In 2024, Singapore is set to initiate a trial for the real-time issuance and utilization of wholesale central bank digital currencies, as announced by Ravi Menon, the managing director of the Monetary Authority of Singapore.
Menon mentioned at the Singapore FinTech Festival 2023 on Thursday that they would be advancing their experiments a step further the following year. However, he did not provide more specific details regarding the timeframe. He conveyed his satisfaction as he announced that the MAS will pilot the live issuance of wholesale CBDCs to instantaneously support payments across commercial banks here. He clarified that MAS, the city-state’s central bank and financial regulator, would be taking on this initiative.
Wholesale Central Bank Digital Currency (CBDC) refers to a digital currency issued by a central bank, exclusively intended for use by central banks, commercial banks, or other financial institutions for settling significant interbank transactions. This stands in contrast to retail CBDCs, which are designed to serve individuals and businesses, facilitating day-to-day transactions.
The Managing Director further mentioned that since 2016, the MAS has been conducting numerous experiments with other central banks and the financial industry. These experiments aimed to explore the utilization of wholesale CBDCs on distributed ledgers for enabling real-time cross-border payments and settlements. He referred to the database spread across a network that is accessible from several geographical locations.
A pilot project known as Project Ubin, initiated in 2016, aimed to investigate the application of blockchain and digital ledger technology in the clearing and settlement of payments and securities. After undergoing five phases of experimentation, Project Ubin concluded successfully in 2021. Partners involved in this project included DBS, Singapore’s largest bank, and Temasek, the sovereign wealth fund.
In November of the previous year, MAS introduced Ubin+ to enhance cross-border connectivity with wholesale CBDCs through collaborative efforts with international partners.
Menon stated that during the pilot phase, Singapore’s central bank would collaborate with local banks to assess the application of wholesale CBDCs for streamlining domestic payments. In this process, banks will issue tokenized bank liabilities in the form of claims on balance sheets. Retail customers can utilize these tokenized bank liabilities in transactions with merchants. Merchants, in turn, will credit these bank liabilities with their respective banks. Tokenization, in this context, involves the conversion of assets into a digital form on a blockchain. As part of the transaction, the CBDC will be automatically transferred to the merchant as a mode of payment.
Menon explained that in the new system, clearing and settlement take place in a single step on the same infrastructure. This is in contrast to the current system where clearing and settlement occur on different systems, leading to a lag in settlement.
On Wednesday, the managing director of the International Monetary Fund encouraged the public sector to continue preparations for the eventual deployment of CBDCs and associated payment platforms.
The Potential Benefits of Implementing CBDCs
The use of wholesale CBDCs enables real-time issuance and utilization, facilitating faster and more efficient cross-border payments and settlements. This efficiency can positively impact overall economic activities by reducing transaction times and increasing the speed of financial transactions. Further, it will streamline domestic payments and cross-border transactions and can potentially reduce costs associated with traditional banking processes, such as fees related to currency conversions and delays in settlement. This cost-effectiveness can benefit businesses and consumers alike.
The adoption of digital currencies, especially in retail transactions, will promote financial inclusion by providing access to a broader range of financial services for individuals who may not have had access to traditional banking systems. Blockchain and digital ledger technology, as explored in projects like Project Ubin, can offer increased security and transparency in financial transactions. This can help mitigate the risks associated with fraud and unauthorized access. Moreover, by enhancing cross-border connectivity with wholesale CBDCs, Singapore can strengthen its position in international trade. The ability to seamlessly conduct transactions with other countries using digital currencies can foster economic cooperation and attract international businesses.
The use of CBDCs can contribute to the global financial integration of Singapore. Collaboration with international partners, as seen in initiatives like Ubin+, can create interoperability between different digital currency systems, making international transactions smoother and more accessible. Being at the forefront of digital currency adoption can give Singapore a competitive edge in the global financial landscape. It positions the country as an innovative and forward-thinking financial hub, attracting international investments and fostering economic growth.