MAS tests central bank digital currencies with global counterparts

THE Monetary Authority of Singapore (MAS) and banks in Singapore have experimented with tokenised Singapore dollars in Project Ubin, initially for interbank payments and subsequently in cross border transfers.

In China, over 100,000 people have downloaded a mobile-phone app enabling them to spend small government handouts of digital cash, or "e-yuan". The European Central Bank had said the digital euro could see the light by 2025, while in America, the Fed is also looking into the idea of a central bank digital currency (CBDC).

A survey by the Bank for International Settlements (BIS) finds a large majority of central banks researching or experimenting with CBDCs, which are digital versions of cash issued by their respective central banks.

Riding on this wave, the MAS is working with the central banks in Australia, Malaysia and South Africa, as well as the BIS' innovation hub to develop shared platforms for cross-border transactions using multiple CBDCs, allowing financial institutions to transact directly with each other in digital currencies. Dubbed Project Dunbar, the initiative will also examine programmability via smart contracts and whether such an approach reduces settlement risks.

Currently, there is a reliance on an intricate network of correspondent banks coordinating across different time zones and currencies to enable cross-border settlement of currencies. A single network, if realised, would enable instantaneous, real-time settlement of cross-border payment. Such a platform could enable direct transactions with different currencies, improving foreign-exchange liquidity and ultimately cheaper payments, the MAS said.

Nevertheless, the authority acknowledged that challenges exist. For one, how various parties can collaborate on a shared platform without compromising monetary sovereignty and privacy amongst other considerations is one aspect that should be looked into.

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"Security and the lack of convergence in standards also feature high in the list of challenges. The systemic impact of potentially displacing the corresponding banking system has yet to be considered fully. Paradoxically, the use of new technologies may create a new class of underbanked or unbanked individuals as well," it said.

To encourage innovative retail CBDC solutions, the MAS had earlier this year launched a global competition, in which the 15 finalists are in the midst of an accelerator programme.

The challenge sought market-ready solutions that can address 12 problem statements centred on CBDC instruments, distribution, and infrastructure.

One such solution was Liberty, designed by Standard Chartered Bank, SC Ventures and Singapore-based fintech Shareable Assets, which seeks to open up retail access to government bond markets.

"Government bonds are regarded as the safest asset for retail investors. Yet, in most jurisdictions, it is inaccessible by the average citizens," said project lead Aaron Gwak, who is also Standard Chartered's head of capital markets in Asean.

This is due to high minimum ticket sizes, processing costs, and the requirement for a banker or broker, which automatically excludes the unbanked population.

"Our solution proposed to the global CBDC challenge involves using Liberty as the catalyst for retail CBDC adoption in any jurisdiction by encouraging citizens to purchase retail bonds denominated in CBDC in small affordable clips," he said.

Another finalist is Tokyo-founded, Swiss-domiciled tech company Soramitsu, which pitched a means of using payments data to help banks layer credit and other services on top of CBDCs.

As part of this year's Singapore FinTech Festival, the 15 finalists will present their innovations and the top three solutions will win S$50,000 in prize money each. The judges include

MAS chief fintech officer Sopnendu Mohanty, BIS Innovation Hub's Singapore centre head Andrew McCormack, the World Bank's lead for payments and market infrastructures Harish Natarajan, and representatives from banks and other global development institutions.

The finalists will also be able to apply for grants under the MAS's financial sector technology and innovation proof-of-concept scheme via a "fast track".

For all our coverage of the Singapore FinTech Festival 2021, go to bt.sg/sff2021.