The Monetary Authority of Singapore (MAS) is embarking on “Project Orchid” to build the technology, infrastructure and technical competencies that are necessary to issue a digital Singapore dollar should it decide to do so in the future, says the central bank’s managing director Ravi Menon.
Speaking at the Singapore Fintech Festival 2021 in a session called “The Future of Money, Finance and the Internet”, Menon says there is no strong case for the issuance of retail Central Bank Digital Currency (CBDC) in Singapore. However, the MAS recognises that there could be potential benefits offered by innovative retail CBDC solutions in the future.
“The 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,” says Menon.
The finalists of the Global CBDC Challenge will demonstrate their solutions to an international judging panel later today (Nov 9).
See: The case for digital currencies and CBDCs
Interest in retail CBDCs has risen sharply in the last two years. According to a survey by the Bank for International Settlements, six out of 10 central banks are experimenting with retail CBDCs.
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Menon says there are three possible reasons for the MAS to issue digital Singapore dollars to the public. First, it would make available the benefits of using central bank money in the growing world of online transactions.
“Like notes and coins, the 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 favour 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,” he adds.
The second reason is that the digital Singapore dollar could potentially foster an effective and inclusive payment ecosystem. It could make it easier for smaller firms to build new payments and related digital services.
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“Startups, for instance, can integrate with a retail CBDC and not need to build their own e-money end-user base. This financial inclusion rationale has been a key motivation for countries like Cambodia and the Bahamas to adopt retail CBDCs,” says Menon.
Lastly, the issuance of the 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 digitalised economy could go some way to mitigate this risk.”
However, issuing a retail CBDC is not a straightforward decision, says Menon. 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 bank's ability to make loans,” says Menon.
That being said, these risks can likely be managed 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 the MAS.
Menon says the issuance of a retail CBDC is ultimately a socio-economic rather than 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.”
