The Monetary Authority of Singapore (MAS) is seeking to achieve five desired outcomes through its collaborative fintech projects — instant remittance, atomic settlement, programmable money, tokenised assets and trusted sustainability data, says its managing director Ravi Menon.
During his opening address at the Singapore FinTech Festival 2022, Menon says the advent of real-time payment systems over the last few years has made domestic payment flows seamless in as many as 60 countries. However, the adoption of cross-border payments faces barriers, as it is slow, costly and relies on an archaic network of correspondent banks. Menon, citing the World Bank, notes that the global average cost of sending remittances is a hefty 6% of the transfer value. “This is particularly painful for the migrant worker who wants to send money home or the small businesses that want to reach out to overseas markets through e-commerce.”
“We want cross-border payments to flow seamlessly like water. One way to do this is to build linkages across countries’ real-time payment systems, just as canals allow boats to pass from one body of water to another.”
To solve this problem, MAS has been working with the Bank for International Settlements (BIS) Innovation Hub on “Project Nexus”, a multilateral solution to link countries’ real-time payment systems. With this solution, each country will only need to link its real-time payment system once to a Nexus gateway, providing direct connectivity to all the other countries already in the network.
Nexus is a unified solution that coordinates payment, foreign exchange (forex) conversion, message translation, and compliance, which would streamline the entire cross-border payment process. Users can look forward to a faster speed of payment transactions, lower costs, more comprehensive access, greater transparency and higher security, says Menon.
He believes that the 10 members of the Asean share a vision of a multilateral network of payment linkages across Asean by 2025 and that Project Nexus can be a crucial enabler towards realising this vision. “Asean is well placed to be a first mover on this multilateral solution. As this network expands, we hope to see more countries coming on board as we build connectivity from Asean to the rest of the world,” says Menon.
This real-time cross-border payment means something other than real-time settlement. This leads to the second desired outcome, the so-called “atomic settlement”, or the simultaneous exchange of two linked assets in real-time. According to Menon, the atomic settlement eliminates settlement risk, duplicated reconciliation, and the need for large pre-funding accounts.
“One of the most promising ways to achieve atomic settlement is through tokenised assets, which can be exchanged simultaneously on a distributed ledger.” This is what MAS has been experimenting with since 2017 through Project Ubin, its success paving the way for further collaborations and progress — Partior, a joint venture among DBS Group Holdings, JPMorgan Chase & Co and Temasek — has used a blockchain-based multi-currency clearing and settlement platform to reduce the settlement time for Singapore dollar and US dollar transactions from days to minutes.
Meanwhile, Project Dunbar — a partnership among the BIS Innovation Hub, Reserve Bank of Australia, Bank Negara Malaysia, South Africa Reserve Bank and MAS — has built open-source distributed ledger platforms for international settlements using wholesale central bank digital currencies (CBDCs).
MAS will also be launching Project Ubin+, a global initiative on the cross-border exchange and settlement of foreign currency transactions using wholesale CBDCs. It will focus on three areas: To study and identify business models and governance structures where settlement can be performed atomically; develop standards to support the atomic settlement of currency transactions across platforms based on distributed ledger technology (DLT) and non- DLT, and establish policy guidelines for the connectivity of digital currency infrastructure across borders.
Through Project Ubin+, MAS will collaborate with international partners to explore a broader range of atomic settlement solutions. It is working with the central banks of France and Switzerland and the BIS Innovation Hub to explore the exchange and settlement of wholesale CBDCs with an automated market maker, enabling the exchange and settlement of digital assets to be performed automatically with innovative contract technology.
The third desired outcome is programmable money, which refers to embedding rules within the medium of exchange itself and defining its usage. These rules are retained even when the money is transferred. With programmable money, there is greater assurance that donations reach their intended beneficiaries, for instance.
“There are four options for programmable money: Cryptocurrencies, stablecoins, tokenised bank deposits and CBDCs. Cryptocurrencies are a non-starter; they have performed poorly as a medium of exchange and a store of value. Given its volatility and speculative nature, cryptocurrencies do not hold promise to serve as money in the first place,” says Menon.
Stablecoins are more promising, he adds. They combine the benefits of stability and programmability if they are well-regulated and secure, backed by reserves per MAS’s latest proposed regulations.
Meanwhile, tokenised bank deposits are digital representations of commercial banks’ deposits, while CBDCs marry the advantages of central bank-issued cash with the advantages of the blockchain.
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The platform for MAS’s explorations in programmable money is Project Orchid, which has introduced the concept of purpose-bound money (PBM). It enables senders to programme conditions on a digital Singapore dollar that its recipients may use. “Rather than debate the pros and cons of retail CBDCs, we have taken the approach of asking ourselves what purposes we want to achieve with programmable money and working from there,” says Menon.
Project Orchid released its first report on Oct 31, which identified four promising areas for the application of PBM in Singapore — incorporating PBM into the existing government voucher system; retail vouchers which can be used at specified outlets; government pay-outs to recipients who do not have a bank account; and disbursing grants to training providers automatically when specified conditions are met.
“MAS and the industry will further sharpen our capabilities in programmable money. We will improve the user experience, strengthen security and privacy, and increase accessibility to broader population segments,” says Menon.
The ‘transformative potential’ of asset tokenisation
While cryptocurrencies have been the rage among the media and public, astute industry players know that the real innovation with vast potential is tokenisation, says Menon. “Asset tokenisation has transformative potential, not unlike securitisation 50 years ago,”
For one, it allows high-value financial and tangible economy assets to be fractionalised and exchanged over the internet on a peer-to-peer basis. It also allows assets to be traded securely without intermediaries, enabling decentralised finance (DeFi) where borrowing, lending and trading activities can be performed autonomously through smart contracts.
Through Project Guardian, MAS and the financial industry are laying the structures and protocols that will help harness the benefits of tokenised assets and DeFi while managing their risks, says Menon. He adds that Project Guardian’s first pilot has demonstrated the potential for reducing costs in executing trades.
DBS Bank, JP Morgan and SBI Digital Asset Holdings have been conducting tokenised forex and government bonds transactions. “If we can scale this, it means freeing up costs involved in executing trades through clearing and settlement intermediaries and managing bilateral counterparty trading relationships,” he says.
Project Guardian has launched two new industry pilots to broaden the tokenised assets in play. The first, led by Standard Chartered Bank, is about issuing tokens linked to trade finance, while the second, by HSBC and UOB, involves tokenising wealth management products. These projects strive to increase efficiency in the product value chains, lower issuance and servicing costs and improve transparency and accessibility.
“As you can see from the examples of Project Ubin+, Project Orchid, and Project Guardian, there is much more to the digital asset ecosystem than cryptocurrencies. The real value in the crypto industry comes not from speculating in cryptocurrencies but from tokenising assets and placing them on a distributed ledger for use cases that increase economic efficiency or enhance social inclusion,” says Menon.
The fifth and last desired outcome is trusted sustainability data. Although good data is foundational in driving the green and transition finance plan, the environmental, social and governance (ESG) data acquisition process is often tedious and costly. Access to good data sources is often fragmented, and data verification is nascent.
“Fintech can be a key enabler in addressing these data challenges. We need fintech to do in the sustainability space what it is doing today in the inclusion space. We need green fintech,” says Menon.
To build a green fintech data ecosystem, MAS has launched a collaborative effort with the financial industry called Project Greenprint, which seeks to build digital utilities that streamline the collection, access, and use of climate and sustainability data. It aims to help mobilise capital to sustainable projects, monitor the climate commitments made and measure the impact associated with investments, says Menon. “Through Project Greenprint, we want to make Singapore a launchpad for ESG fintech solutions that will help drive Asia’s and the world’s transition to net zero.”