In 2016, the Monetary Authority of Singapore (MAS) — Singapore’s central bank and financial industry regulator — embarked upon a journey to explore the use of blockchain and distributed ledger technology for “clearing and settlement of payment and securities”. Named Project Ubin after the eponymous island off Singapore’s coast, the project concluded its five-phase experimentation process this year. Notable among its work is exploring the possibility of creating a “central bank digital currency” (CBDC) which is in essence, a digital Singapore dollar. 

However, the iconic likeness of Singapore’s first President Encik Yusof Ishak is not going to disappear in a hurry as physical banknotes will not be supplanted by retail CBDCs anytime soon. Instead, MAS’s focus is on wholesale CBDCs, which are restricted-access digital tokens that represent bank reserves in a country’s central bank. 

Sopnendu Mohanty, MAS’s chief FinTech officer, is optimistic that a CBDC will take off here. Via Project Ubin, the real value in using wholesale digital currencies with wholesale CBDCs playing a role in resolving inherent issues with cross-border payments, has been recognised. Sopnendu notes that a partner jurisdiction is needed for the technology to go live, with his team already in discussions with their jurisdictions to discuss production-grade implementation in future. 

Of course, blockchain and distributed ledgers can also be adapted towards other uses such as bond issues too. Besides developing a CBDC, Project Ubin has also explored using distributed ledgers to reimagine interbank real-time gross settlement systems (RTGS), delivery versus payment (DvP) and cross-border payment versus payment (PvP) solutions. It has also investigated potential efficiency gains for the broader economy that could be attained through better connectivity and integration with blockchain applications as well. 

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“There are pre-defined notions about how and where the technology is supposed to operate because of its origins from the bitcoin world,” says Sopnendu in an interview with The Edge Singapore. He sees blockchain technology bifurcating from its original use case for cryptocurrency, finding other use cases other than serving as a digital currency. In fact, he considers the most promising use cases of blockchain technology as being supply chain financing, issuance of financial instruments and in the space of sustainable finance. 

For example, BondEvalue — a blockchain-based start-up that emerged from the MAS Sandbox — helped fractionalise bonds typically sold in big tranches of at least US$200,000 ($267,640) to make them available to investors in small sizes. Singapore Exchange has also teamed up with HSBC Singapore and Temasek to complete its first digital bond issuance on blockchain for agri-food giant Olam International. The Philippines Treasury has similarly used blockchain to issue treasury bonds. “2020 has triggered many production-grade activities,” says Sopnendu, noting that MAS’s next challenge beyond Project Ubin is to work with industry to generate production-ready use cases. 

“The biggest surprise to me was the hugely positive reactions from the central banks around the world to start taking this seriously,” says Sopnendu. He cites former IMF managing director Christine Lagarde’s landmark “Winds of Change” speech in favour of a digital currency at the 2018 Singapore Fintech Festival as a catalyst for this interest. The Committee on Payments and Market Infrastructures (CPMI) plans to explore new multilateral cross-border payment platforms and arrangements, cross-border CBDC transactions and global “stablecoin” arrangements to enhance cross-border payments. 

Growing pains 

Naturally, the adoption of blockchain and distributed ledger technology into Singapore will not happen overnight. “Life doesn’t happen that easily. You need to find a way to co-exist as you go through a transition process,” remarks Sopnendu. 

There are several key hurdles. For one, there’s the need for deeper knowledge of blockchain technology within the wider business landscape; organisations will also require sufficient resources to shift from legacy systems to new blockchain technology. Most important of all, the technology must deliver a strong value proposition to industry since most successful technology shifts take place when the first-use case is highly valuable with a serious impact on broader society and not just a “nice to have”, Sopnendu says. 

But if any country can make this transition successfully, it would probably be Singapore. “Singapore has the talent, the technical knowhow, a reasonable understanding of the [blockchain] space and the ability to use this understanding to partner with somebody willing to connect,” says Sopnendu. After three to four years, he says, Singapore has developed a robust blockchain ecosystem, with IMDA (Infocomm Media Development Authority) and MAS nurturing an ecosystem with close to over 100 blockchain start-ups. Most banks are willing to adopt this technology too, he adds. 

There are also the security concerns of the digital finance system — but one which Singapore is well-placed to handle. According to Sopnendu, MAS’s cybersecurity mantra in a digital world is “cyber secure by design” where the cybersecurity requirements are at a “software design-level” rather than an afterthought, or a need to have. 

“We have got to be passionate, focused and relentless on getting this right because there is no appetite for any failure in this space,” states Sopnendu emphatically. A single catastrophic failure in cybersecurity has very little room for contingency since any data lost in an attack is extremely difficult to recover or replace. Placing cybersecurity at the top of its risk management considerations, MAS has worked to develop pools of cybersecurity expertise while urging start-ups to participate in the broader technology risk-management certification process which includes cybersecurity, he says. 

Now as the FinTech world evolves, regulators must keep up. For example, the Payment Services Act (2019) introduced a modular, activity-based regulatory framework — likely a world-first — that allows for more fine-tuned regulation proportionate to the risks of each service while providing room for innovation, instead of imposing a blanket set of rules. With a more conducive market environment, investors will be even more inclined to make further investments. To Sopnendu, that is an example of how the relationship between the regulator and industry can be cooperative, rather than unnecessarily adversarial. 

FinTechs for the future 

At present, big changes in FinTech are taking place amid bigger changes in geopolitics, which has surfaced thorny issues such as data nationalism — efforts by states to control the flow of data for normative and security-based reasons — posing significant obstacles to further development of the FinTech industry. “This is the most serious concern for them,” warns Sopnendu. 

Should access to data from multiple jurisdictions be cut off, he fears, FinTech businesses will be significantly handicapped by reduced access to the data they need to conduct their business. “Data is everything. Your software can only become as good as the data which it processes,” he argues, with barriers to data access pouring cold water on the FinTech industry’s amazing growth potential. 

To overcome excessive data nationalism on the international stage, MAS is looking to establish bilateral trusted data corridors with like-minded states to ensure bilateral free data flows. Singapore’s strong data governance standards and policies are aligned with Global Data Policy Requirement, making it an attractive partner for bilateral connectivity agreements with other jurisdictions. 

One such agreement has already been inked between MAS and Bangko Sentral ng Pilipinas (BSP). Under the agreement, both parties have committed to allow financial institutions in both jurisdictions to electronically transfer data across borders freely for business within the scope of their licensing and place minimal restriction to where this data is stored and processed. 

Sopnendu sees the gradual development of such bilateral data connectivity agreements as a potential template for future multilateral arrangements. Though such multilateral initiatives remain some distance away, he believes Singapore is in a strong position to lead the establishment of a robust framework for multilateral data connectivity agreements. 

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In contrast, Sopnendu is less concerned about the impact of US-China financial decoupling on the FinTech sector. He is confident that Fintechs, which typically are smart and nimble, will be able to quickly adjust to changes in the supply chain should they arise out of the US-China tensions. FinTechs can even adjust to any changes in core banking services, even taking advantage of such changes to devise alternative solutions to overcome structural changes in the business and regulatory landscape. 

In another sign of how the momentum is behind the FinTech ecosystem, even with Covid-19 hitting global economies, investment in this sector in Singapore so far this year has already exceeded last year’s $1.2 billion total. Almost half of the money went to FinTechs helping small businesses and banks to digitise, which Sopnendu sees as being a key driver of FinTech growth as the global economy shifts away from “efficiency madness” towards sustainability and resilience. 

But more than just a “regulation-taker”, FinTechs also have the power to shape the world in a more positive direction by taking on pressing global challenges. Two great existential issues — climate change and sustainability, and the need for widespread digital transformation — can be resolved by FinTechs, says Sopnendu. He also hopes that FinTechs will be able to help tackle the global pension gap — expected to reach US$400 trillion by 2050 — creating a severe deficit in funding for the global retired population. 

But for now, says Sopnendu, such world-changing solutions will have to wait. The role of FinTechs over the next three to five years is to help the global economy recover from the current crisis and help small businesses digitise to adapt to the post-Covid economy. With a return to some semblance of normalcy, the FinTech industry can then channel its energies towards “building back better”.