CBDCs, DeFi, ESG: MAS’ managing director Ravi Menon shares S’pore’s fintech plans and projects

As part of Singapore Fintech Festival 2022, Ravi Menon, Managing Director of Monetary Authority of Singapore (MAS) talked today (November 3) about the five key outcomes Singapore hopes to achieve through collaborative fintech projects.

In particular, these projects work towards achieving instant remittance, atomic settlement, programmable money, tokenised assets, and producing trusted sustainability data.

He likened the project outcomes to the five fundamental elements that function as cosmic agents of change in Chinese philosophy — water (instant remittance), metal (atomic settlement), fire (programmable money), wood (tokenised assets) and earth (trusted sustainability data).

Building connectivity from ASEAN to the rest of the world

In his opening address, Ravi Menon expanded on Minister Lawrence Wong’s opening address yesterday on the potential tech has to improve Singapore’s payment connectivity with other countries.

Real-time payment systems have revolutionised domestic payment flows in almost every country.

In Singapore, real-time transfers can be done with just mobile numbers or unique identity numbers, 24/7 through PayNow. Other countries have also instilled similar systems, such as Malaysia’s DuitNow, and Thailand’s PromptPay.

However, the world still does not have a solution for seamless cross-border payments.

“For most people, it remains slow, costly, opaque, and inefficient, relying on an archaic network of correspondent banks,” said Ravi Menon. “We want cross-border payments to flow seamlessly like water.”

Building linkages across countries real-time payment systems could provide a solution to this. However, bilateral linkages, such as the linkage of Singapore’s PayNow with Thailand’s PromptPay, consume time and eat up resources to implement.

Each new linkage requires a refresh in technical alignment between two payment systems and entails accommodating domestic policies, such as data privacy and security, sanction screening and capital controls.

Furthermore, the number of required links grows exponentially as the number of countries participating in the payment network increases. According to Menon, 190 links would be required for 20 countries to be interlinked on a bilateral basis.

Hence, MAS has been working with the Bank for International Settlements Innovation Hub on Project Nexus, a multilateral solution to link real-time payment systems between countries, aimed to address the challenges of speed, cost, access and transparency.

With this solution, each country will only need to link its real-time payment system once to a Nexus gateway, which in turn provides direct connectivity to all the other countries already in the network.

Users can look forward to faster speed or payment transactions cleared in 60 seconds on a 24/7 basis.

Project Nexus aims to meet G20’s target for cross-border retail payments of less than three per cent of transfer value, provide wider access by enabling connectivity for banks as well as non-bank financial institutions and provide greater transparency by providing centres with upfront certainty of the fees that are due and immediate updates on transaction status.

On top of that, it also provides higher security as the central platform leverages on the strong security and risk mitigation protocols built into national faster payment systems. 

MAS believes that the Association of Southeast Asian Nations (ASEAN) is well placed to be the first mover of this multilateral cross border payment solution.

The 10 members have a shared vision of a multilateral network of payment linkages across ASEAN by 2025, and MAS believes that project Nexus can be a key enabler towards realising this vision.

The simultaneous exchange of two linked assets in real time

However, real-time cross-border payments does not mean real-time settlement.

While Project Nexus allows for instantaneous real-time cross-border payments, the actual movement of funds between the two banks is not instantaneous.

The process involves many intermediaries, goes through different ledgers, and takes a few days to complete, potentially creating multiple points of failure and generating higher costs.

“We want to create a real time settlement system, that is strong and secure. Like metal, we want atomic settlement,” said Ravi Menon.

Atomic settlement is the simultaneous exchange of two linked assets in real time, which eliminates settlement risk, duplicated reconciliation, and the need for large pre-funding accounts. It has benefits not only for retail payments, but also for cross-currency and securities transactions.

One of the most promising ways to achieve atomic settlement is through tokenised assets, which can be exchanged simultaneously on a distributed ledger. And this is what MAS has been experimenting with since 2017, through Project Ubin.

Project Ubin demonstrates three things:

The success of Project Ubin paved the way for collaborations such as Partior and Project Dunbar.

Partior is a joint venture between DBS Bank, JP Morgan, and Temasek which uses a blockchain-based multi-currency clearing and settlement platform to reduce the settlement time for Singapore dollar and US dollar transactions from days to minutes.

Meanwhile, Project Dunbar is a partnership between the BIS Innovation Hub, Reserve Bank of Australia, Bank Negara Malaysia, South Africa Reserve Bank, and MAS to build an open-source distributed ledger platforms for international settlements using wholesale central bank digital currencies (CBDCs).

Hence, to further propel the development of real-time settlement systems, MAS will be launching Project Ubin+, a global initiative on the cross-border exchange and settlement of foreign currency transactions using wholesale CBDCs.

Project Ubin+ will focus on three areas. Firstly, it will study business models and governance structures where settlement can be performed atomically to improve efficiencies and reduce risks.

Next, it will develop standards to support the atomic settlement of currency transactions across platforms, by using distributed ledger technology and non-distributed ledger technology (DLT) based platforms.

Finally, it will focus on establishing policy guidelines for the connectivity of digital currency infrastructure across borders to enable better access and participation.

MAS will also be collaborating with international partners to explore a broader range of atomic settlement solutions. 

For example, MAS will be partnering the central banks of France and Switzerland and the BIS Innovation Hub to explore the exchange and settlement of wholesale CBDCs with an automated market maker. An automated market maker enables the exchange and settlement of two or more digital assets to be performed automatically through a smart contract.

Additionally, MAS and SWIFT will collaborate to explore different interoperability models, to enable instant cross-border payment and settlement across DLT-based systems and existing payment infrastructures.  

Reshaping money through tokenisation

The third desired outcome MAS hopes to achieve from its collaborative fintech projects is programmable money.

Currently, digital money accounts for 92 per cent of Singapore’s money supply — payment to merchants, account-to-account transfers, setting up timed or regular payments, can all be done through a few taps on a mobile phone.

The only issue with money today is that it is not programmable. Programming money by embedding rules that define its usage comes from tokenising the money and placing it on a distributed ledger.

Project Orchid was hence conceived, giving way to the launch of purpose bound digital Singapore Dollars.

Just as the heat of fire reshapes objects into new forms, we want to reshape money through our experiments with tokenised deposits and CBDCs. The platform for our explorations in programmable money is Project Orchid, which has introduced the concept of purpose bound money.

Earlier this week, Project Orchid released its first report, which highlighted four areas of the application of purpose bound money in Singapore.

Purpose bound money can be incorporated into Singapore’s existing government voucher system, commercial vouchers, government payouts, and disbursing grants to training providers .

MAS aims to further sharpen its capabilities in programmable money by improving user experience, strengthening security and privacy, and increasing its accessibility to broader segments of Singapore’s population.

Paving the way for the next evolution of financial markets

Menon revealed that while cryptocurrencies have been the rage, the real innovation with vast potential lies with tokenisation.

Tokenisation involves using a software programme to represent the ownership rights over any item of value as a digital token or asset.

Asset tokenisation enables Decentralised Finance, or DeFi, where borrowing, lending and trading activities can be performed autonomously through smart contracts. DeFi can potentially enhance the efficiency and accessibility of financial services.

However, DeFi is still in its infancy stage, and is not without significant risk, he explained. To harness the potential benefits of DeFi while managing the risks that may come with its, MAS has launched Project Guardian.

The project focuses on the four main areas of open and interoperable networks, trust anchors, asset tokenisation, and institutional grade DeFi protocols.

The first pilot of Project Guardian, where DBS Bank, JP Morgan and SBI Digital Asset Holdings conducted transactions in tokenised foreign exchange and government bonds, demonstrated the potential for reducing costs in executing trades.

To broaden the set of tokenised assets in play, Project Guardian has launched two new industry pilots.

The first pilot will be led by Standard Chartered Bank, and will focus on the issuance of tokens related to trade finance. Meanwhile, the second pilot will be led by HSBC and UOB, and will involve tokenising wealth management products.

These projects strive to increase efficiency in the product value chains, lower issuance and servicing costs, and improve transparency and accessibility. We believe Project Guardian can help pave the way for the next evolution of financial markets in Singapore.

We want to create a future where any asset can be fractionalised, no market is too big to access, trading costs are drastically reduced, and trust can be established with greater transparency and better accountability.

In his speech, he emphasised that while Singapore wants to be a crypto asset hub, it does not want to be a hub that centres around trading and speculating in cryptocurrencies.

A launchpad for ESG FinTech solutions

According to Menon, Singapore desires to achieve trusted sustainability data through its collaborative fintech projects.

Quality data is key in the fight against greenwashing, and enables stakeholders to make well-informed ESG-investment decisions. However, the process of acquiring ESG data is often manual, tedious and costly.

Access to good data sources is often fragmented, and data verification is at a nascent stage. Fortunately, fintech can be leveraged to address these data challenges.

In fact, we need FinTech to do in the sustainability space what it is doing today in the inclusion space. We need Green FinTech.

Just as Earth provides a firm, steady ground upon which we stand, we want to create a trusted data ecosystem that provides a firm foundation for sustainable finance. 

Hence, to build a Green FinTech data ecosystem, MAS has launched a collaborative effort with the financial industry, Project Greenprint. 

Project Greenprint seeks to build digital utilities that streamline the collection, access, and use of climate and sustainability data. It aims to help mobilise capital to sustainable projects, monitor the climate commitments made, and measure the impact associated with investments.

To enable this, Project Greenprint has focused on four digital utilities, and these include an ESG disclosure portal, an ESG registry of green certifications, a data orchestrator, and a digital marketplace.

On top of that, MAS will be piloting the ESG Disclosure Portal with SGX to enable listed companies to carry out baseline sustainability reporting against a set of 27 core metrics. 

The portal, titled ESGenome, the portal allows companies’ one-time inputs to be automatically mapped across a range of major sustainability standards and frameworks. These inputs can generate sustainability reports.

Meanwhile, the ESG registry, titled ESGpedia, utilises distributed ledger technology to record and maintain the provenance of green certifications issued by various sectoral bodies.

“We will continue to build up the Registry’s network of certifications, providing more confidence to users of these data.”

On the other hand, data orchestration entails aggregating ESG data from multiple data sources to meet specific green and transition financing needs. This requires interoperability and consent-based access to major ESG data providers, utilities providers, sectoral platforms, and the ESG registry itself.  

We are already doing small-scale pilots to identify financing gaps and technology solutions for decarbonisation in priority sectors such as energy, real estate, agriculture, and transportation. 

We will partner financial institutions to integrate more advanced datasets into their financing frameworks.

The digital marketplace, aimed to launch next year, seeks to synergise connectivity across the Greenprint utilities and facilitate access to ESG data. 

It will facilitate linkages between ESG FinTech solution providers and investors, financial institutions, and corporates, and house an ESG Data Directory to facilitate discovery and access to the ESG datasets, contributed by the Greenprint digital utilities and collaborators. 

“Through Project Greenprint, we want to make Singapore a launchpad for ESG FinTech solutions that will help drive Asia’s and the world’s transition to net-zero,” said Menon.

Featured Image Credit: Singapore Fintech Festival 2022