanking interaction based on Adaptive Flexibility
Approaches to Financial Inclusion. The outcomes of these interactions are then shared
with Commonwealth Finance Ministers ahead of their annual meetings in early October
each year.
40
The CPTM Smart Partnership Approach
to Socio-Economic Transformation
‘The CPTM Way’
Click here
‘Limitless Opportunities’
Click here
41
CPTM
Commonwealth Partnership for Technology Management (CPTM)
Brief On Adaptive Flexibility Approaches
to Financial Inclusion in a Digital Age
- Recommendation and Proposals Published by CPTM, London, September 2016
Produced and edited by the CPTM Smart Partners’ Hub Team
For further information and background, contact
Dr Mihaela Y Smith, PJN KMN
CPTM Chief Executive / Joint Dialogue Convener
http://www.cptm.org/
[email protected]
CPTM SMART PARTNERSHIP DIALOGUE™
“Towards a Smarter Globe”
CPTM is a not-for-profit Company Limited by guarantee
Incorporated in England on 13th June 1995, under Companies Act 1985 to 1989
“This Company is being established, with the agreement of Commonwealth Heads of Government,
pursuant to their decision taken at their meeting in Limassol on 25th October 1993 to revise the financial
and organic structure of the Commonwealth Consultative Group on Technology Management.”
CCGTM was established by the CHOGM, Kuala Lumpur, 1989.
CPTM Ltd was launched at the CHOGM, Auckland 1995.