Economic Transitions: Technology – Opening remarks from Governor Makhlouf at Financial System Conference

Introduction

Good morning everyone. I am delighted to welcome you to our 5^th Financial System Conference.¹

Almost 7 years ago in my first speech as Governor, I spoke of the importance of economic resilience through the transitions shaping our world.²

In that speech in Waterford, I focused on climate and technological change, the changing financial system and geo-economic fragmentation. And noted that external risks had heightened for both structural and cyclical reasons, including rising trade barriers and geopolitical uncertainty.³

Events since November 2019 have underlined – to put it mildly – those external risks, and the importance of building economic resilience.

When I look back on my first term as Governor it is the accelerating nature of these transitions, and the way they are already crystallising, that stands out for me.

As does the response of policymakers, central banks, and industry to addressing them.

The strategy we put in place in 2021 was about ensuring the Central Bank could respond to these changes.⁴ By being more future focused, more open and engaged, strengthening our safeguarding frameworks and transforming our organisation.

In fact, it was in the context of the forces shaping the financial system that this very conference was first established, bringing together perspectives from across the whole financial system, in Ireland, Europe and beyond, to discuss, debate and find ways forward on these issues.⁵

And so I am very much looking forward to today’s discussions, which cover the breadth of these challenges. In particular, I would like to welcome Vice-President Vujčić, Commissioner Albuquerque, Minister of State Feighan and Governor Krogstrup to today’s conference.

Technological change

For my part, I want to concentrate today on one of these transitions: the impact of the rapid technological transition underway in our economy and financial system. 

Specifically, I want to talk about artificial intelligence – its development, deployment and adoption – as well as the digitalisation of both the money and the assets that make up our financial system.

Artificial Intelligence

First, artificial intelligence.  

As a general purpose technology of clear potential and magnitude, AI looks as if it will have a significant impact on our economy and on our financial system.

It will affect how we achieve monetary and financial stability, and how we ensure the financial system is working for consumers, investors and the economy.  And of course it will impact growth, the labour market, productivity and ongoing national economic development.

In that speech in Waterford 7 years ago, I noted the profound impact artificial intelligence would have on the labour market but also that the long-run historical evidence pointed to the benefits for workers who can increase their productivity by using machines and technology.

While I remain of this view, the speed and extent to which the capabilities of this technology has developed have surpassed all of our short run expectations.  And it is challenging old assumptions.

AI also has the potential to re-shape the financial system, and the way in which financial services are consumed and delivered.

The vast majority of firms we regulate are already using AI, from machine learning to generative and agentic AI.  Evidence suggests that consumer use in financial services is relatively high and consistent across most surveys, ranging from understanding financial information to more specific usage.⁶

In terms of the financial system, we are focused on AI’s  impact on:

-         Financial stability: from systemic risks of frontier model use for cyber offence and defence to the implications of increasingly-leveraged and interconnected financing of AI-related investments;

-         The safety and soundness of firms: the implications for firm operational and cyber resilience, its use for critical firm services, the governance of AI deployment, and business model risks from AI disruption;

-         The protection of consumer and investor interests:  from the risk from firms’ use of AI for consumers and investors, as well as consumers’ own use of AI for financial advice or executing financial services through agents; and for

-         Financial Integrity: and its potential to fuel financial crime, whether fraud, scams or money laundering.

Responding to the challenge

So the breadth in terms of AI capabilities and impact is clear, and potentially unprecedented.

But so too is the pace at which those capabilities appear to be developing, and the rate at which deployment and adoption could take place.

Such a challenge – in terms of pace and scale of development, adoption and deployment – necessitates a response.  And we have been responding, across the whole of our mandate.

From an economic perspective, we have been – and continue to – analyse both the near-term and longer-term implications of AI developments.

In the near term, the global AI-related investment cycle is having an impact on Irish growth. Ireland hosts a substantial share of Europe’s hyperscaler data centre activity and is also home to several large-scale semiconductor manufacturers engaged in cross-border trade.  The recent strong growth in AI-related investment has supported domestic activity, and we have examined these developments in recent Quarterly Bulletins.

But this is only one dimension of the impact of AI on the Irish economy. We have also been looking at longer term implications, including how AI could influence Ireland’s labour market.⁷

While Ireland starts from a good position, my key takeaway from our analysis is that skills matter and we need to manage the challenge of likely bottlenecks and mismatches, something consistent with my overall view on skills and life-long learning which I have set out before.⁸  And in the automation or augmentation debate, the history of technology and the labour market suggests AI will do both, with implications for how policymakers must respond.

From a financial stability perspective, stretched valuations remain a concern. In my view a market correction would not be a surprise and, indeed, corrections have been a feature of other historic infrastructure booms.  Adding to the risks is the sheer size of the buildout, the scale of the debt financing driving these investments, and the circularity of some of the financing.  Some of this looks uncomfortably familiar.

This is why in our first Financial Stability Review of the year we examined the domestic financial stability implications of developments in AI financing, including transmission channels of an AI-related financial market shock.⁹

But this is a rapidly evolving landscape, reinforcing the need for vigilance, as well as economic and financial sector resilience.  In the current environment this means minding tail risks, understanding their transmission channels and engaging in scenario planning and risk management practices that go beyond historical precedent, capturing both novel and traditional risks.

We have also been focused on AI from a regulatory and supervisory perspective.

Following a spotlight in last year’s Regulatory and Supervisory Outlook report, this year we set out our supervisory perspectives on the use of AI by firms and our expectations around governance, strategic alignment and accountability.¹⁰  While these can be powerful tools, it is humans who deploy them and therefore humans who remain accountable and responsible for them.

Given the step change in the risk landscape this year, we have also engaged with the financial sector on risks from the capabilities of frontier AI models, particularly in terms of cyber resilience in the financial system. While there has been huge progress in operational resilience in the sector in recent years, the risks remain severe and the bar for resilience is rising, alongside the capabilities of these models.

We also plan to deepen our analysis around the supervision of AI, ensuring that we have the capabilities to evaluate the systems being used in financial services, and the wider impacts they may have on the economy.

These activities are of course just the tip of the iceberg in terms of our response to a significant technological transition.  Which brings me to another, perhaps obvious, point: in times of rapid change, it is important that we remain anchored.

For the Central Bank of Ireland, that starts with our mission: delivering in the public interest by maintaining monetary and financial stability, while ensuring the financial system is operating in the best interests of consumers and the wider economy.

We will remain focused on these outcomes but also neutral on the means or the technology used to achieve them.  But technology neutral does not mean technology blind.  

Although AI could change how the economy and financial system operate, how financial services are delivered, the way risks to our objectives manifest themselves and therefore how we do our job, it will not change our objectives.  We remain anchored in delivering price and financial stability and a financial system that works for the economy as a whole.

In fact, adapting to change while remaining focused on our objectives has been an important part of the broader shift in our approach to innovation over the course of our current strategic cycle.  It is at the core of what being future-focused and open and engaged are about.  Our Innovation Hub and Innovation Sandbox in particular help us deepen our engagement and understanding of the innovation ecosystem and better anticipate and adapt to as necessary.

In terms of our Hub, around half of the engagements currently coming to us through this channel are AI related, up from one in five just a few years ago.  

And in terms of the Sandbox, I am delighted to announce today that the theme of our third programme will be Advancing AI for Consumer Good, addressing issues such as:

• How can AI be used to support consumers in vulnerable circumstances?
• How do we make automated decisions fairer and easier to explain?
• How do we strengthen resilience to fraud and scams?  And,
• How do we keep accountability clear as AI moves from advising to acting?

These are important questions that go to the heart of embracing the opportunities from this technology while managing the risks. Applications will open in January and, in line with previous programmes, successful participants will receive structured regulatory advice and support from specialists across the Bank.

Tokenisation

Enough about AI (for now at least!). 

Let me move to the second technological transformation I want to talk about today, namely tokenisation and distributed ledger technology (DLT).

Again this technology has the potential to reshape the monetary and financial system, and to deliver real benefits for users of financial services.  It could improve how financial markets operate, how financial assets are issued, held and transferred, and how money and securities move through the system. Done well, tokenisation could lead to greater efficiency of existing financial services, as well as the emergence of new products and new ways of meeting the needs of households and businesses. 

But technological capability alone will not realise these opportunities. Rather the system needs to evolve to enable them.

Recognising this, earlier this year we published a Discussion Paper seeking views on our thinking on DLT and tokenisation.

And today we are publishing our feedback statement to that Discussion Paper.¹¹ I want to share with you some of what we heard and our plans for what comes next.

First, thank you to all who responded, from across the ecosystem, including digitally-native firms, industry bodies, asset managers, banks and market and payment infrastructure operators.

The feedback we received was thoughtful and extensive and covered a range of topics: from how tokenisation could address longstanding inefficiencies in finance to the management of systemic, sectoral and transitional risks; from issues around legal certainty and regulatory adaptability to the evolution of public and private money; and from interoperability and infrastructure to questions of governance and accountability.

Of course, while evidence of the potential of this technology is clear, at this stage of its deployment the scale of benefits to consumers and investors, the commercial viability of emerging models and their resilience under stressed conditions, remain uncertain.

And while the future is uncertain, it is important that – should the financial system evolve through this technology – the conditions are there to ensure it does so grounded on resilience and trust.  And that is a key focus for us at the Central Bank.

The Discussion Paper has informed how we will continue to respond to this technological transformation.  We have decided on a number of priority areas for future work.

First, as part of the Eurosystem, we will work to enable central bank money settlement and evolving the collateral framework.  This includes projects such as Pontes and Appia, as well as work around collateral eligibility of tokenised assets.¹²

Second, we will continue to support efforts domestically and across the EU to advance legal regulatory clarity, including working with the Department of Finance to support delivery on the actions arising from the Ireland for Finance Strategy – Vision 2030.

Third, we will evolve our approach to innovation alongside the changing landscape, including:

-         Expanding our Innovation Hub to include a dedicated tokenisation access point (TAP); and,

-         Launching a more proactive approach to engaging with the ecosystem, through policy sprints on emerging issues of regulatory significance. This innovation insights model will involve working with and drawing on insights from across the sector and will have a particular emphasis on tokenisation over the coming months.

Fourth, we will continue to deepen our analysis and capabilities around on-chain developments and our understanding of the macro-financial implications of a broader shift to tokenised finance.

Fifth and finally, we will also help to shape the ecosystem to guard against fragmentation, including by supporting industry efforts to develop common standards and practices.

All of these priorities are in line with – and advance – our strategic shift towards better anticipating and responding to changes in the economy and financial system.¹³

Throughout all of this work we will remain grounded in our objectives.  Our focus is on ensuring we understand the changing nature of the financial system, and that our frameworks are evolving alongside it, enabling the opportunities from innovation done well, while managing the risks.

Conclusion

Let me conclude by returning to where I began and the great transitions underway.  

The job of central banks and regulators is not just to analyse and forecast but to respond in the face of change.  At the Central Bank of Ireland, we have been responding – and will continue to do so – guided by our principles of being forward-looking, connected, proportionate, predictable, transparent and agile.

Maintaining trust in our monetary and financial system matters more than ever at a time of significant structural – and sometimes rapid – transitions.  All of us – central banks, industry, government, and civil society – need to work harder to maintain it.  

In the Central Bank’s case, we will do this by, among other things, continuing to be open and engaged.  And that means listening, which is why I am looking forward to hearing different perspectives throughout the day.

I hope you enjoy the conference.