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MAS, R3 test blockchain in payments

Project Ubin assesses feasibility of inter-bank transactions facilitated by distribution ledger technology

IN November last year, the Monetary Authority of Singapore (MAS) announced that it was partnering R3 - blockchain-inspired technology company and consortium of the world's largest financial institutions - to produce a proof of concept to conduct inter-bank payments facilitated by distributed ledger technology (DLT).

Named Project Ubin, the digital cash-on-ledger project has the participation of Bank of America Merrill Lynch, Credit Suisse, DBS Bank, HSBC, JPMorgan, Mitsubishi UFJ Financial Group, OCBC Bank, Singapore Exchange, United Overseas Bank, and BCS Information Systems.

DLT is a type of database that is spread across multiple sites, countries or institutions. It is decentralised in nature, eliminating the need for an intermediary to process, validate or authenticate transactions.

Each party - an individual, an organisation or a group - is represented by its computer, called a node, on the network. Each node logs all transactions on the network, and nodes work directly with one another to check a new transaction's validity through a process called consensus. Each of these transactions is encrypted and sent to every node on the network to be verified and grouped into timestamped blocks of transactions. Blockchain is one such type of distributed ledger that has gained notoriety as the core technology behind bitcoin.

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Let's say John pays Sally S$20 through a DLT-based solution. A copy of that transaction is sent to all the other nodes on the network and each would verify that its copy of the ledger is the same as the others.

Each transaction has a unique signature, called a hash, that includes a reference to the previous transaction as well as a digital signature from the node initiating the transaction. This hash gives the nodes on the network a common signature with which to validate the transaction.

Nodes on the network, called miners, compete to solve complex algorithms to write batches of valid transactions to a block. This block is a time-stamped group of transactions chained to previous blocks, forming an immutable or tamper-resistant blockchain of historical transaction data.

DLT has seen high traction in the global market with over US$1.4 billion of investments made in the last three years. The technology was made possible by three technology innovations: peer-to-peer networks, public key cryptography, and consensus algorithms.

There are many intrinsic benefits of DLT, which make it a disruptive force across industries. It allows for the disintermediation of processes that once required centralised third parties. For example, since nodes work directly with one another, when John paid Sally the S$20, their transaction took place directly without a third party such as a bank, and was validated by all of the nodes on the network (instead of a centralised bank).

Disintermediation minimises the time taken to clear transactions and the costs associated with transferring assets. Removing third parties can also make networks less susceptible to certain types of cyber-attacks, as there is no central point of failure to be targeted. And loss of one node does not pose a threat to the larger network.

Transactions stored on a distributed ledger use digital signatures, making them tamper-resistant. This can help prevent some types of fraud and ensure the integrity of the data.

Although distributed ledgers can create immediate value for two participants, there is a network effect - so larger networks with more participants create more efficiency. The value of the network depends on the number of participating nodes - the greater the number of people using it, the more valuable the network.

DLT enables Smart Contracts, virtual agreements encoded on the network, that are automatically executed based on logical conditions. Imagine John issuing a Smart Contract with instructions to send Sally S$20 if the stock for Company X hits S$1.20 earnings per share (EPS).

The Oracle - a trusted data feed to a Smart Contract, which may be needed when data is not intrinsically available on the ledger - validates the logical conditions of the Smart Contract. It watches the EPS value and triggers the Smart Contract when the EPS of Company X hits S$1.20, and makes the payment to Sally.

Project Ubin was conceived as an opportunity for Singapore to take a leading role in the research on central bank currency on a distributed ledger, and central bank digital currencies. Phase 1, which ran from Nov 14, 2016, to Dec 23, 2016, served as the foundation to assess the feasibility and implications of DLT, and to identify the elements required for future enhancements.


Project Ubin places a tokenised form of the Singapore Dollar (SGD) on a distributed ledger.To use a physical analogy, the SGD-on-ledger is a specific-use coupon issued on a one-to-one basis in exchange for money. The coupons have a specific usage domain - in our case, for the settlement of interbank debts - but have no value outside of this. You can cash out by exchanging the coupons for money later. Think of these like the coupon booklets at fun fairs - visitors can buy them to spend on games and food within the fairgrounds only.

Project Ubin's Phase 1 model was designed so credit exposures do not arise between participants when payments are transferred. Participants pledge cash into a custody account held at the central bank. MAS then creates an equal value in Digital SGD on the distributed ledger and sends each bank Digital SGD according to the amount they pledged. Once banks receive their Digital SGD transfers from the central bank, they are free to make transfers to each other or back to the central bank.

An appropriate legal structure is required to ensure that the transfer of Digital SGD is equivalent to a full and irreversible transfer of the underlying claim on the central bank's currency. The current iteration of Project Ubin utilises cash custody accounts, and is thus subject to an element of credit risk as the ownership of the cash custody accounts remains with the holder.

During Project Ubin's Phase 1, banks fund their expected payments on a gross basis with payments, so there is virtually no liquidity risk in the distributed ledger.

In the future, it is possible that the distributed ledger could co-exist as a permanent facility alongside a conventional payment platform. In such a world, banks would have to decide on an allocation of liquidity to each system.

The objectives for future phases of Project Ubin include reviewing securities settlement, exploring cross-border payments with other jurisdictions such as Canada and Hong Kong, and studying legal, regulatory and monetary policy implications of digital currencies issued by central banks.

  • The contribution was extracted from Deloitte's Project Ubin report. The report summarises the findings and insights of work done by MAS and R3.
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