Ravi Menon, Managing Director, Financial Authority of Singapore: The Way forward for Cash, Finance, and the Web, Enterprise Information

SINGAPORE, Nov. 10, 2021 /PRNewswire/ — Ravi Menon, Managing Director, Financial Authority of Singapore (MAS), delivered a speech “The Way forward for Cash, Finance, and the Web” at Singapore FinTech Pageant 2021 on 9 November 2021:

Good morning everybody. When you’ve simply joined us, welcome to Day Two of the Singapore FinTech Pageant. I need to discuss the way forward for Cash, Finance, and the Web. However first, just a little historical past.

JUNO, PLUTUS, MERCURY

Cash as a medium of trade and retailer of worth has been round for millennia. It’s named after the Roman goddess of cash, Juno, who carried the title Moneta. Rome’s forex was first minted at her temple within the third century B.C. Cash has come a great distance since: from bullion cash, to paper notes backed by the gold commonplace, to fiat forex backed by central banks, and now digital cash.

Finance or the intermediation of financial savings and investments existed in lots of historical civilisations. The Roman god of wealth, Plutus, comes closest to being the presiding deity for finance. Finance too has come a great distance: overseas trade markets and payments of trade emerged within the Center Ages, earlier than fashionable finance took form with fractional reserve banking, inventory markets, mutual funds, and insurance coverage.

The Web is more moderen. Its official birthday is 1 January 1983, although the idea itself – particularly a pc community which permits info sharing amongst customers – goes again to the US defence trade within the Sixties. In fact, the traditional Romans didn’t have a god for the Web, however maybe Mercury – the god of commerce and communications – comes closest.

The way forward for Juno, Plutus, and Mercury is more and more turning into entwined, largely attributable to expertise. Let’s try what Juno, Plutus, and Mercury have been as much as these days.

JUNO AND INNOVATIONS IN MONEY

Juno has been busy up to now decade with new types of cash rising. However earlier than we will make sense of latest cash, allow us to refresh our understanding of present cash.

At this time, we maintain cash in two types: bodily money within the type of notes and cash; and digital cash within the type of deposits with industrial banks.

Most of our cash is privately created by industrial banks and is in digital kind. Financial institution deposits account for 92% of the cash provide in Singapore and are the premise for all digital funds by households and companies, utilizing debit and bank cards, e-wallets, and account-to-account financial institution transfers. The industrial banks in flip place reserves with the central financial institution to settle inter-bank transactions arising from these digital funds.

Confidence in cash is anchored by the central financial institution. Central banks conduct financial coverage to make sure low and steady inflation, which safeguards the buying energy of our cash. As well as, by regulating industrial banks and appearing as lenders of final resort throughout disaster durations, central banks underpin the general soundness of the banking system.

The credibility of cash is underpinned by this two-tier financial construction the place industrial banks create cash and central banks protect its worth.

Three new developments have emerged over the previous decade that basically problem this two-tier financial construction: cryptocurrencies; stablecoins; and central financial institution digital currencies.

Cryptocurrencies

A cryptocurrency is a digital token issued and managed inside a decentralised protocol, equivalent to a distributed ledger or blockchain. It represents an asset in digital kind that may be transferred or traded on the protocol.

The phrase “crypto” comes from the Greek phrase kryptos – which suggests “secret”. Certainly, the anonymity of crypto tokens has sadly made them nicely fitted to facilitating illicit transactions, together with cash laundering. Cryptocurrencies have additionally helped to gas ransomware – one of many quickest rising crimes in our on-line world.

Are cryptocurrencies cash? Up to now, the reply should be no. Cryptocurrencies have carried out poorly as a medium of trade, a retailer of worth, or a unit of account. MAS prefers to name them by their extra correct technical identify: crypto tokens. We outline tokens which are used for funds functions as digital cost tokens, and entities which give providers associated to such tokens in Singapore are topic to licensing and supervision by MAS, primarily for cash laundering and terrorism financing dangers.

MAS frowns on cryptocurrencies or tokens as an funding asset for retail traders. The costs of crypto tokens should not anchored on any financial fundamentals and are topic to sharp speculative swings. Traders in these tokens are liable to struggling important losses.

However MAS can also be of the view that blockchains and crypto tokens can convey many potential advantages. The blockchain is fitted to functions the place you will need to know the historical past of possession and switch of worth however there isn’t a trusted central get together or reliance on a central get together is simply too expensive. A probably sturdy use case of crypto tokens is to facilitate cheaper and sooner cross-border funds and commerce finance.

However to be considered cash, crypto tokens must be extra steady in worth and have credible backing. Therefore, the emergence of stablecoins.

Stablecoins

Stablecoins search to mix the credibility of fiat currencies with some great benefits of the blockchain. The extra prevalent stablecoins are pegged to the US Greenback, promise to redeem at par, and declare to be backed by reserves.

Will Juno settle for stablecoins as cash? An encouraging signal is that stablecoins are starting to seek out acceptance exterior of the crypto ecosystem. Some expertise companies have built-in well-liked stablecoins into their cost providers. Visa and Mastercard each permit transactions to be settled utilizing USD Coin.

Or are stablecoins extra akin to the Chimaera, a monstrous fire-breathing hybrid creature in Greek mythology? Stablecoin issuers appear to be banks after they take cash and provide to return it on demand, but when they don’t intermediate credit score, would financial institution regulation be acceptable for them? They might seem to be cash market funds, however are capital market guidelines adequate to make sure that reserve backing is absolutely there behind these stablecoins? We do not know.

Stablecoins can probably pose monetary stability dangers. For instance, if there’s a run on a big issuer of a stablecoin, there could possibly be contagion dangers to monetary markets ought to the reserve belongings be quickly liquidated.

MAS has been considering deeply about these points, at the same time as we license crypto token gamers and encourage experimentation on this house. We’ve got to strategy the Chimaera with versatile regulatory chains which is able to permit us to harness its potential advantages however might be tightened shortly if the beast threatens to breathe hearth.

Central Financial institution Digital Currencies

The historical past of privately issued cash with out public backing has not been inspiring. Will individuals put their religion in crypto tokens or stablecoins that aren’t backed by a central financial institution devoted to defending its worth? On the similar time, is there not a approach to harness the potential advantages of distributed ledgers via some type of digital forex?

Therefore, the worldwide surge in curiosity in central financial institution digital currencies, or CBDCs. A CBDC is the direct legal responsibility of and cost instrument issued by the central financial institution. 

What’s MAS’ stance in direction of CBDCs? To reply that, let me distinguish between two kinds of CBDCs:

• Wholesale CBDCs – that are restricted to make use of throughout the banking system and are akin to the reserves industrial banks place with the central financial institution in the present day.
• Retail CBDCs – that are issued by the central financial institution to most people; they might be the digital equal of in the present day’s notes and cash.

MAS sees a lot promise in wholesale CBDCs. They’ve the potential to radically remodel cross-border funds. However since wholesale CBDCs by definition should not meant for use as forex by most people, they aren’t cash. So let me deal with retail CBDCs for now.

Retail CBDCs are primarily digital variations of money. Curiosity in retail CBDCs has risen sharply within the final two years. In accordance with a survey by the Financial institution for Worldwide Settlements, six out of ten central banks are experimenting with retail CBDCs.

MAS has been rigorously learning the financial deserves and implications of a retail CBDC within the Singapore context. We’ve got simply launched an in depth paper outlining our present considering.

There are three potential causes for MAS to challenge to the general public a digital Singapore greenback.

First, a digital Singapore greenback would make obtainable the advantages of utilizing central financial institution cash within the rising world of on-line transactions. Like notes and cash, a digital Singapore greenback issued by MAS can be secure, broadly accepted, and bear the authority of the state. Money is the final word risk-free asset, and means of ultimate settlement. The speedy displacement of money in favour of digital funds primarily based on financial institution deposits or e-wallets is among the chief motivations for international locations like Sweden and China to contemplate retail CBDCs.

Second, a digital Singapore greenback may probably foster an environment friendly and inclusive cost ecosystem. It may make it simpler for smaller companies to construct new funds and associated digital providers. Begin-ups, for example, can combine with the retail CBDC and never must construct their very own e-money and person base. This monetary inclusion rationale has been a key motivation for international locations like Cambodia and the Bahamas to undertake retail CBDCs.

Third, a digital Singapore greenback may mitigate towards the encroachment of privately issued stablecoins or overseas CBDCs in Singapore’s funds panorama. As these international digital currencies enter our market and turn out to be broadly accessible sooner or later, they might probably displace using the Singapore greenback in home retail transactions. A digital Singapore greenback issued by MAS that’s congruent with the wants of a digitalised economic system may go some approach to mitigate this danger.

However issuing a retail CBDC shouldn’t be an easy resolution.

Retail CBDCs can probably pose important dangers to financial and monetary stability. There could possibly be some disintermediation of the banks, significantly throughout stress durations if individuals can change deposits into risk-free central financial institution cash on the “click on of a button”. Even in regular instances, if individuals held a good portion of their deposits within the type of digital Singapore {dollars} with MAS, it could significantly cut back our banks’ capability to make loans. However we will possible handle these dangers by designing the retail CBDC with smart safeguards, equivalent to inventory and movement caps on the quantity of digital Singapore {dollars} that anybody is allowed to position with MAS.

On steadiness, the case for a retail CBDC in Singapore shouldn’t be pressing. 

• For a topic that has attracted a lot consideration, there are neither sturdy causes for or towards a retail CBDC in Singapore. Why do I say that?
• Bodily money is more likely to be with us for fairly a while extra and so the want for a digital model of money is moot at this level.
• The monetary inclusion advantages of a digital Singapore greenback should not compelling. A excessive proportion of Singaporeans have financial institution accounts and digital funds in Singapore are pervasive, extremely environment friendly, and aggressive.
• Potential forex substitution by overseas digital currencies is a distant tail danger at this level.

The issuance of a retail CBDC is finally a socio-economic moderately than a financial consideration. Transferring to a totally cashless society with all cash within the type of financial institution deposits won’t make a big distinction to the conduct of financial coverage. The query is whether or not the general public is snug with holding solely financial institution deposits and whether or not there may be public demand for a state-issued forex that’s as secure as money however in digital kind. So for now, there isn’t a sturdy case for a retail CBDC.

On the similar time, MAS recognises there could possibly be potential advantages supplied by modern retail CBDC options sooner or later.

MAS is subsequently embarking on Challenge Orchid – to construct the expertise infrastructure and technical competencies essential to challenge a digital Singapore greenback ought to Singapore determine to take action in future.

MAS will pursue Challenge Orchid in shut partnership with the non-public sector, constructing on the wealthy findings from the International CBDC Problem that MAS launched earlier this yr. We’ve got obtained greater than 300 proposals from over 50 international locations in response to the issue statements we posed. This afternoon, the finalists of the International CBDC Problem will exhibit their options to a global judging panel.

PLUTUS AND THE ERA OF DIGITAL FINANCE

To not be outdone, Plutus, the god of finance, has not been idle. Finance is turning into more and more digitalised, with new kinds of monetary service suppliers, enterprise fashions, and collaborations. I’ll spotlight two developments which are shaping the way forward for Finance:

• the search for real-time cross-border funds; and
• the rise of collaborative information platforms.

Actual-Time Cross-Border Funds and Settlements

5 years in the past, MAS started experimenting with blockchain expertise and wholesale CBDCs via Challenge Ubin, to make cross-border funds cheaper, sooner, and extra environment friendly.

The success of Challenge Ubin has impressed Partior – a blockchain-based interbank clearing and settlement community collectively established by DBS Financial institution, JP Morgan, and Temasek. It permits banks to settle cross-border funds in numerous currencies in actual time, utilizing both industrial financial institution digital cash or wholesale CBDCs.

Challenge Ubin has additionally served as a basis for Challenge Dunbar – a blueprint for a multi-currency settlement platform that operates throughout international locations utilizing wholesale CBDCs. Challenge Dunbar is a partnership amongst MAS, the Financial institution for Worldwide Settlements Innovation Hub, Reserve Financial institution of Australia, Financial institution Negara Malaysia, and South Africa Reserve Financial institution. Commerical banks will be capable to transact straight with each other utilizing the wholesale CBDCs of their respective international locations, eliminating the necessity for intermediaries and lowering the time and price of cross-border transactions, if Challenge Dunbar succeeds.

Not all cross-border cost enhancements want CBDCs or the blockchain. Singapore’s real-time retail cost system – PayNow – is constructing direct linkages with different international locations’ cost methods. PayNow has already linked with Thailand’s PromptPay, enabling people within the two international locations to switch funds straight to 1 one other’s financial institution accounts utilizing simply the payee’s cell phone quantity. PayNow plans to hyperlink up with Malaysia’s DuitNow and India’s Unified Cost Interface subsequent yr. However establishing bilateral cost linkages one jurisdiction at a time is difficult work. We want a multilateral answer.

MAS is subsequently working with the BIS Innovation Hub on Challenge Nexus –  a standard blueprint for the way international locations can absolutely combine their real-time cost methods onto a single cross-border community. If it really works, it’s going to make PayNow globally interoperable a lot sooner.

Collaborative Knowledge Platforms

Trade collaboration via expertise and information sharing platforms will turn out to be an essential driver of innovation in the way forward for Finance.  MAS has been selling such collaboration for the reason that starting of our FinTech journey in 2015.  Let me spotlight three latest initiatives.

First, ChekFin, a decentralised credentials platform to assist partnerships between monetary establishments and FinTech companies. Monetary establishments searching for collaboration with FinTech companies typically have issue ascertaining their reliability and capability. ChekFin will allow monetary establishments to acquire verified credentials of FinTech companies, equivalent to enterprise references, awards they’ve obtained, and investor funding information. These credentials are immutably saved on a blockchain as a golden supply of data. FinTech companies determine who they need to share their non-public credentials with. ChekFin is a partnership among the many ASEAN Monetary Innovation Community, BCG FinTech Management Tower, and Affinidi, with MAS as a founding accomplice. Ten international monetary establishments have already signed up for ChekFin, and the platform can be launched subsequent month.

Second, Challenge Greenprint – a expertise and information platform to assist the inexperienced finance ecosystem. MAS and the trade will collectively develop 4 interoperable platforms below Challenge Greenprint:

• a Widespread Disclosure Portal for monetary establishments and corporates to make dependable and comparable ESG disclosures;
• a Knowledge Orchestrator to combination ESG information from totally different sectoral platforms and trusted information sources;
• an ESG Registry to file and keep ESG certifications on a distributed ledger; and
• the Greenprint Market to attach inexperienced expertise suppliers with traders and corporates.

Third, COSMIC – a platform for monetary establishments to collaborate utilizing information analytics to fight the dangers of cash laundering. This platform for info sharing and evaluation will generate a wealthy and dynamic information pool of high-risk actors and their webs of anomalous actions. COSMIC will allow seamless information trade with monetary establishments’ personal information analytics methods in order that they’ll successfully establish and disrupt felony networks sprawling throughout a number of monetary establishments. MAS has been co-creating COSMIC with six main banks in Singapore and the platform is scheduled to go-live in 2023. In its preliminary part, COSMIC will deal with dangers associated to the abuse of shell firms, illicit misuse of commerce finance, and evasion of United Nations sanctions.

However the way forward for Finance can’t be divined with out contemplating the way forward for the Web. Plutus can be crossing paths very often with Mercury.

MERCURY AND THE ADVENT OF WEB 3.0

This new age of the Web has been dubbed Internet 3.0. A great way to start out making sense of Internet 3.0 is thru refreshing our understanding of Internet 1.0 and a pair of.0.

• Internet 1.0 is the “readable” Web, centred on entry to info and the place most customers had been customers of content material. It’s about internet pages, emails, and chatrooms.
• Internet 2.0 is the “interactive” Web, with wealthy exchanges of data and user-generated content material and collaboration. Key options are running a blog, tagging, and social media.
• Internet 3.0 is the “private” Web, empowering end-users via functions that permit the decentralised sharing of data. The important thing enablers of this new paradigm are good contracts and tokenised belongings.

Good Contracts and Tokenisation

Good contracts are laptop programmes that robotically execute actions in line with the phrases of the contract. Tokenised belongings, applied as good contracts, are digital representations of real-world belongings. They could possibly be bodily belongings equivalent to commodities and actual property; or intangible property equivalent to monetary belongings, patents, or digital music and artwork. As soon as tokenised, rights and possession of those belongings could possibly be transferred seamlessly, bettering liquidity and effectivity. This has the potential to considerably improve financial alternative and inclusion.

Good contracts and tokenisation are already getting used to boost the market infrastructure for monetary belongings in Singapore.

• Olam Worldwide issued final yr a digital bond on SGX’s digital issuance, depository and servicing platform.
• SembCorp via UOB Financial institution issued a digital bond this yr on the ADDX digital securities platform, eliminating handbook processes in custody and post-trade administration via good contracts on a blockchain.
• Digital bonds have many benefits:
• they might be issued in smaller denominations;
• main issuance settlement instances might be shortened; and
• coupon and redemption funds might be automated.

Decentralised Finance

Internet 3.0 can probably disrupt the world of Finance. That is the phenomenon of decentralised finance or DeFi, the place end-users carry out monetary transactions straight with each other utilizing good contracts, with out the necessity for monetary intermediaries. It’s a basically totally different strategy to monetary infrastructure, in comparison with the centralised methods of in the present day.

DeFi is already a rising actuality, albeit nascent. Crypto tokens are purchased and offered on decentralised exchanges, with out the necessity for intermediaries to clear and file the commerce. One other instance is borrowing and lending, the place anybody can lend and borrow on to others through a liquidity pool managed by a wise contract.

DeFi has the potential to yield important financial and social advantages. By changing intermediaries and central counterparties, these open crypto networks can probably cut back the price of finance. When companies of all sizes, and even people, can straight entry monetary infrastructure, it may imply extra competitors and inclusion.

However DeFi shouldn’t be with out dangers and vulnerabilities. These open crypto networks should not on the stage the place they’ll meet the excessive requirements of governance, safety, and resilience which are required of vital infrastructure by central banks and regulators. There have been some unsavoury practices on this house: “flash loans” getting used to control costs available in the market; bots getting used to front-run retail trades. With decentralised governance, who do you strategy to recuperate misplaced accounts or reverse unintentional transfers of cash?

Present regulatory frameworks will must be tailored if DeFi turns into a actuality. Rules crafted to handle dangers in a world of intermediaries are ill-suited the place intermediaries are changed by good contracts. Enforcement is more difficult when management or governance is dispersed throughout the blockchain.

MAS will comply with Internet 3.0 and DeFi developments intently, deepen our understanding, and search to harness the advantages whereas managing the dangers. We are going to work with each the monetary trade and the broader ecosystem to seek out the correct steadiness.  It will likely be a studying journey.

Regulatory Sandbox Plus

And what higher approach to study than by experimenting? We are going to facilitate experiments for blockchain and DeFi innovation via regulatory sandboxes. 5 years in the past, MAS launched the FinTech Regulatory Sandbox, to assist stay experimentation of expertise improvements. Two years in the past, we enhanced it with Sandbox Categorical, so that companies can start market testing of low danger actions in a pre-defined atmosphere sooner.

MAS will improve its regulatory sandbox with Sandbox Plus. We are going to broaden participation to early adopters of expertise, along with first movers. We will present monetary grants to first movers of innovation, to assist their expertise, human capital, and market improvement. We will enrol eligible candidates in Deal Fridays, a programme collectively organised by MAS and Enterprise Singapore, the place they may achieve entry to the investor neighborhood.

Conclusion

The way forward for Cash, Finance, and the Web can have far-reaching results on economies and societies. It’s important that public authorities and the monetary and expertise communities work collectively to form that future, in order that Cash, Finance, and the Web might be forces for good, serving to to develop financial alternative, improve social inclusion, foster stability, and defend our planet. Finally, Cash, Finance and the Web should serve the individuals who use them.

MAS is dedicated to partnering you on this thrilling journey. Have an ideal FinTech Pageant!

PR Newswire is the Supporting Media Companion of Singapore FinTech Pageant 2021.