Digitization – a challenge and a source of transformation for the role of the central bank


The economic outlook for the coming years , in the European Union and around the world, has changed substantially as a result of the COVID-19 pandemic since the beginning of 2020.

The urgent and coordinated response from the European Union and its members to deal with the enormous economic and social consequences included digital transformation , involving switching from analog to digital , optimizing work processes, teamwork and customer experience as well implementation of digitized and integrated business solutions to signal errors, through which the remote business can be coordinated.

I. General aspects

The digitalization of the banking sector is accelerated by changes in market demand and supply , depending on customer expectations and needs, non-banking competition , and the need to increase bank resilience and profitability .

In this regard, in the last two years, action has been taken to:

  • operationalization of digital banks, operating as technology companies that provide an enhanced customer experience, with their involvement and support for their operations through the banking system (by digitizing existing processes, making them available via the Internet and mobile channels and building new opportunities for customers, first and foremost digital and data);
  • open services and beyond the banking system – the provision of third- party services through APIs, due to regulations such as PSD2 and GDPR for digital banks, non-banks and several cross-sector markets offered by banks (eg energy services, health services, car buying and selling, home concierge services, etc. .);
  • decentralized financingblockchain technology , on par with traditional banking transactions, has become increasingly involved (without intermediaries), absorbing cryptocurrencies, NFTs and digital currencies, so that central banks have expanded their reach to a new virtual and creative economy through unlocking the potential for completely new market assets such as art, real estate and gambling. Consequently, traditional banks need to build a strategy to address this new segment of customers and, at the same time, proactively engage regulators ;
  • metaverse banking (MetaFi) – gaining an important place in the market in all industries, including the banking sector and connecting the physical and virtual worlds through innovations in hardware and software , but in order to thrive, it also needs an economic system based on technology, platform, market and trade .

Therefore, in the first instance, Covid-19 accelerated the deployment and implementation of new technologies to capture as much real-time and useful information as possible and to respond quickly to changing market conditions .

Progress in decentralized finance and NFTs has allowed financial institutions to imagine and develop a long-term strategy around the metaverse , providing digital assets, exchange platforms or custody that can be extended to to support the requirements of the virtual world , with the possibility of develop your own virtual world platforms (a private metavers) and create new products and even markets , which they can link back to traditional infrastructure.

We can say that central banks and system banks are financial-banking and capital market institutions which, in their capacity as institutions of public interest , are called to serve the interests of all stakeholders .

II. challenge

Trying to avoid technical approaches and focusing on innovation and refurbishment trends in the financial field, we appreciate that:

  • the advancement of technology has a significant impact on the way financial markets operate;
  • financial institutions invest in automation and innovation to reap the competitive benefits of these processes;
  • digitization becomes important in terms of how financial market players operate and interact with market participants;
  • Digitization generally requires huge human and financial resources

The country’s financial resources, and especially its human resources, must be directed and used in order to develop an economy that knows and amplifies our base of existence, present and future, and does not endanger it;

  • we need to benefit from NEXT GENERATION EU and other European funds

A major contribution, in this sense, is the way we will use the money allocated through the National Recovery and Resilience Plan (remember that almost 60% of these funds at European level are directed to investments in the green economy and digitalization ). They support and encourage public and private institutions of a transformational nature to initiate and develop strategies and business plans with an impact on economic growth and stability (we refer to both institutions involved in the green economy and those promoting innovation and digitalization );

  • The supervision of financial markets is raised to a higher level of quality through digitization, with central banks benefiting in a timely manner from a powerful source of market information .

As new technologies develop and implement, central banks recognize that many of the tools, methods, and processes in place are inadequate to the current stage and may pose risks and shortcomings .

One of the future challenges will require that the central bank’s policies be clearly defined in relation to its purpose and status in order to become more effective and better implemented .

In the same context, we need a ” change of mentality and reduction of inertia to change “, essential elements integrated in the complex process of transforming society, to avoid remaining anchored in unsustainable systems.

It will be essential for both challenges working group knowledge base , their professional homogeneity and flexibility in thinking, as well as their direct orientation towards ongoing assessment of the potential impact of different directions of action to enable us to change direction along the way, if necessary. Raising professional skills to a higher level is imperative.

The profitability of the banking system in the next period largely depends on how they address and solve the requirements of the following 3 challenges: digitization, climate change and cybersecurity .

At the institutional level, it is necessary developing the activity in accordance with current and future requirements and adjusting the general and specific attributions of the internal structures in order to optimize them and for respond to the challenges, trends and needs of stakeholders in relation to clearly delimited processes and subprocesses . The tools we use to create and communicate our knowledge of digital, environment, and cybersecurity must also be increasingly reliable, flexible and innovative to ensure that we are constantly on the lookout ready to process and provide the information needed when needed.

All this requires significant investments aimed at preventing losses and at “capturing” the windows of opportunities aimed at increasing turnover or launching new activities and banking products .

Circumscribed to the above, we consider that:

  • macroeconomic stability supports fiscal sustainability as well as price stability and financial stability ;
  • it is necessary for financial institutions to become strong, innovative and to prove profitability, good risk management and sustainability ;
  • Global post-pandemic analyzes have shown that in countries where digital infrastructure has been implemented and developed, companies and households have been strongly encouraged to digitize .

In order to implement and complete such priority targets, it is necessary that:

  • governments and other national official institutions to create the eligible framework and contribute massive investments in areas of strategic importance

In this process, an important place is occupied by the development of local companies and institutions focused on innovation, on the adoption of new technologies and on the training and upgrading of professional skills and abilities of the main national resource, namely human resources.

In this way, it is valued potential for growth of the national economy and is an important support for the sustainability of public debt (in other words, Romania to strengthen its skills and strength to create a sustainable balance between the two twin challenges, current phenomena, namely, low economic growth and skyrocketing public debt growth ).

  • financial institutions need to pay more attention to the phenomenon of the digitalisation of financial markets (which must be seen from two angles, namely as an opportunity for greater competitiveness but also as a source of risk ) and, at the same time , effectively and efficiently address sustainable financing .

With reference only to the banking sector, their digital transformation is probably the most urgent problem to be solved, all the more so as the pressure lies in the requirements and expectations of the stakeholders , as well as in the non-banking competition represented by FINTECHs .

At European level, the digital transformation of banks is supported, tracked and overseen by adoption of the strategy for financing and digital transformation (2 European programs – DORA and MICA), taking into account ensuring the sustainability of the business model and strategy of each banking institution in the long run, as well as ensuring good risk management . The national targets of this package are customer protection, fair competition and financial stability .

  • digitization is an effective and efficient transformational force for financial institutions , but we recommend that digitization does not lead to financial exclusion

In other words, it should not deprive of the necessary financial services geographical areas and population not yet involved in the use of digital services. We need to strike a balance between the efficiency of financial activity and its social utility .

  • digitization , like other policies and solutions for transformation and progress, must to end by ensuring prosperity, sustainability and inclusion for the Romanian society , on the one hand, and to move from quantitative to qualitative approaches , when we talk about risk management, with an emphasis on the preventive and proactive sides, through prompt identification, detection, protection and response with quality repairs following disruptions caused by cyber risks.

In today’s climate, banks are called upon to exercise a strong “SENSE OF URGENCY” in the direction of implementing strategies and business models that make them stronger and more competitive in a market strongly involved in innovation and, at the same time, strengthen customer trust and loyalty.

Going through the list of challenges and priorities that banks need to pay immediate attention to leads us to cybersecurity and data protection , the growing role of FINTECH – as aggressive competitors -, and transparency and reporting .

Let’s not forget that in this world of change and transformation, information and communication technology , as well as ” third party risks “, remain a constant challenge.

We are members of the European Union and, in this sense, at national and institutional level we need to know, make decisions and stay integrated in the new phenomena and processes in progress. Based on the EU strategy according to which Europe’s transition to a new historical stage , namely the “OPEN STRATEGIC AUTONOMY”, is considered to be a widespread use of a EURO DIGITAL will be a good signal of sovereignty at European level, this process leading to increasing the role of the EURO worldwide . We note that the potential introduction of a EURO DIGITAL does not envisage its use as a monetary policy tool, nor as a means of investing in the capital market or of transforming bank deposits into EURO DIGITAL. It is intended to be used only as a means of payment .

Also not to be overlooked is the latest development in the debate at European level , namely on decentralized finance (abbreviated DeFi) which is becoming perhaps the most significant evolution in emerging technology in the field of global finance . The DeFi platform uses blockchain technology and crypto assets , as stable currencies as possible, to create an open, decentralized, digital source as an alternative to traditional finance , a kind of FINANCIAL METAVERSE, but with tangible implications. DeFi replicates traditional banking and at the same time offers new and innovative services .

It is estimated that:

  • operations under this new platform have now reached over $ 100 billion from $ 500 million in 2019;
  • with the capitalization of crypto assets, their volume should increase to over $ 2 trillion.

We emphasize that DeFi will not go beyond traditional finances . We are talking about a speculative field, dedicated to a small group of investors, a field that generates complex risks . As I know, financial market regulators and supervisors are closely monitoring this new area. The literature mentions the development of 2 DeFi applications : decentralized foreign exchange – DEXs and lending platforms . In our opinion, there are some areas that need to be well regulated in relation to DeFi , namely, KYC, compliance, transparency, risks embedded in contracts . After all, we need to focus on protecting our customers, preventing and mitigating systemic risks, and maintaining a transparent, fair, and orderly financial marketplace .

III. The role of the central bank from a digital perspective

In this global context, the central bank is called upon to contribute, through specific policies and instruments, to the proper functioning of the national economy, ensuring the maintenance and strengthening of a sound banking system and an effective and efficient process of financing the economy for sustainable growth. its . Although we are in a market economy that we consider functionalWe express the opinion that in the context of transformingcurrent national, internaland naAt the national level, we need to consider a wide range of objectives, including: ensuring the protection of the savings of households and companies , financing the economy at bearable and fair costs, encouraging competitive prices in the economy, efficient use of national financial resources, ensuring the trend in terms of price stability and financial stability and ensuring quality financial services for businesses and households.

More efficient and effective use of technology can be a valuable tool in the fight against money laundering (AML) and terrorist financing operations , increasing the performance of this regulatory and surveillance activity .

At the same time, the needs and expectations of society and customers are one of the main drivers of innovation and implementation of new technologies in the financial sector , a transformation that improves and strengthens the processes of risk management, security of operations, protection and quality of transactions .

As the advancement of technology has a significant impact on the financial market environment, the central bank needs to assess innovation and new technologies in the financial markets in order to take the necessary steps to increase effectiveness and efficiency in strengthening financial stability and the smooth functioning of financial markets .

Starting from the surrounding reality, according to which digitalization becomes important in terms of the way in which central banks operate and interact with financial market participants , it is clear that one of the main sources of this trend for central banks is the huge amount of information they need to use. they will build and formulate policies and strategies , if they can to better understand the mechanisms and “machinations” of financial markets .

On the other hand, commercial banks invest in automation and innovation through a complex transformation process to take advantage of the competitive advantages they generate .

Also, in order to achieve efficiency and reduce costs, central banks and commercial banks are concerned with the implementation of innovation and new technologies in the post-transactional area, especially in the area of risk management and optimization of collateral and collateral . In this way, regulatory and supervisory requirements can be better met , as well as those to ensure transparency throughout the trading cycle.

IV. Trends and strategic directions

Romania’s economy must move seriously to a massive structural adjustment , based primarily on internal material and human resources , with sustainable priorities and with an emphasis on the transition to a green economy and the digitalisation of the country , areas that offer many opportunities, but also challenges.

For this reason, structural reforms, legislation and banking regulations need to provide conditions for the promotion and encouragement of digitalisation-related investments .

In turn, central banks can support, through specific policies and instruments, the promotion of productive activity and entrepreneurship , especially in areas related to climate change, the green economy and the digital transformation.

As a result, the central bank must act from a LEADERSHIP position in the financial markets and, in this sense, we consider that it can initiate partnerships with Fintech companies, with producers of advanced technologies, but who know the specifics of a central bank. Also, take into account the local specifics, the strategy and the policies of the local central bank . In establishing partnerships, start from the proven principle in practice, namely that “ no one size fits all

At the same time, it must be emphasized that banks’ increasing reliance on digitalisation and new technologies have increased the risk of cyber attacks. It thus becomes an objective necessity to invest in cybersecurity , through new technologies, through the training and skills of the staff involved , as well as by ensuring acceptable resilience , in terms of the risks posed by a possible cyber attack. In the same context, new banking regulations on risk management, reporting and improving corporate governance can support risk mitigation measures . We also mention that a quantification of cyber risks is quite difficult and partially valid. Therefore, it is necessary to achieve a sustainable resilience at the level of each institution in order to be able to “navigate” with greater ability during the period of a possible cyber attack.

The interbank payment system , including cross-border payments, has an exceptional evolution in volume and quality through the implementation of new technologies, digitization. We believe that we must pay special attention to the future of TRANSFOND , which plays and will play an important role in the Romanian payment system, based on supervision and regulation in accordance with national and European requirements.

In the the area of regulation and supervision requires a well-oriented professionally transition, which includes a increase individual and team skills , to understand the phenomena and their implications, in order to make decisions in line with the speed of implementation of digitization and technology tariffs in financial markets.

Close follow-up of decisions and implementations related to the European Commission’s strategy on digitization funding can and must support progress in the financial sector by integrating and linking measures at national level with those at EU level . Here, we also include the activity of regulation and supervision of technology companies involved in the process of digitization and digital transformation.

The ID stage differs from country to country, with local sensitivities, but in all cases the security and protection of information must be ensured , even in the most risky situations.

New technology needs to make progress and improve ID verification , collect a large amount of information, distribute it and thus improve the bank’s customer experience in terms of AML procedures and regulations .

It is becoming increasingly clear that AML risk management is not possible without accurate and complete information and technology that allows us to use the information for the benefit of the mission and role of this business .

Financial education promoted by central banks is called upon to have its say and in the case of AML : we find that an important GAP is maintained between the public’s desire for strengthening the fight against money laundering and terrorist financing , on the one hand, and accepting its compliance with the rules imposed for its monitoring, on the other.

There remains an issue to be addressed, namely the rapprochement between positions related to the fight against money laundering and terrorist financing while strengthening and maintaining the confidentiality of private information . And here we need a prioritization in solving until we get “hit the head of the wall.” Closer collaboration between the Government, Parliament, the central bank and the banking system is essential, reaching a consensus on issues involving data protection and information distribution .

Digitization must be implemented on the basis of an open architecture , with high interoperability. Creating partnerships is essential.

Digitization also helps to improve risk management . For example, when it comes to reporting on bank liquidity, the new technology helps central banks to gain quick access to each bank’s liquidity position , assess the situation, and take action in a short period of time (not days). .

The accumulation of information on financial markets and their distribution to legally empowered institutions must be well coordinated and transparent . In this way, the aim is to strengthen customer confidence, the whole market, the financial system, the policies and tools used . This is where the central bank’s regulation and supervision speak, and they are called upon to strike a balance between the need to protect customers and the promotion of innovation and progress .

Based on the principle “the same risk, the same activity, the same regulations ”, the central bank can keep up with specific activity and decisions in the pace of launching and implementing new technologies and innovations . Financial market regulations must not remain frozen for long periods, they must be amended in accordance with evolution and requirements of financial markets , while paying more attention to analysis and understanding the implications of innovation and new technologies on the market, customers and financial stability .

Today’s realities show that cyber risk is one of the main sources of operational risks in financial institutions. The central bank must impose on the banking system preventive measures to strengthen the risk management activity, to improve the internal procedures, as well as to raise the competencies of the employed human resource to a higher level . Banks must be resilient enough to be able to sail safely, protecting stakeholders and maintaining critical functions , during the period of cyber attacks sometimes generating interruptions in activity.

When it comes to issuing and implementing rules and regulations , it is recommended at EU level to apply the principle of proportionality to cyber risks, risk management, as well as to “third party risk” (the latter being represented by the partners of financial institutions providing services from private platforms).

An important role in this is played by cyber risk insurance (which includes a multitude of risks that threaten the assets of companies, governments or individuals, losses generally including financial or non-financial assets, identities, disclosure of sensitive information and interruption of activities / and last but not least, the payment of GDPR fines). This has become a safe practice to cover the residual risk , because as the defense grows, financial crime seeks the weaknesses of society and chooses the easiest way to try to destroy our way of life.

Current trends show that Central Bank Digital Currency will not replace cash in the economy. Both will coexist as important payment instruments .

In the next period, however, they must be realized qualitative and quantitative analyzes for assess the medium and long term implications the effects of different types of CBDC systems on financial stability and monetary policy implementation, the reliability of existing payment systems with which any CBDC should be interoperable, ensuring consumer confidentiality, guaranteeing anti-money laundering (AML) and sanctions, and, not least, if the costs of this significant change to our existing monetary system would outweigh the benefits .

The complex stage of the digital transformation of the financial markets requires central banks to remain proactive , ” on top of the events “, through decisions, regulations and amendments to their strategy . There are multiple areas that require effective and timely involvement, namely, artificial intelligence, open finance (perspectives and policies), Central Bank Digital Currency, domestic and cross-border payments, instant payments (included in the European Payments Innitiative). Alignment and integration with developments in European financial markets , as well as The demands and expectations of the internal market create many opportunities, but at the same time it requires major initiatives and investments at the level of central banks , as well as identifying and establishing partnerships at national or cross-border level. We reiterate our consideration that many of these objectives and requirements can be solved by developing and using the platform and experience gained by the Romanian company TRANSFOND , with decisions to change the status, objectives and strategy of this company , within the necessary limits.

That’s why “intellectual development of monetary and banking theory ”, which has serious effects on the evolution of the national economy, have smaller gaps than those applied at European and even global level and ensure acceptable resilience in the event of new global economic recessions, he presumes outlining and concretizing the favorable premises by which:

  • innovation and digital transformation will impose moving from business model = faster, better, cheaper = to a progressive one , which achieves the goal of a greater “EFFICIENT CAPITAL” with a better risk and exposure tracking and management solution and a solving the “COST-EFFICIENCY, COST-EFFECTIVE” model at the level of the stakeholders’ expectations .

Thus, identity management in metavers is, in our opinion, the area in which banks should focus, for better risk management, compliance management, data protection and fraud management .

  • we need to be part of and stick to the EU’s strategy, which is to make Europe a ‘global digital player’. We have potential and we need concrete results with long-term ADDING VALUE influences on Romania.

In this regard, we believe that the digitalisation of the banking sector must be carried out in conjunction with the European Union’s vision and the path to Europe’s digital transformation by 2030, in order to maintain the ” compass for the EU’s digital decade , focusing on:

  • skills development ( gender convergence of ICT specialists and acquisition of basic digital skills in at least 80% of the population);
    • creating secure and sustainable digital infrastructure (connectivity – Gigabit for everyone, 5G everywhere, state-of-the-art semiconductors EU share of global production doubled, data storage and protection about 10,000 highly secure edge nodes in terms of climate, Edge and Cloud type, quantum calculation making the first computer with quantum acceleration);
  • Research, Development and Innovation (RDI) can be a key element of technological progress in the new context of global competitiveness.

By reference to the architecture constituted over time, after the Revolution of December 1989, together with the national research and development system (in which it occupies a special place research and development system of national interest ), The National Network for Innovation and Technology Transfer (ReNITT) can play a crucial role for sustainable economic development of our country, investing in technology transfer centers , technology information centers , technology and business incubators , respectively in the 4 science and technology parks , for:

  • projected targets and trajectories, towards “value added” activities ;
    • a sound common governance framework for monitoring progress and addressing shortcomings ;
  • We are in a period where the existing gap can be relatively easily recovered to analyze the impact of these social and economic transitions on digitalisation, the environment and cyber security , as an activity based on:
    • supporting the assimilation of technological innovation in the Romanian financial-banking sector, with an impact on the critical infrastructures and areas of intervention of line ministries that have provided activities and projects in the National Recovery and Resilience Plan (PNRR) [2] ;

Nicolae Dănilă Ruxandra Rîmniceanu

[1] TECH companies able to withstand competition from the US and Asia

[2] Memorandum on the Mechanism for the elaboration of the Romanian Government’s position on the National Recovery and Resilience Plan, https://sgg.gov.ro/new/wp-content/uploads/2021/01/MEMO-11.pdf , accessed on 07.02.2021

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