Foreword by Governor György H. Matolcsy

Foreword by Governor György H. Matolcsy

“There is nothing permanent except change.” (Heraclitus)

What is the role of the central bank? Over the more than 200 years of history of central banks this question has been asked quite often. I would emphasise here that this question has remained with us so long not because central bankers could not find a satisfactory answer, but rather because our constantly changing world requires constantly changing answers. Surveying the literature, one finds a wide range of papers that discuss the changing role of central banks and argue that a different approach is necessary for a certain matter. Rightfully so, since most answers, but for a few universal truths, have an expiration date. Human history is marked by the alternation of relatively peaceful and turbulent periods, and the first quarter of the 21st century has proven to be quite the latter. The global financial crisis, the COVID-19 pandemic, climate change and geopolitical transition are just a few of the challenges that humanity has faced in the last two decades. However, turbulent times often bring great opportunities for the brave and sometimes the most outrageous idea sparks the greatest innovation. Today, questions regarding the roles of central banks may be more relevant than ever, as more and more central banks decide to take the lead in change and respond to the emerging challenges with innovations of their own. The days when central banks only concern was to maintain price stability and financial stability are long gone, albeit no less important than before, and new initiatives, such as sustainability, digitalisation, social responsibility and enhanced international cooperation have appeared.

Decarbonisation efforts are crucial for the future of the Earth. Research shows that greenhouse gas emissions from human activities have already warmed the climate by more than 1 °C since pre-industrial times, and the temperature will only continue to rise if we do not restrain our emissions. Some adverse effects have already appeared, but humanity still has the chance to avoid the worst if we act quickly and collectively. One after the other, major economies are setting their carbon neutrality targets and pledging to reach net-zero emissions by 2050 (EU, USA, Japan and South Korea among others) or by 2060 (China, for instance). However, this is easier said than done, and if governments really want to reach their targets, they must incentivise all players on the market to opt for greener choices. Fortunately, central banks are well-equipped to support this endeavour by developing sustainable financing solutions, providing green loans and formulating novel, sustainability-oriented regulatory frameworks. Furthermore, considering the enormous investments needed to transform the economy, the financial sector will undoubtedly play a major role in the process, and as a consequence, it is inevitable for central banks to take the helm and set the course for the transformation. Many of them have already introduced and started implementing their green strategies, while in some cases, such as Hungary I am proud to say, the duty of the central bank to promote environmental sustainability has already been enshrined in law, namely the Hungarian Central Bank has a clear green mandate. Undoubtedly, one of the biggest trends of the 21st century is digitalisation. We are living in an age where we can pay our bills, buy stocks or close billion-dollar business deals with just a few taps on our telephones. Countries like China are racing ahead in terms of digital services: the world’s second largest economy now has more than 872 million online payment service users and mobile payments are becoming more popular than cash. Financial technology has been appearing in the most unexpected places, the biggest breakthrough being the birth of cryptocurrencies

back in 2008, but mobile payment solutions, decentralised finance and digital banks are all shaping the financial system, pushing financial regulators around the world to re-evaluate their regulatory, licensing and supervisory work. However, the private sector is not the only source of progress, and central banks have been responsible for major digital finance innovations in the past decade, such as introducing 24/7 instant payment systems or running key pilot projects on central bank digital currency, which could become the money of the future. Nevertheless, sustainability efforts mean nothing if they are not undertaken by all, and central bank digital currencies become all but useless at the borders if there is no cooperation among neighbours. The biggest trends and challenges of the 21st century go well beyond national level, making international cooperation vital. Knowledge sharing, joint research projects and the harmonisation of national systems and regulations have become the new norm, and while competition and national security are still important factors to be considered, the careful mix of competition and cooperation are serving the advancement of our economies well. This is especially true in the supercontinent called Eurasia, where the exchange of goods and ideas goes back millennia, supporting the birth of many of the most revolutionary innovations, from the compass to the steam engine. Fortunately, central banks are in the privileged position to initiate and benefit from international cooperation, which is well reflected in the growing number of bilateral agreements and multilateral organisations in the financial sector in the past few decades. Sustainability, digitalisation and the strengthening of international relations are three key trends where central banks must lead the way, as the economy of the future is built on the work we are putting into these crucial areas and the generations we educate on the possibilities these areas may hold. In the 21st century, the boundaries between different fields of the economy and sciences are disappearing as the new sustainable economy

emerges, which – similarly to society itself – is based on rapidly changing knowledge networks and platforms. In this new world, knowledge, talent and creativity are becoming pivotal resources, and the generations who hold these key resources will become the foundation and builders of the economies of the future. Besides their role in the financial markets, central banks are also active participants in the sustainability revolution and digitalisation movement and accumulate vast knowledge to be passed on to the coming generations, through which they can support the birth of a greener, more liveable future. The first quarter of the 21st century has been full of challenges and opportunities, to which central banks have responded by adapting their ways and coming up with innovations of their own. This volume compiled by the Magyar Nemzeti Bank, the central bank of Hungary, attempts to give an overview of said innovations and best practices all over Eurasia representing the diversity, progressive spirit and cooperation of the nations of the supercontinent. The volume reflects on the most relevant fields of central bank innovations from sustainability and digitalisation to social responsibility and international cooperation, with contributions from renowned experts from China, France, the Republic of Korea, Germany, Kazakhstan, Portugal, the Bank for International Settlements Innovation Hub and Hungary. The MNB is immensely grateful to all authors for sharing their valuable thoughts and sincerely hopes the volume will provide new insights on the novel and diverse responsibilities of central banks for all readers, regardless of their age and professional background.

György H. Matolcsy Governor Magyar Nemzeti Bank