MAS to conduct trials for digital Singdollar that support government payouts, vouchers

ALTHOUGH the Monetary Authority of Singapore (MAS) still does not see a compelling case for a retail central bank digital currency (CBDC) in Singapore, it will be conducting trials with smart contracts and digital Singapore dollars that could help make the use of government payouts and digital vouchers more targeted and seamless.

Central to these experiments – conducted with government agencies, banks, and other players – is “purpose-bound money” (PBM), a protocol that specifies conditions upon which an underlying digital currency can be used.

Examples of conditions include expiry dates, specific merchants and product classes, or predetermined denominations.

PBMs are bearer instruments transferable between two parties without intermediaries.

One of these trials is a partnership between DBS and GovTech to disburse government vouchers to selected participants at the upcoming Singapore Fintech Festival. This builds on the government voucher platform RedeemSG, and involves the government working with DBS to issue digital Singdollars in the form of tokenised bank deposits to retail consumers. Each consumer can then use the vouchers at a specified list of merchants via a unique crypto wallet.

Merchants will receive the digital dollars embedded in a “PBM wrapper”. Once the conditions specified by the PBM wrapper are met, the money will be instantly released to the merchant.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

Apart from tokenised bank deposits, PBM protocols can also be “wrapped” onto XSGD stablecoins – which will be the case in a separate trial led by Temasek, Fazz (formerly known as Xfers) and Grab. In this trial, corporate sponsors would work with Fazz to mint and issue the stablecoins “wrapped” with specific terms and conditions. The PBM is uploaded to the blockchain wallet of Singapore Fintech Festival participants during registration, which can be used at designated merchants. When spent, the PBM is “automatically unwrapped” and the underlying XSGD deposited in the merchant’s Grab wallet.

MAS outlined these trials in a report released on Monday (Oct 31), which also marked the completion of an initial phase of Project Orchid, launched in November 2021 in partnership with the private sector to build up competencies necessary to issue a digital Singdollar.

While it deems the case for a retail CBDC in Singapore as “not compelling for now”, the authority said it continues to “develop capabilities to support a retail CBDC should the need arise”.

Its report also highlighted some challenges and friction points that voucher campaigns are confronted with. For example, campaign organisers need to work out a host of implementation details, such as how to disburse the vouchers and reconcile transactions when they are redeemed. Also, voucher schemes today often operate on separate distribution channels, and the process of training staff to handle different vouchers could be onerous.

There are also risks from misappropriation, as well as deviation from the intended purposes of the voucher issuer. For example, with direct payouts to bank accounts or the use of cheques, it is not possible for the issuer to specify that money be spent on approved merchants and not “vices”, MAS said.

Furthermore, scammers have targeted government payouts, such as by submitting fraudulent claims.

The use of PBM could eliminate the need for voucher users to have a bank account, reduce complexity from multiple schemes, and speed up payment processing times and lower business costs, the authority said.

Its programmability feature also allows government agencies and corporates to define conditions for how, where and when the monies should be used. However, MAS noted in its report that programmability is “neither an inherent nor unique feature of a retail CBDC”.

It would also reduce reconciliation efforts. While current voucher campaigns would require multi-step reconciliations involving the campaign organiser, the merchant and the voucher issuer’s bank, the PBM allows real-time settlement and reduces the risk of a reconciliation mismatch.

MAS noted that the PBM protocol adopted should be interoperable across different platforms, wallets and payment rails so that it does not lead to fragmentation in the payment ecosystem. The authority also said it will not consider cryptocurrencies nor commodity-backed or unbacked stablecoins as underlying currencies for PBM.

Two other trials that Project Orchid is piloting include allowing SkillsFuture grants to be automatically released to participating training providers when eligibility conditions are met, as well as testing the use of PBM for Central Provident Fund Board disbursements to recipients without bank accounts.

MAS chief fintech officer Sopnendu Mohanty said the authority’s understanding of the digital Singdollar’s potential uses, and the infrastructure required to support it, has been “sharpened” through practical experimentation with the industry.

“The introduction of e-money provided the ability to store value electronically and carry it with us. Digital currencies go beyond that, allowing money to be programmed and used for specific purposes only… We look forward to collaborating further with industry participants and policymakers in subsequent phases of Project Orchid,” he added.