The location for Felix Hufeld’s speech about the future is full of reminders of the past. A towering silver Bundesadler, the German federal eagle, stands guard on the end wall of the former plenary chamber of the German Bundestag. Next to it flies the German flag as a symbol of the German state. On 1 July 1999, before the end of the “Bonn Republic”, the German Parliament met here on the Rhine for the last time before moving to Berlin. The start of a new political era.

And now the start of another era is going to be discussed here; this time, it is a technological one. Felix Hufeld, the President of the German Federal Financial Supervisory Authority (BaFin), stepped up to the podium to open the third edition of BaFin Tech at the World Conference Center (WCC). “The digital transformation in the financial industry is powerful enough to turn business models, companies and even entire markets upside down”, said Germany’s most senior financial supervisor. His motto is: “Only by being well-informed supervisors can we become better supervisors.”

BaFin hosted this event in September to shine a light – once again – on the opportunities and risks of digitalisation. 400 guests took the opportunity to exchange ideas and opinions, primarily about cryptoassets and artificial intelligence (AI). Among them were tech visionaries, founders of fintech companies, legislators and academics as well as representatives of established banks, insurers and financial services providers.

The majority of them have been part of the crypto scene from the very beginning. “There is now little left of the anarchist, state-independent philosophy once used by cryptocurrency supporters to justify the need for the existence of cryptocurrencies,” observed Hufeld. Now the debate is guided by regulatory and technical questions of detail.

Artificial Intelligence: the all-powerful algorithm

The digital revolution promises a tremendous upheaval. PwC Management Consulting predicts that the extensive use of artificial intelligence and algorithms that are continuously learning and solve problems themselves could result in the financial industry contributing an additional two trillion US dollars to global economic output. Even today, AI does more than just calculate insurance premiums. Banks and financial services providers use algorithms to assess the creditworthiness of their customers, detect fraud and automate a wide range of business areas, from account opening to asset management.

“But the increasing displacement of human decision-makers by algorithms or other forms of artificial intelligence presents us with problems, too,” said Hufeld. For example, insurers are already able to carry out risk assessment procedures for new business and for claims processing without human intervention. In the future, more processes could be delegated to our computerised colleagues. “But what happens when something goes wrong and errors occur? Can a member of the management board say, “it wasn’t me, it was the algorithm?” In my view: no! The ultimate responsibility has to remain with the management board – with people“, warned Hufeld. In the end, it is still people who decide.

Machines cannot replace people

“Artificial intelligence must not replace people,” agreed Dr Stefan Rüping. The head of Big Data Analytics at the Fraunhofer Institute for Intelligent Analysis and Information Systems (IAIS) knows that “solving problems and making decisions are still human competences.” The idea is rather, he explained, for computers to take on the tiresome routine tasks so that humans can concentrate on the more important aspects. But there is one thought that the IT expert simply cannot get out of his head. He has programmed algorithms that doctors use to treat patients and algorithms that are used by self-driving cars on the road, and asks himself, “What happens when errors occur? Whose fault is it?”

When machines are fed with vast quantities of data, they learn new standard processes. They become more intelligent - but for Dr Christian Grobe, that is not enough. For the co-founder of Billie, a start-up that manages business accounts for companies and settles invoices, it is not AI experts with the relevant methodological skills that Germany lacks, but the necessary digital infrastructure: for example, a way of accessing data in the commercial register and the Federal Gazette and potentially data on creditworthiness such as via Creditreform. It is only with these fundamental data that he will be able to improve models and make computers more intelligent, he argues.

“The value of currencies is based on trust”

And the digital economy reveals other conflicts, too. Most recently, Facebook Inc.’s plans to bring the world’s first stable cryptocurrency to the market, under the name of Libra, caused a stir across the entire finance scene. Unlike existing cryptocurrencies, such as Bitcoin, based on distributed ledger technology, Libra is a stablecoin with a value tied to a basket of different currencies, such as the dollar and the euro.

How are governments, central bankers and financial supervisors to deal with this type of financial innovation in the future? Dr Jörg Kukies, State Secretary at the Federal Ministry of Finance, insists on the sovereignty of the state. “Currencies belong in the hands of democratically legitimised governments and central banks.” BaFin President Felix Hufeld believes that the “public control of currencies, the value of which is ultimately based on trust” is necessary today and will continue to be so in the future. This is the only way to protect the “foundations of all financial transactions”. This leads many observers to ask themselves whether central banks might at some point develop their own digital means of payment to keep pace in the global power game.

BaFin’s financial supervisors are already closely monitoring the development of cryptoassets and react whenever they deem it necessary. But in the case of crypto-based business models specifically, a “degree of asynchronicity” is evident, said BaFin’s President. While regulatory questions are being debated in great detail in some areas, such as in the securities sector, the discussions in other areas are still very abstract, as is demonstrated by the example of Libra.

Miye Kohlhase from the Association of German Banks (Bundesverband deutscher Banken - BdB) called for a reliable legal framework to be created for securities in distributed ledger technology systems to ensure that the transfer of these securities is governed by clear principles. “Regulation needs to be adapted for the securities business of tomorrow,” said Kohlhase.

BaFin at the forefront of the global debate

State Secretary Dr Jörg Kukies explains that digitalisation is a priority for the German Federal Government. His principle is: “Think and act digitally.” Kukies also points to the BaFin report "Big data meets artificial intelligence” (“I have carefully read every single one of the 200 or so pages.”), which reinforced the German financial supervisor’s position at the forefront of the global debate.

“Digital technologies are essential in order for the European financial market to be competitive at an international level,” said Kukies. In his view, Germany will only remain competitive on the global stage if growth financing in the country is simplified, following the example set by the USA and Asia. In light of Germany’s presidency of the Council of the European Union in the coming year, at the European level the German Federal Government is throwing its weight behind the financial market union project (the capital markets union and the banking union).

The German financial supervisor itself is becoming increasingly digitalised, too. Answering the question of how BaFin can make better use of artificial intelligence and big data, for instance in internal processes, data analysis and reporting, is a key task for Silke Deppmeyer, who was recently appointed Chief Digital Officer (CDO) at BaFin.

BaFin already does use artificial intelligence to some extent in its ongoing supervision, for example in securities supervision to provide evidence of market abuse, such as insider trading, committed by speculators. In the opinion of Dr Thorsten Pötzsch, the use of big data and artificial intelligence is also essential for combatting financial crime. The Chief Executive Director for resolution and prevention of money laundering at BaFin warned: “do not try to use IT for any skulduggery,” promising: “we will catch you.” Because in the end, it’s always people who decide.