Connecting global markets, lifting the living standards of society and facilitating financial inclusion in Asean, are the vision and purpose of the Monetary Authority of Singapore (MAS). Add to this the Bank of International Settlement’s “do no harm” mantra, and it is to these ends that the last five Singapore Fintech Festivals (SFF)  have worked towards.

The past SFFs have helped connect a global community of financial institutions and FinTechs to support Singapore’s economy and the wider Asean economy. Financial inclusion remains a work-in-progress against a backdrop of millions in Asean without a bank account. The journey has a lot further to go and SFF2021, whose theme is Web 3.0 this year, continues the task with the latest technology.

In the age of blockchain, AI and machine learning, technology has enabled new ways and means for financial institutions to connect global markets and MAS has been at the forefront of much of the experimentation. MAS has helped co-create industry solutions and cross-border collaborations with several initiatives which were showcased at previous SFFs. These included Business Sans Borders, APIX, SG Findex, COSMIC and Nexus Global Payments. As part of parallel developments in the capital markets, a couple of local banks have also kick-started listing digital assets on digital exchanges.

Meanwhile, the various experimentations by Project Ubin, Project Jasper and Project Dunbar, and offshoots such as MarketNode, Partior and the DBS Digital Exchange (DDEX) can truly revolutionise banking and financial services.

“As we look to harness technology in financial services, it is crucially important to link this back to purpose — how it can help lift society and the economy, and how this ties in with financial inclusion, financial access, sustainability, and infrastructure development,” says Leong Sing Chiong, deputy managing director (markets and development), MAS.

As Leong sees it, MAS plays the role of enabler and facilitator. Business Sans Borders or BSB, developed by MAS and IMDA, is a “meta-hub” or connector of several SME-centric platforms. This in turn helps SMEs seamlessly access a larger ecosystem of buyers, sellers, logistics service providers, financing, and digital solution providers. BSB utilises AI to enable SMEs to discover prices and sales opportunities, access various supply chains, and easily source for and utilise relevant digital and financial solutions.

Asean Financial Innovation Network (AFIN) comprising MAS and five other entities formed the API Exchange (APIX). APIX is a cross-border, open architecture API marketplace and sandbox platform for collaboration between FinTechs and financial institutions where participants can integrate and test solutions with each other via a cloud-based architecture.

“Certain enabling infrastructure needs to be put in place in order for the full potential of that technology to be realised,” Leong says.

Building financial muscle

Interestingly, following Project Ubin and Project Nexus, the organisations and FinTechs at the cutting edge of technology are not Grab, Sea or the neobanks but the traditional banks. And as the banks harness distributed ledger and blockchain to ease pain points in banking to create efficient, seamless and lower cost transactions and products to facilitate financial inclusion, Singapore, the region and the world benefit.

“The financial sector needs to start building muscles for the future of financial services. We have to ask what the future shape of financial services could look like and how do we want to position ourselves for it?” Leong asks.  

Take investment banking and capital markets, which comprise significant portions of non-interest income for the local banks. The banks are now viewing capital markets through the prism of distributed ledger and blockchain. In December 2020, DBS Group Holdings launched DBS Digital Exchange (DDEX) which gives blockchain the opportunity to transform capital markets (see “Blockchain spawns new digital exchanges” on Page 8).

United Overseas Bank (UOB) piloted a perpetual security that is used as additional tier-1 capital (AT1) on Marketnode. The purpose of the pilot, according to UOB spokespersons, is to build end-to-end distributed ledger technologies to enable capital market transactions, starting with fixed income. In addition, UOB has sandboxed and tested transactions with market risk as well.

On Oct 7, UOB and ADDX, a digital securities exchange similar to DDEX, digitised and digitally custodied a sustainability-linked bond launched by Sembcorp Industries. This initiative comes amid a rise in the use of digital securities to enhance the efficiency of bonds and other fixed income instruments.

JP Morgan, which was a partner in several experiments with blockchain in Partior and the various phases of Project Ubin, has a digital exchange of its own, Onyx Digital Assets. Onyx enables the processing, recording and Delivery-vs-Payment (DVP) exchange of digital assets across asset classes. The network provides access to JPM Coin, a stablecoin, which supports the payment leg of Onyx Digital Assets transactions.

Four main trends
As Leong sees it, there are already three observable trends that are emerging. First, the incumbent financial institutions have been raising their game, digitalising their business models and collaborating with FinTechs.

Second, non-financial institution platform providers are also getting into the financial game. “They’re starting to transform the distribution of financial services, influencing how financial services are being delivered to the end customers,” he says. The third trend is Web 3.0, and decentralised finance or DeFi.

See: ESG, blockchain and FinTech unicorns

“In the next five to 10 years, we may see shifts between the different future states. From MAS’s perspective, it is not about placing big bets, such as going all out for Web 3.0 and DeFi. It is making sure that we have the skills and capabilities to operate across the different future states,” Leong suggests.

DeFi is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges or banks to offer traditional financial instruments and instead utilises smart contracts on blockchains. Both DBS and UOB are using DeFi. DBS is using DeFi in its DDEX and Partior initiatives while UOB has used DeFi by piloting a perpetual security on Marketnode and listing a sustainable bond on ADDX.

Regulation could take a front seat and market observers believe this is the immediate market megatrend. Market observers often look to China and the US to divine future trends. In these global giants, the cold wind of regulation on FinTechs and Big Techs is blowing.

“Regulation of all the challengers to traditional banks is the biggest trend. You are seeing that in every country and that will accelerate. Different countries — depending on their individual systems — will deal with regulation differently. That’s the most important trend,” says Harsh Modi, an analyst at JP Morgan, in an earlier interview.

The US Congress, rarely bipartisan, came together in its view that Facebook — which is changing its name to Meta — is a harm to society, following revelations by a whistleblower. The UK Parliament is meeting with the same whistleblower while other Meta employees are coming forward with the company’s allegedly harmful algorithms.

Elsewhere, the Chinese government is curtailing the expansion of its FinTechs such as Ant and Alibaba, and its Big Techs. The curtailing of time spent on video games will impact Tencent, which also owns stakes in WePay and WeBank. In addition to hours spent on video games, the Big Techs turned FinTechs were marketing investment products at a faster pace and a much bigger scale than the regulators could keep up with. These caused market conduct issues and the regulator had to come in albeit belatedly.

“[Lack of] regulation had allowed a lot of the challengers to build their businesses almost with a light touch and the logic was they are not big enough to create systemic risk. If you start putting too much regulation, you stifle innovation,” Modi reasons.

“Regulations will be required for lending and is a must for deposits. My sense is you will have this continuum from FinTechs who ultimately start banking operations and they will have no choice but to get regulated,” Modi adds.

In Singapore, MAS is bringing some of these FinTechs such as Grab, Sea and Ant into the regulatory space by awarding them digital full bank and digital wholesale bank licences.

“We welcome technology and innovation because fundamentally it’s good for growth. But where new players carry out substantive activities which are caught within our regulatory ambit, it is important for these new players to be regulated. Just as incumbent banks need to ramp up their digital capabilities, new digital players need to understand and learn how to operate within the regulatory framework. If you’re offering a banking service, the same prudential requirements apply to you,” Leong points out.

Interoperability key for cross-border transfers
The second megatrend, according to Modi of JP Morgan is the ability to effect cross-border transfers instantaneously, at scale.

The MAS has provided the infrastructure for the implementation of cross-border payments — at scale — through a couple of experiments. Project Ubin and Nexus Global Payments address different markets. Project Ubin focuses on the wholesale and corporate sector which is vast. Cross-border transfers in this market segment amount to more than US$156 trillion ($210 trillion) a year.

Nexus focuses on individual, SME and business transfers across borders using domestic instant payment systems (IPS) such as PayNow. IPS are fast, efficient and done instantaneously, but cross-border transfers between accounts in two countries remain slower and expensive.

In April, Singapore’s PayNow service and Thailand’s domestic IPS, PromptPay were linked in a world first, allowing customers of participating banks in Singapore and Thailand to send money to each other using just the telephone number of the recipient. Previously, it cost a minimum of $15 for a cross-border transaction between Singapore and Thailand. Now it is just $3.   

“Thailand was a great partner because they have a ready fast payments system that enabled MAS and Bank of Thailand to connect our PayNow and PromptPay systems more expeditiously,” Leong observes. “We are looking to establish fast payments linkages with India and Malaysia next,” he indicates.

“Immediately after Singapore’s PayNow was connected to Thailand’s PromptPay, we saw real value,” observes Sopnendu Mohanty, chief fintech officer, MAS. Sums as low as $300 can be transferred cheaply, he says. “Migrant workers are using this more and more to send money back home,” Mohanty adds.  

The next step is to effect instant transfers between PayNow and India’s Unified Payments Interface (UPI) by next July. When implemented, fund transfers can be made from India to Singapore using mobile phone numbers. By 4Q2022, the first phase of the PayNow-DuitNow linkage with Malaysia will be launched. This will allow customers of participating financial institutions to make real-time fund transfers between Singapore and Malaysia using just a mobile number. Both India and Malaysia have significant numbers of their nationals working in Singapore, who remit money home.

“A big part of being a financial centre is serving the region, connecting global markets where cross-border interoperability is paramount. There is no point being No 1 in technology when you can’t get it to operate cross-border,” Leong says.

Cross-border payments are inherently more complex than domestic payments; they require additional steps, such as currency conversion and compliance checks to prevent the financing of terrorism and money laundering. IPS from different countries also speak different languages when they share data and payment instructions.

“Longer term, rather than proliferating bilateral linkages, it’s important to think in terms of building a gateway to facilitate multilateral payment linkages. That’s what we are currently doing with the BIS Innovation Hub Singapore Centre, through Project Nexus,” Leong says.

Nexus overcomes the complexity of linking IPS on a country-to-country basis by providing a standardised way for domestic payment systems to speak to each other.  This enables “interoperability” between payment systems.

The power to revolutionise  
MAS embarked on Project Ubin with a consortium of banks and large corporations in 2016. The initial purpose was to experiment on a digital SGD created on the blockchain for interbank payments. The final phase showed that a central bank digital currency (CBDC) can facilitate cross-border payments. Project Dunbar is the next phase after the conclusion of Project Ubin. Dunbar is experimenting with multi CBDCs on an interoperable platform with the participation of four central banks.

To recap, Project Ubin started with the local CBDC to experiment on interbank payments using blockchain. In Phase 2, Project Ubin tested three different models of decentralised interbank payment and settlements with liquidity savings mechanisms, including for specific Real Time Gross Settlement (RTGS) functionalities.

In Phase 3 in 2018, MAS and Singapore Exchange (SGX) collaborated to develop delivery-versus-payment (DvP) capabilities for the settlement of tokenised assets across different blockchain platforms. Phase 3 experimented on financial institutions and corporate investors carrying out simultaneous exchange and final settlement of tokenised digital currencies and securities assets successfully. The project demonstrated settlement finality, interledger interoperability and investor protection. Since then, DDEX and Onyx were launched in December 2020 and Marketnode in January, with all three using blockchain technology.

In Phase 4, Project Jasper by the Bank of Canada (BoC) and Project Ubin, announced in 2019 a successful experiment on cross-border and cross-currency payments using CBDCs.

Phase 5 proved the viability of multi-currency settlement on a common platform, which enables the issuance and distribution of digital currencies on a common network. Phase 5 marked the end of Project Ubin and the genesis of Project Dunbar.

“Project Dunbar aims to develop a multi-CBDC (m-CBDC) settlement platform, with the involvement of other central banks,” Leong says. This allows financial institutions to transact directly with each other in digital currencies issued by participating central banks. Four central banks are currently participating in Project Dunbar — Reserve Bank of Australia, Bank Negara Malaysia, South Africa Reserve bank and MAS. “More on this will be presented at the upcoming Singapore FinTech Festival,” Leong promises.

“In a future scenario where CBDCs become more mainstream, we want to be able to support an m-CBDC platform that ensures that our financial centre continues to be interconnected,” Leong says.

Partior is the commercialisation of Project Ubin’s findings. “Partior”, which means “share and distribute” in Latin, is a blockchain technology provider for payments clearing and settlement. It was launched on Oct 26 and has begun its first pilot with participating banks, achieving end-to-end settlements in SGD and USD of less than 120 seconds.

Partior is important because it uses a blockchain-based peer-to-peer Interbank Clearing and Settlement network, and real-time settlement of wholesale banking payments in multiple currencies.  

If the partners of Partior develop a model that is superior to the current traditional correspondent banking model, which has a few pain points including multiple validations on payment details by banks, and costly and onerous post-transaction exception handling and reconciliation activities, then it will be truly revolutionary.

“Today’s correspondent banking model involves several layers of checks, transactions, and intermediaries. Think of a platform that can cut through these different layers of intermediaries and transactions, and cross-border interbank payments can be carried out far more efficiently,” Leong indicates.

SFF2021: Blockchain comes into its own  
With the local and global traditional banks at the forefront of — possibly — revolutionary change, what can the new digital banks bring to the financial landscape?

“Our local banks have been implementing their digital banking strategies even before we introduced new digital banking licences.  With the new digital banks coming in, the local banks will have to ensure that their value proposition to customers remains strong,” Leong says.  

The general view is that competition spurs greater innovation, diversity and choice. Digitalisation enhances the efficiency, cost and accessibility of financial services. Overall, this improves customer outcomes. As part of the framework, the new digital-only banks are discouraged from engaging in value-destroying competition such as not being encouraged to compete on price.  

“Overall, a well-balanced regulatory framework enables us to harness the benefits of technology, give customers choice, improve customer outcomes and achieve sustainable growth,” Leong says.

The theme for this year’s SFF2021 is Web 3.0. Over three days, SFF2021 will bring together global experts to discuss how Web 3.0 and key technological advances will power the future of financial services.

The conference will examine three key structural drivers that could reshape financial services in the coming decade which traditional banks are implementing in their products and services. These are: Reconfiguration of financial products and services delivery through Embedded Finance (EmFi), DeFi and digital currencies; integration of ESG into the core design of financial services’; pervasive adoption of foundational digital infrastructure (Digital Identity, Trusted Data Exchange, Interoperable Payment Systems and Consent Systems)

Embedded finance or EmFi refers to non-financial companies that have value propositions that are significantly enhanced or even transformed through the associated financial products and services embedded within. These include entities such as GrabPay, WePay, and AliPay. Eventually, some of these EmFi entities and FinTechs encroach on the regulated space and end up being regulated.

“We want to create a nurturing environment for FinTechs. Over time, some may become unicorns and may contribute more significantly to our financial system. It reflects our belief as a central bank and regulator, that financial services, enabled by technology, can better uplift society, improve people’s lives, and contribute to the betterment of the global financial system,” Leong states.

Above all, the SFF, at its core, is all about being a global knowledge platform. It stands for inclusion and it stands for improving people’s lives.

The participants are all crazily passionate about technology. But more than that, they have a deep conviction about using technology to solve problems, and making an impact. “They are hungry to learn, but they’re also happy to contribute to learning. And this is what makes for a truly global community,” Leong says.