MAS neutral to a digital Singdollar for now, but prepping for future potential

Kelly Ng

Published Tue, Nov 9, 2021 · 10:00 AM

THERE are presently neither strong reasons for or against a retail central bank digital currency (CBDC) in Singapore, Monetary Authority of Singapore (MAS) chief Ravi Menon said on Tuesday (Nov 9), even as he noted that interest in these digital versions of cash has "risen sharply" in the last 2 years.

Still, the MAS will work with industry partners to equip itself with competencies to issue a digital Singapore dollar, should it decide to do so in the future.

While a digital Singdollar backed by the central bank could be beneficial in a growing world of online transactions, the case for it is "not urgent", said Menon, who was speaking at the second day of the annual Singapore Fintech Festival.

The need for a digital version of cash is moot at this point, since physical cash is likely to be with us for some time, he explained.

The financial inclusion benefits of a digital Singdollar are also not compelling as they may be in other economies, because a high proportion of Singaporeans have bank accounts and electronic payments in Singapore are pervasive, efficient and competitive.

Finally, while some are mulling retail CBDCs to mitigate against the threat of displacement by foreign digital currencies, this is "for now a remote tail risk" in Singapore, Menon said.

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He also noted that retail CBDCs could pose "significant risks" to monetary and financial stability. There could also be disintermediation of the banks, especially during stress periods, if people were able to switch deposits into risk-free central bank money.

"The issuance of a retail CBDC is ultimately a socioeconomic rather than a monetary consideration. Moving to a fully cashless society with all money in the form of bank deposits will not make a significant difference to the conduct of monetary policy," he said.

"So for now, there's no strong case for retail CBDC. But at the same time, MAS recognises that there could be potential benefits offered by innovative retail CBDC solutions in the future."

The authority is thus launching Project Orchid to build up the tech infrastructure and competencies necessary to issue a digital Singdollar, Menon said.

This will be done in partnership with the private sector, building on findings from the global CBDC challenge it launched earlier this year.

That said, the MAS sees promise in wholesale CBDCs - which only involve the participation of financial institutions and not meant to be used as currency by the general public - in "radically transforming" cross-border payments, Menon said. It has already been engaging in projects on wholesale CBDC solutions, such as Project Ubin, which has since inspired Partior, a blockchain-based interbank clearing and settlement network jointly established by DBS, JPMorgan and Temasek.

In his speech, Menon cited cryptocurrencies and stablecoins as the other 2 recent developments that have challenged the 2-tier monetary system, but raised doubts about each of them. Cryptocurrencies have been used to facilitate illicit transactions, including money laundering, and have performed poorly as a medium of exchange and store of value, he said.

"MAS frowns on cryptocurrencies, or tokens, as an investment asset for retail investors. The price of crypto tokens is not anchored on any economic fundamentals and is subject to sharp, speculative swings. Investors in these tokens are at risk of suffering significant losses," Menon warned.

As for stablecoins, there is uncertainty as to whether existing capital market rules are sufficient to ensure reserve backing. Stablecoins may also pose risks to financial stability. For instance, if there is a run on a significant issuer of a stablecoin, there could be contagion risks to financial markets, should its reserve assets be rapidly liquidated.

All that said, MAS sees the benefits that blockchain technology and crypto tokens can bring, such as facilitating cheaper and faster cross-border payments and trade finance, Menon said.

Decentralised finance, or DeFi, is another trend that MAS is watching closely in this new age of the Internet, often dubbed Web 3.0. Menon described Web 3.0 as the "personal Internet", where information is decentralised and shared, through various applications.

Here, end users can perform financial transactions directly with one another using smart contracts - computer programs that automatically execute actions according to the terms of the contract - without the need for financial intermediaries.

MAS is widening its existing FinTech Regulatory Sandbox framework with Sandbox Plus, which will broaden participation to early adopters of technology innovation. This enhanced framework will provide financial grants to first movers of tech innovation to support technology, human capital and market developments. Eligible participants will also get access to Deal Fridays, a platform to connect with the investor community.

Sandbox Plus will take effect on Jan 1, 2022.

DeFi applications can "substantially enhance economic opportunity and economic inclusion", Menon said.

But they are not without risks.

"These open crypto networks are not at this stage where they can meet the highest standards of governance, security and resilience that are required by central banks and regulators. And there have already been unsavory practices in this space (such as) flash loans being used to manipulate prices in the market (and) bots being used to front run retail trades," he said.

There are also questions of what regulations and enforcement processes would be appropriate in a world where intermediaries are replaced by smart contracts.

"Who do you approach to recover lost accounts or reverse accidental transfers of money? Existing regulatory frameworks will need to be adapted for application if DeFi becomes a reality," Menon said.

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