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Singapore Fintech Festival 2022: MAS MD Menon equates fintech transformation to Wu Xing

Singapore Fintech Festival 2022: MAS MD Menon equates fintech transformation to Wu Xing

Day two of Singapore Fintech Festival kicked off with Ravi Menon, managing director of the Monetary Authority of Singapore on the global plenary stage highlighting that innovation and digitalisation of financial services has marched on, gathered pace, and has become more pervasive.

According to Menon, the Covid-19 pandemic, and subsequent lockdowns led to “an overdue cleansing of unsustainable business models, highly risky practices, and unviable use cases.” He continued to say that “the digital asset industry will emerge leaner and stronger.”

Singapore has seen unrivalled collaboration over the last few years, across businesses, financial institutions, fintech startups and central banks. Fintech investment in the nation state hit US$3.9 billion, a staggering jump from US$0.9 billion in 2019.

Menon’s speech focused on what’s next for fintech in Singapore and he explored five issues that continue to permeate. To resolve these problems, he turned to the Chinese philosophy of Wu Xing, where “there are five fundamental elements that function as cosmic agents of change: Water, Metal, Fire, Wood, Earth.”

He added that the five key outcomes we want to achieve through our collaborative fintech projects are:
- Instant remittance
- Atomic settlement
- Programmable money
- Tokenised assets
- Trusted sustainability data.

Instant remittance = Water

Alongside the connection between Singapore’s PayNow to Thailand’s PromptPay and working towards the same for India’s Unified Payments Interface and Malaysia’s DuitNow, Menon explained that each new linkage “requires a refresh in technical alignment between the two payment systems. It also entails accommodating domestic polices, such as on data privacy and security, sanctions screening and capital controls.”

MAS has been working with the BIS Innovation Hub on Project Nexus, a multilateral solution to link countries’ real-time payments systems. “With this solution, each country would 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 within the network.

“Furthermore, Nexus is a unified solution that coordinates payment, foreign exchange conversion, message translation as well as compliance, which would streamline the entire cross-border payment process,” Menon said.

The ten members of ASEAN have a shared vision of a multilateral network of payment linkages across the region by 2025.

Atomic settlement = Metal

While Project Nexus will solve problems around clearing, it does not solve the settlement problem and the actual transferal of funds between banks is still not instantaneous on a global scale because there are too many intermediaries and ledgers that the transaction needs to go through. Atomic settlement is the perfect solution and what MAS has been working on with Project Ubin since 2016.

Project Ubin has paved the way for other collaborations such as Partior and Project Dunbar, but MAS will be launching Project Ubin+, “a global initiative on the cross-border exchange and settlement of foreign currency transactions using wholesale CBDCs.”

Menon explained that MAS will also work with the French and Swiss central banks to test the exchange and settlement of wholesale CBDCs with an automated market maker. In addition to this, MAS will partner with Swift to enable interoperable, instant, cross-border payment and settlement across DLT-based systems and existing payments infrastructures.

Programmable money = Fire

Despite digital money accounting for 92% of money supply in Singapore, money is not programmable. Menon defined programmable money as “embedding rules within the medium of exchange itself that defines its usage. These rules are retained even when the money is transferred.”

Using charity donations as an example, Menon stated that with programmable money, “we can have better assurance that donations reach their intended beneficiaries and the funds are used for their intended purposes. We can programme the beneficiaries and purposes into the money itself. The programmability comes from tokenising the money and placing it on a distributed ledger.”

There are four options for programmable money. “Cryptocurrencies are a non-starter,” but “stablecoins are more promising,” Menon mentioned. Tokenised bank deposits are also a viable option as they are a digital representation of commercial banks’ deposits that can be used as digital cash. In a similar vein, CBDCs – which are direct liabilities of the central bank – combine the advantages of issued cash with the benefits of the blockchain.

MAS is “discouraging retail investment in cryptocurrencies; facilitating stablecoins through sound regulation; allowing tokenised bank deposits; and experimenting with CBDCs.” Menon explained that: “MAS expects all stablecoins and tokenised deposits issued in Singapore to meet a minimum standard with regard to the surety of its value,” as seen with Project Orchid.

Tokenised assets = Wood

Menon believes that “asset tokenisation has transformative potential, not unlike securitisation 50 years ago.” He added that “DeFi is still in its infancy and is not without significant risks.” Through Project Guardian, MAS are laying the protocols that will help harness the benefits of tokenised assets and DeFi while managing their risks.

Summarising the four points, Menon stated that “the real value in the crypto industry comes not from speculating in cryptocurrencies but from tokenising assets and placing them on a distributed ledger for use cases that increase economic efficiency or enhance social inclusion. The question is often asked: does Singapore want to be a crypto asset hub?

“If a crypto hub is about experimenting with programmable money, yes we want to be a crypto hub. If it is about applying digital assets for use cases like atomic settlement, yes we want to be a crypto hub. If it is about tokenising real and financial assets to increase efficiency and reduce risks in financial transactions, yes we want to be a crypto hub. But if it is about trading and speculating in cryptocurrencies, that is not the kind of crypto hub we want to be,” Menon clarified.

Trusted sustainability data = Earth

While the industry is aware that good data is imperative to driving the green and transition finance agenda, the ESG data acquisition process is often manual, tedious and costly and this challenge continues to permeate. Fintech can support the resolution of this issue, and MAS have launched Project Greenprint to build digital utilities that streamline the collection, access, and use of climate and sustainability data.

Menon said: “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.”

He concluded: “The five desired outcomes – instant remittance, atomic settlement, programmable money, tokenised assets, and trusted sustainability data – remind us that everything we do in finance, technology, and fintech must have a larger purpose. We want to expand economic opportunity, enhance social inclusion, reduce risks, and protect our planet.

“The essential feature of the five fintech projects to achieve these desired outcomes is collaboration – collaboration between the public and private sectors; collaboration between incumbent financial institutions and emerging fintech firms; and collaboration across borders. Like the five elements of Water, Fire, Earth, Metal and Wood, it is exchange and interactions that generate growth and new possibilities.”

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