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The Future of Money, Finance and the Internet by Ravi Menon - Finextra

The Future of Money, Finance and the Internet by Ravi Menon

(Screenshot from SFF 2021)

I think the Singapore government is brilliant.

Why? Let’s see. I have interacted with quite a few countries’ officials throughout my professional life and learned to judge them based on my personal experience. (Some day I will tell you about Chinese officials that came to censor our media’s content about China.)

Singapore might be the only one that is fully accessible — any department, open to dialogue 24/7 via Zoom, LinkedIn, or personal meetings. Singapore stations business development managers in all major countries around the world, and their job is to help you do business with (or in) their country. Be those private or public sectors, investment, or simply matchmaking.

Like this is not enough, Singapore has proved to have one of the most intelligent and up-to-date officials. At any level, they can talk to you about NFTs, DeFi, CBDCs, cross-border challenges, in more detail that you would. That is a very distinct contrast with most countries’ governments that are detached from the trends and the reality in general. 

To top it off, Singapore is probably the global leader in the regulatory sandbox experiments, playing with web 3.0 in the open. That makes it even more important to watch closely. Whatever Singapore does now will influence what other countries will do tomorrow. Of course, China has probably done that yesterday. 

Instead of dealing with my opinions, let me acquaint you with the person I am inspired by. Below is the deciphered speech by the managing director of MAS (Monetary Authority of Singapore) Ravi Menon made at the Singapore Fintech Festival this year. As a bonus, you may learn what the new buzzwords mean.

The Future of Money, Finance and the Internet

by Ravi Menon, Managing Director, Monetary Authority of Singapore (MAS)

Money as a medium of exchange, and store of value has been around for millennia. It is named after the Roman goddess of money. Juno, who carried the title ‘moneta’. Rome’s currency was first minted at a temple in the third century BC. Money has come a long way since. From bullion coins to paper notes, paper notes backed by gold, to fiat currency backed by central banks. And now digital money.

Finance, which is the intermediation of savings and investment, existed in many ancient civilizations. The Roman God of wealth Plutus comes closest to being the presiding deity for finance. Finance too has come a long way. Foreign exchange markets and bills of exchange emerged in the Middle Ages. Before modern finance took shape with fractional reserve banking, stock markets, mutual funds and insurance.

The internet is more recent. Its official birthday is January 1st 1983. Though the concept itself, namely a computer network, which enables information sharing among users, goes back to the US defense industry in the 1960s.

Of course, the ancient Romans did not have a God for the internet. But perhaps Mercury, the god of commerce and communications comes closest. The future of Juno, Plutus and Mercury is increasingly becoming entwined in large part due to technology. So let’s check out what Juno, Plutus and Mercury have been up to lately.

Juno has been busy in the past decade with new forms of money emerging. But before we can make sense of new money, refresh our understanding of existing money.

Today we keep money in two forms: physical cash in the form of notes and coins and digital money in the form of deposits with commercial banks. Most of our money is privately created by commercial banks and is in digital form. Bank deposits accounted for 92% of the money supply in Singapore. They are the basis for all electronic payments by households and firms using debit and credit cards, e-wallets and account to account bank transfers.

Commercial banks, in turn, place reserves with the central bank to settle interbank transactions arising from these electronic payments. Confidence in money is anchored by the central bank. Central banks conduct monetary policy to ensure low and stable inflation. Which safeguards the purchasing power of our money.

In addition by regulating commercial banks, and acting as lenders of last resort during crisis periods, central banks underpin the overall soundness of the banking system. So the credibility of money is underpinned by this two tier monetary structure where commercial banks create money and central banks preserve its value.

Three new developments have emerged in the past decade that fundamentally challenge this two-tier monetary structure. Cryptocurrencies, stable coins and central bank digital currencies.

Cryptocurrency is a digital token issued and managed by a decentralized protocol or within a decentralized protocol, such as a distributed ledger. Or blockchain. It represents an asset in digital form that can be transferred or traded on the protocol.

The word crypto comes from the Greek word Kryptos. Which means secret. Indeed, the anonymity of crypto tokens has unfortunately made them well suited for facilitating illicit transactions, including money laundering. Cryptocurrencies have also helped to fuel ransomware, one of the fastest growing crimes in cyberspace.

Are cryptocurrencies money? So far, the answer must be ‘no’. Cryptocurrencies have performed poorly as a medium of exchange, a store of value or a unit of account. MAS prefers to call them by their more accurate technical name — crypto tokens. We defined tokens that are used for payments as digital payment tokens. Entities which provide services related to such tokens in Singapore are subject to licensing and supervision by MAS. Primarily for money laundering, and terrorism financing risks.

MAS frowns on cryptocurrencies, or tokens as an investment asset for retail investors. The prices of crypto tokens are not anchored on any economic fundamentals and are subject to sharp speculative swings. Investors in these tokens are at risk of suffering significant losses.

MAS also overviews that blockchains and crypto tokens can bring many potential benefits. The blockchain is suited for applications where it is important to know the history of ownership and transfer of value, but there is no trusted central party or reliance on a central party is too costly. A potentially strong use case of crypto tokens is to facilitate cheaper and faster cross border payments and trade finance. But to be regarded as money, crypto tokens need to be more stable in value and have credible backing.

Hence the emergence of the second phenomenon. Stable coins. Stable coins seek to combine the credibility of fiat currencies with the advantages of the blockchain. The more prevalent stable coins are pegged to the US dollar. They promise to redeem at par and claim to be backed by reserves.

Will Juno accept stable coins as money? Well, an encouraging sign is that stable coins are beginning to find acceptance outside of the crypto ecosystem. Some technology firms have integrated popular stable coins into their payment services. Visa and MasterCard both allow transactions to be settled using USD coin, the stable coin.

All crypto stable coins are more akin to the Chimera, which is a monstrous fire breathing hybrid creature in Greek mythology. The stable coin issuance looks like banks when they take money and offer to return it on demand. But if they do not intermediate credit, will bank regulation be appropriate for them?

They may seem like money market funds, but are capital market rules sufficient to ensure that reserve backing is really there behind these crypto stable coins? We don’t know.

Stable coins can potentially pose financial stability risks. For example, if there’s a run on a significant issuer of a stable coin, that could be contagious risks to financial markets, should the reserve assets be rapidly liquidated.

MAS has been thinking deeply about these issues, even as we license crypto token players and encourage experimentation in this space. We have to approach this chimera with flexible regulatory chains, which will allow us to harness its potential benefits, but can be tightened quickly if the beast threatens to breathe fire.

The third phenomenon — central bank digital currencies.

The history of privately issued money without public backing has not been inspiring. Will people put their faith in crypto tokens or stable coins that are not backed by central banks, which are dedicated to protecting its value?

At the same time, is there not a way to harness the potential benefits of distributed ledger through some form of digital currency?

Hence, the global surge in interest in Central Bank digital currencies or CBDCs. CBDC is the direct liability of, and payment instrument issued by the central bank.

What is MAS’s stance towards CBDCs. To answer that, let me distinguish between two types of CBDCs.

One — wholesale CBDCs which are restricted to use within the banking system and are akin to the reserves commercial banks place with a central bank today.

Then, you have retail CBDCs which are issued by the central bank to the general public. They would be the digital equivalent of today’s notes and coins.

MAS sees much promise in wholesale CBDCs. They have the potential to radically transform cross border payments. But since wholesale CBDCs by definition are not meant to be used as currency by the general public. They’re not money.

So let me focus now on retail CBDCs. Retail CBDCs are essentially digital versions of cash. Interest in retail CBDCs has risen sharply in the last few years. According to a survey by the Bank for International Settlements, 6 out of 10 central banks are experimenting with retail CBDCs. MAS has been carefully studying the economic merits and implications of a retail CBDC in the Singapore context. We have just released a detailed paper outlining our current thinking.

There are three possible reasons for MAS to issue to the public a digital Singapore dollar. First, a digital Singapore dollar would make available the benefits of using central bank money in the growing world of online transactions. Like notes and coins, digital Singapore dollar issued by MAS will be safe, widely accepted and bear the authority of the state. Cash is the ultimate risk free asset and means of final settlement. The rapid displacement of cash in favor of electronic payments based on bank deposits or e-wallets is one of the chief motivations for countries like Sweden and China to consider retail CBDCs.

Second reason, a digital Singapore dollar could potentially foster an efficient and inclusive payment ecosystem. It could make it easier for smaller firms to build new payments and related digital services. Startups for instance, can integrate with the retail CBDC and not need to build their own e money and user base. This financial inclusion rationale has been a key motivation for countries like Cambodia and the Bahamas to adopt retail CBDCs.

Third reason, a digital Singapore dollar could mitigate against the encroachment of privately issued stable coins or foreign CBDCs in Singapore’s payments landscape. As these global digital currencies enter our market and become widely accessible in the future, they could potentially displace the use of the Singapore dollar in domestic retail transactions. Digital Singapore dollar that is issued by MAS that is congruent with the needs of a digitalized economy could go some way to mitigate this risk.

Issuing a retail CBDC is not a straightforward decision. Retail CBDCs can potentially pose significant risks to monetary and financial stability. There could be some disintermediation of the banks, particularly during stress periods. If people can switch deposits into risk free central bank money at the click of a button, even in normal times, if people held a significant portion of their deposits in the form of digital Singapore dollars with MAS, it would considerably reduce our banks ability to make loans.

We can likely manage these risks by designing the retail CBDC with sensible safeguards, such as stock and flow caps on the amount of digital Singapore dollars that anyone is allowed to place with MAS. On balance the case for retail CBDC in Singapore is not urgent. In fact, for a subject that is so controversial, and has attracted so much attention there are neither strong reasons for or against a retail CBDC in Singapore.

Why do I say that? First, physical cash is likely to be with us for quite some time. And the need for a digital version of cash is moot at this point. The financial inclusion benefits of a digital CBDC, a digital Singapore dollar, are not compelling. A high proportion of Singaporeans have bank accounts and electronic payments in Singapore are pervasive, highly efficient and competitive.

Now the third reason a possible currency substitution by foreign digital currencies is for now a remote tail risk. The issuance of a retail CBDC is ultimately a socio economic, rather than a monetary consideration. Moving to a fully cashless society with all money in the form of bank deposits will not make a significant difference to the conduct of monetary policy.

The question is whether the public is comfortable with holding only bank deposits and whether there is public demand for a state issued currency that is as safe as cash but in digital form. So for now, there’s no strong case for retail CBDC.

But at the same time, MAS recognizes that there could be potential benefits offered by innovative retail CBDC solutions in the future.

MAS is therefore embarking on Project Orchid to build the technology, infrastructure and technical competencies that are necessary to issue a digital Singapore dollar, should Singapore decide to do so in the future. MAS will pursue project Orchid in close partnership with the private sector. Building on the rich findings from the Global CBDC Challenge that MAS launched earlier this year.

We have received more than 300 proposals from over 50 countries in response to the problem statements that we posed. This afternoon the finalists of the Global CBDC Challenge will demonstrate their solutions to an international judging panel.

Not to be outdone, Plutus the God of finance has not been idle. Finance is becoming increasingly digitalized. As we all know, new types of financial service providers, business models and collaborations.

I’d highlight just two developments that are shaping the future of finance. One — request for real time, cross border payments. And two — the rise of collaborative data platforms.

Five years ago MAS began experimenting with blockchain technology and wholesale CBDCs through Project Ubin to make cross-border payments cheaper, faster and more efficient. The success of project Ubin has inspired Partior, a blockchain based Interbank Clearing and Settlement Network jointly established by DBS bank, JP Morgan and Temasek. It enables banks to settle cross border payments in different currencies in real time, using either commercial bank digital money or wholesale CBDCs.

Project Ubin has also served as a foundation for Project Dunbar. This is a blueprint for a multi currency settlement platform that operates across countries using wholesale CBDCs. Project Dundar is a partnership among MAS, the Bank for International Settlements Innovation Hub, the Reserve Bank of Australia, Bank Negara Malaysia and the South African Reserve Bank. Commercial banks will be able to transact directly with one another using the wholesale CBDCs of their respective countries. Eliminating the need for intermediaries and reducing the time and cost of cross border transactions, if Project Dunbar succeeds.

Not all cross border payment improvements need CBDCs or the blockchain. Singapore’s real time retail payment system PayNow is building direct linkages with other countries’ payment systems. PayNow has already linked with Thailand’s PromptPay, enabling individuals in the two countries to transfer funds directly to one another’s bank accounts using just the mobile phone number. PayNow now plans to link up with Malaysia’s DuitNow and India’s Unified Payment Interface (UPI) next year.

But establishing bilateral payment linkages one jurisdiction at a time is hard work. We need a multilateral solution. MAS is therefore working with the BIS Innovation Hub on Project Nexus, which is a common blueprint for how countries can fully integrate their real time payment systems onto a single cross border network. If it works, it will make PayNow globally interoperable much faster.

The next key development — collaborative data platforms. Industry collaboration through technology and data sharing platforms will become an important driver of innovation in the future of finance. MAS has been promoting such collaboration since the beginning of our FinTech journey in 2015.

Let me highlight three recent initiatives. First, ChekFIN. This is a decentralized credentials platform to support partnerships between financial institutions and fintech firms. Financial institutions that are seeking collaboration with FinTech firms often have difficulty ascertaining their reliability and capacity. ChekFIN will enable financial institutions to obtain verified credentials of FinTech firms, such as their business references, the awards they have obtained, and investor funding records. These credentials are then immutably stored on a blockchain as a golden source of information. Now, FinTech firms decide who they want to share their private credentials with. ChekFIN is a partnership among the ASEAN Financial Innovation Network, BCG FinTech Control Tower, and Affinidi. With MAS as a founding partner 10 global financial institutions have already signed up for ChekFIN and the platform will be launched next month.

Second, Project Greenprint which I mentioned at last year’s festival. This is a technology and data platform to support Singapore’s and Asia’s green finance ecosystem. I’m pleased to say that MAS and the industry will together develop four interoperable platforms under Project Greenprint.

First, a common disclosure portal for financial institutions and corporates to make reliable and comparable ESG disclosures.

Second, a data orchestrator to aggregate ESG data from different sectoral platforms and trusted data sources. Third, an ESG registry to record and maintain ESG certifications on a distributed ledger for provenance. The Greenprint marketplace, the fourth platform, to connect green technology providers with investors and corporates.

Collaborative platform COSMIC. This is a platform for financial institutions to collaborate using data analytics to combat the risks of money laundering. This platform for information sharing and analysis will generate a rich and dynamic data pool of high risk factors and their webs of anomalous activities. COSMIC will enable seamless data exchange with financial institutions’ own data analytic systems. So they can effectively identify and disrupt criminal networks that are spawning across multiple financial institutions. MAS has been co creating COSMIC with six major banks in Singapore and the platform is scheduled to go live in 2023. In its initial phase Cosmic will focus on risks related to the abuse of shell companies. The illicit misuse of trade finance and evasion of United Nations sanctions.

But the future of finance cannot be divined without considering the future of the Internet. Plutus, the God of finance, we’ll be crossing paths quite often with Mercury, the God of the internet.

This new age of the internet has been dubbed 3.0, which we’ve all been hearing about for the last one or two days. A good way to start making sense of web 3.0 is through refreshing our understanding of web 1.0 and 2.0. We may call web 1.0 as the readable internet centered on access to information and where most users were consumers of content. It is about web pages, emails and chat rooms. Web 2.0 is the interactive internet with rich exchanges of information and user generated content and collaboration. Key features are blogging, tagging, social media networks. We could think of web 3.0 as the personal internet, empowering each end user through applications that allow the decentralized sharing of information.

Information is no longer in silos. It is decentralized and shared. The key enablers for this new paradigm are 1) smart contracts and 2) tokenized assets.

Smart contracts are basically automatically executed actions according to the terms of the contract. Tokenized assets implemented as smart contracts are digital representations of real world assets. They could be physical assets such as commodities and real estate or intangible property. Such as financial assets, patents or digital music and art. Once tokenized, the rights and ownership of these assets could be transferred seamlessly, improving liquidity and efficiency.

Now this has the potential to substantially enhance economic opportunity and economic inclusion. Smart contracts and tokenization are already being used to enhance the market infrastructure for financial assets and support.

Olam International issued last year a digital bond on SGX’s digital issuance, depository and servicing platform. SembCorp through UOB bank issued a digital bond just earlier this year. On the ADDX digital securities platform. Eliminating manual processes in custody and post-trade administration through smart contracts on a blockchain.

Digital bonds have many advantages, they can be issued in smaller denominations. Primary issuance settlement times can be considerably shortened, and coupon and redemption payments can be automated.

Web 3.0 can also potentially disrupt the world of finance. This is through the phenomenon of what’s called decentralized finance or DeFi, where end users perform financial transactions directly with one another using smart contracts without the need of financial intermediaries. It is a fundamentally different approach to financial infrastructure, compared to the centralized systems of today.

DeFi is already a growing reality. Albeit still nascent. Crypto tokens are now being bought and sold on decentralized exchanges without the need for intermediaries to clear and record the trade.

Another example of worrying for financial institutions is borrowing and lending where anyone theoretically can lend and borrow directly to others, while a liquidity pool is managed by a smart contract.

DeFi has the potential to yield significant economic and social benefits by replacing intermediaries and central counterparties. These open crypto networks can potentially reduce the cost of finance. When firms of all sizes and even individuals can directly access financial infrastructure, it could mean more competition and inclusion.

But DeFi is not without risk and vulnerability. These open crypto networks are not at this stage where they can meet the highest standards of governance, security and resilience that are required by central banks and regulators.

There have already been unsavory practices in this space. Flash loans being used to manipulate prices in the market. Bots been used to front run retail trades. With decentralized governance, who do you approach to recover lost accounts or reverse accidental transfers of money?

Existing regulatory frameworks will need to be adapted for application if DeFi becomes a reality. Regulations crafted to manage risks in a world of intermediaries are ill suited where intermediaries are being replaced by smart contracts. Enforcement is more challenging when control of governance is dispersed across the blockchain.

MAS will follow web 3.0 and DeFi developments closely, deepen our understanding and seek to harness the benefits while managing its risks. We will work closely with both the financial industry and the broader ecosystem to find the right balance. It will be a learning journey.

What better way to learn than by experimenting? So we will facilitate experiments of blockchain and DeFi innovation through regulatory sandboxes. Five years ago, MAS launched the FinTech Regulatory Sandbox to support live experimentation of technology innovations. Two years ago we enhanced it with Sandbox Express so that businesses can begin market testing of low risk activities in a predefined environment faster. MAS will enhance this regulatory sandbox with Sandbox Plus, we will broaden participation to early adopters of technology, in addition to first movers. We will provide financial grants to first movers of innovation to support the technology, human capital and market development.

We will enroll eligible applicants in Deal Fridays, a program that is jointly organized by MAS and Enterprise Singapore, where these firms and startups will get access to the investor community.

To conclude, the future of money, finance, and the Internet will have far reaching effects on economies and societies. It is important that public authorities and the financial and technology communities work together to shape that future. So that money, finance, and the internet can be forces for good. Helping to expand economic opportunity, enhance social inclusion, foster stability, and protect our planet. Ultimately, money, finance, and the internet must serve the people who use them. MAS is committed to partnering you on this exciting journey.”

P.S.: The speech is deciphered using Later I have discovered an official record, almost identical. Remarkable example of AI’s work.