How Singapore Is Looking At Web 3.0 And DeFi As It Prepares For A Digital Singapore Dollar



The case for a retail central bank digital currency (CBDC) in Singapore is not urgent, but there could be potential benefits offered by innovative retail CBDC solutions in the future, said Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), in a speech today at the Singapore FinTech Festival.

The MAS is partnering with the private sector on a retail CBDC project called “Project Orchid” to prepare for the possibility of issuing a digital Singapore dollar should the country decide to do so in the future, Menon said.

The MAS has partnered with the IMF, World Bank, Asian Development Bank, UN Capital Development Fund, UN High Commission for Refugees, UN Development Programme and the Organisation for Economic Co-operation and Development (OECD) on a Global CBDC challenge to develop retail CBDC solutions to improve payment services and promote financial inclusion. Fifteen finalists for the challenge, which include ANZ Banking Group, Ethereum software company ConsenSys and IBM, are presenting their solutions to an international panel of judges during the Singapore FinTech Festival.

No strong reasons for or against retail CBDC

There were neither strong reasons for or against a retail CBDC in Singapore, Menon said. “Physical cash is likely to be with us for quite some time more and so the need for a digital version of cash is moot at this point. The financial inclusion benefits of 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. Possible currency substitution by foreign digital currencies is a remote tail risk at this point.”

Menon added that the issuance of a retail CBDC was ultimately a socio-economic rather than a monetary consideration. “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.”

Aside from Project Orchid, Singapore is currently collaborating with the Bank for International Settlements and the central banks of Australia, Malaysia and South Africa on a wholesale CBDC project called Project Dunbar to design, develop and test prototype shared platforms for cross-border payments using multiple CBDCs.

See related article: Will Singapore launch a people’s digital currency — and support DeFi?

Flexible regulatory approach

Singapore’s central bank chief also cautioned against cryptocurrency 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,” Menon said. “Investors in these tokens are at risk of suffering significant losses.”

Singapore refers to cryptocurrencies as crypto tokens and the country is emerging as a hub for fintech and crypto firms with its forward-thinking approach to lay down clear rules for crypto companies and a licensing regime primarily for money laundering and terrorism financing risks.

With the rapid rise of stablecoins, cryptocurrencies pegged typically pegged 1:1 to fiat currency and designed to minimize price volatility, Menon said the MAS was taking a flexible regulatory approach that would allow it to harness the potential benefits of stablecoins but could be tightened quickly.

The central bank was also keeping a close eye on Web 3.0 and decentralized finance (DeFi) developments. Web 3.0, where users can perform financial transactions directly with one another using smart contracts without the need for intermediaries, could also potentially disrupt the world of Finance, Menon said. “It is a fundamentally different approach to financial infrastructure, compared to the centralized systems of today.”

DeFi has the potential to bring economic and social benefits by replacing the need for intermediaries and bringing greater inclusion. However, it was not without its risks. “There have been some unsavoury practices in this space: ‘flash loans’ being used to manipulate prices in the market; bots being used to front-run retail trades,” Menon said. “With decentralized governance, who do you approach to recover lost accounts or reverse accidental transfers of money?”

Menon acknowledged the need to adapt existing regulatory frameworks with the rise of DeFi and to balance harnessing the benefits of innovation while managing risks. “We will work with both the financial industry and the broader ecosystem to find the right balance.”

The central bank, which has been facilitating experiments for blockchain and DeFi innovation through regulatory sandboxes, also announced today that it was enhancing its regulatory sandbox with Sandbox Plus to expand the eligibility criteria of the sandbox to include early adopters of technology innovation.

This theme for this year’s Singapore FinTech Festival, the sixth edition of one of Asia’s largest fintech events, is “Web 3.0 and its impact on financial services.” The weeklong event runs from Nov. 8 to 12 and will feature over 350 sessions and more than 700 speakers.

See related article: Temasek-founded Affinidi launches new business unit to bring Web 3.0 to financial services to Southeast Asia



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