The digital future of the central banks

How the most powerful financial institutions can take advantage of the technological progress?

09:00 | 29 юли 2022
Снимка: Hollie Adams/Bloomberg
Снимка: Hollie Adams/Bloomberg

By Preslav Raykov

As the favorite joke of Mario Draghi goes “the best heart for a transplantation is the one of a 75 years old central banker, because it has never been used.” However, in the past few years we cannot be sure that the main figures in the central banking haven’t used their hearts and emotions, as well as great dose “friendly” political advises to guide the global financial system through challenging times.

Currently, the focus and attention on the situation with the global economy, which enters into a recession everywhere and is followed by suppressed economic growth, high inflation and unemployment falls entirely on the central bankers. The claims that they, led by political pressure and financial folly, flooded the economy with cheep credit resource which is currently generating inflation, are completely reasonable.

After the 2008 crisis, the global central banks began their gradual addiction to digital printing of cheep financial resource. Just for this period the big central banks put 25 billion dollars into the global economy through quantitative cut offs. For two years, in respond to the Covid pandemic, the balance sheets of the four major central banks expanded to extra 11,3 billion dollars to support economies and the functioning of global financial markets and banks' new asset purchases have increased the size of their cumulative balance sheets by approximately 73% since the start of 2020. This scale is unimaginable to most of us, but the effects are beginning to be very clearly felt.

And although central banking should be entirely a matrix of logical decisions according to certain economic, financial and social indicators, we can claim that in the last 15 years, human emotional dependence to the model of digital money printing has been irreversibly completed. Central bankers are increasingly depleting their resources and tools to act against economic shocks and maintain price stability, and the growing volumes of data make analyzing the situation and making a timely and correct decision too complex for the human mind. And if decisions are made by people, and they are subject to emotions, desires, fear and greed, then the logical question arises: why not replace the people who make the most important decisions for the global financial system with digital algorithms?

Digital central banking

The world of digital central banking, backed by an artificial intelligence, machine self-study, quantum computing, blockchain and digital currency can be closer than we think. Undoubtedly, in the last 10 years, technological development, as well as the acceleration of computing power, have led to many new models for the analysis of large volumes of data, statistical modeling, behavioral and risk analysis, and self-learning algorithms in the field of regulatory mechanisms. Blockchain technologies and decentralized finances are already successfully transforming a big part of the conventional financial system, but are not yet so strongly implemented in the central banking. If we support the statement that central banks should be politically independent institutions which only transfer data, then applying these technologies to the sector should be mandatory and irreversible in the really close future.

Artificial intelligence and central banks

Modern economic generates exceptional volume of data, which become more and more related and complex. The exponential growth of the large financial arrays reflecting the combination of new and rapidly developing electronic footprints that humanity leaves, as well as the huge arrays of financial, administrative and commercial data, confront central banks with the challenge of ensuring adequate reliance on all these data, as well as their correct interpretation on the economic processes behind them.

For this purpose, in the last 5 years, the application of artificial intelligence and machine self-learning in the field of central banking has been actively tested. Although it can be used only in low level tasks for now, the technological advances and cost savings are likely to embed artificial intelligence deeper and deeper in the main functions of the central banks. Currently the Bank of England is the main player that is working on implementing an AI-powered bot. Recently, the designed by BNB – BoB can be from a significant importance in some spheres of central banking such as in response to an emerging crisis. If the central bank is facing a liquidity crisis and has hours or days to respond, the speed of collecting and analyzing information is crucial. Having such an AI engine on standby that is an expert in assessing the situation could prove invaluable because it would relieve bankers responsible for making complex decisions from the burden of the risk of emotional distortion and data interpretation, and at the same time thereby ensuring timely decision-making. BoB can also assist central banks in labor-intensive tasks such as information gathering, analysis of large volumes of data, forecasting and risk management, financial supervision and analysis of monetary policy and payment systems. The European Central Bank (ECB) also announced in March that it will implement an artificial intelligence platform developed by Swiss startup Squirro. The platform will enable the bank to analyze huge unstructured databases, extracting from them the information necessary for decision-making in certain areas of regulatory policy, as well as in the development of risk models for monitoring commercial banks.

Squiro's products are already successfully used in many other central banks – the German Bundesbank, as well as the Bank of England, and the company recently started a procedure to acquire the American company in the field of artificial intelligence – OpenExchange

For the moment, the technology for artificial intelligence is available, and the obstacles to central banks actively starting to offer it are mainly institutional inertia, as well as political and legal obstacles to its successful implementation in this area. Of course, the application of artificial intelligence in central banking has its risks. It is possible to create a premise of procyclicality if the majority of computer models analyze the situation in the same way, taking the same measures. Also, the issues of ensuring cyber security and the potential for hacker attacks on such systems raise serious questions.

Peter Pan and central bankers

Another interesting method which currently is being applied by the financial sphere and can significantly help central banking decisions are the models of speech and behavior analysis. As is well known, every word of the central bankers is analyzed in great detail and interpreted accordingly in the context of what was said and the corresponding economic situation. More than once, central bankers have surprised the markets with phrases and sentences that have then translated into serious market movements.

However, sometimes the context of the speeches is extremely complicated and differentiated – from the Peter Pan tales that Haruhiko Kuroda - chairman of the Bank of Japan used in one of his speeches, through the winged phrase “whatever it takes” that Mario Draghi used to love repeating when he was the head of ECB and to Elvira Nabiulina's brooches – head of the Russian central bank, or comparing economy with Diego Maradona’s play, made by Mervyn King from the British central bank. The language and gestures of the central bankers are watched and analyzed by number of institutions, banks, private funds and companies and the speed that these algorithms extract the meanings and connect them to potential market movements is mind-blogging.

One of the companies that offer this kind of service – Prattle Analytics LLC – claims that it can analyze 500 words speech within 45 seconds and connect it to over 80 billion interrelationships concerning speech, as well as to derive possible scenarios for the development of these interrelationships and the potential effects on markets and various financial instruments. Founded in 2014 by Evan Schnidman and up to this point is analyzing the speeches of 15 central banks, the company point out that analyzes of U.S. Federal Reserve messages are even faster and with an almost immediate result – without any delay. Within milliseconds, customers receive the information from the speech analysis and can immediately make a decision based on it. Many of the central bankers have even begun to pre-screen their speeches through precisely such companies to reveal to them how the algorithm will read the messages in their words. Jerome Powell addressed this issue at one of his press conferences, saying that he would try to speak in "plain English" so as not to confuse the algorithms.

In addition to the software used to interpret emotions, gestures, body language and even clothing, in the future the central bankers can equip themselves with tools to monitor every single public appearance of a politician, prominent economist, world forum leader, or television host. Such model would allow them to extract information extremely fast and from different resources, tracked simultaneously. Very soon it will be possible every public performance to be recorded and broadcast  in real time to companies like this to analyze data and deliver them to the relevant organizations.


The metaverse is another segment that could transform central banking. A number of commercial banks have already embarked on massive investments in the Metaverse, and many central banks are planning to issue digital currencies that will be usable there. According to Morgan Stanley's predictions, the metaverse in China alone could reach a size of $8 trillion. in the next 10 years. Meanwhile, the bank predicts that the metaverse will provide a market opportunity valued at more than $1 trillion. in annual revenue.

Metanomics – the planned new model of interaction in the digital sphere will also require transactions between institutions, avatars and companies. Imagine a world in which the bigger part of you everyday life is online – in different part of the metaverse, built by different suppliers. The job is online, school is online, games, hobbies, communication, initial medical examinations – everything went online. The planned move to the metaverse provides an opportunity to sell goods and services to consumers. Whether it's clothes for your avatar, digital versions of textbooks, irreplaceable token (IRT) artwork designed for virtual houses, or tickets to a virtual concert. All these interactions will have to happen through digital currencies, and they will have to be managed by certain institutions. Just such an authority will be the central bank of the metauniverse, and its meta-currencies.

Digital currencies of the central banks quickly drew attention in the past 2 years and at the moment over 100 nations worldwide have started or already have pilot projects for these kind of instruments. In the Bahamas, a "Sand Dollar" has already existed for a year, in China there is a digital yuan, and the Swedish central bank – the Riksbank – is also developing a digital money concept. The Federal Reserve in the United States states in its analysis that digital currencies will redraw a large part of financial relationships in the near future. Digital currencies of the central banks are meant to be fiat currency – direct obligation to the bank. These currencies give an answer to the question how the unbankable part of the population will access financial services. Currently, there are over 1,7 billion people worldwide that do not have access to the standard financial services and transferring to the digital world can solve exactly these problems, allowing them to not get shut out from the metaverse. At the moment, the bigger part of the digital currencies of the central banks are based on blockchain decisions that successfully prove themselves as safe and working option for the sector.

Quantum Computing

All these new technologies cannot be possible without the progressive increase in computing power. That is why many of the central banks started looking for solutions in this direction. Quantum computers are already a step closer to realizing calculations that are thousands of times faster than existing ones. The vast arrays of ever-increasing data, the maintenance of the metauniverse and blockchain solutions, artificial intelligence and machine self-learning require gigantic computing centers. Canada's central bank is currently experimenting with quantum computing as a means of dealing with complex financial problems and models potentially related to cryptocurrencies that are beyond the range of traditional computing capabilities of today's computers. Multiverse Computing, company for a quantum software, based in Spain and with offices in Toronto, recently created simulation model in cooperation with the central bank of Canada. The economists from the central Canadian bank wanted to test the power of quantum computing on a research case that was extremely hard to solve with the help of classical computing skills. The project proves that quantum computing can ensure new insights into economic problems by performing complex simulations.

Qantum computing is used in quantum theory for solving complicated problems, as well as for evaluation of probabilities. Computers can process exponentially bigger amount of data, compared to the traditional computing models. Thus, they can redraw a number of economic and financial theories. Undoubtedly the era of quantum computers is yet to come, but when it comes there will be great consequences for the global economic and the financial system. However, the rapid development of quantum computing brings benefits as well as risks. Quantum computers could revolutionize industries and fields that require significant computing power, but they could break many of the current encryption algorithms, thereby threatening financial stability by compromising the security of mobile banking, e-commerce, fintech, digital currencies and exchange of information on the Internet.

Digital bankers

While the world is going through another financial crisis, engendered in large part by the actions of conventional central bankers, technological developments now provide the necessary opportunities to replace humans in making important decisions about our economy. Artificial intelligence that will analyze huge databases for the world economic processes, companies that will monitor and analyze every word spoken by world leaders and implement it in interest rate decisions. Avatars and digital currencies in the metaverse can replace the monthly press conferences of the central bankers and the quantum computing will be able to forecast all possible scenarios for the development of the future financial economic system.

THE BOTTOM LINE Is it possible to replace bankers and financiers who are making the most important decisions in the world financial system with digital algorithms?