Singapore to test digital currency in latest fintech initiative

The "proof-of-concept" project is aimed at simplifying the payments process and reducing transaction costs, says Ravi Menon

The Monetary Authority of Singapore is poised to become the latest central bank to test its own digital currency, which it will use in a trial of a blockchain-driven system for interbank payments.

The “proof-of-concept” project, which also involves the city’s stock exchange and eight banks, is aimed at simplifying the payments process and reducing transaction costs, Managing Director Ravi Menon said in a speech Wednesday. It may include cross-border transactions with the participation of another central bank in the future, he said.

“Today, banks have to go through correspondent banks to intermediate these payments. It takes time and adds to cost,” Menon said. “This project marks the first step in MAS’s exploration of ways to harness the potential of central bank-issued digital currency.”

The project is the latest sign that a long-discussed development for the banking industry — the adoption of blockchain to speed up and simplify interbank deals — is gaining traction after years of debate and warnings about possible safety breaches. 

The MAS plan involves an internally-created digital currency. It’s a similar approach taken by the Bank of Canada, which said in June it’s running experiments on interbank payment systems using blockchain-type technology.

According to Menon, under the MAS trial:

Banks will deposit cash as collateral in exchange for digital currency issued by the central bank 

Participating banks can pay each other directly with this digital currency instead of first sending payment instructions through MAS

Banks can later redeem the digital currency for cash

Central banks in China and the UK have also been studying the prospects of issuing their digital currencies, which are independent of bitcoin, which is commonly associated with blockchain but whose allure has been tarnished by fraud and money-laundering concerns. UBS Group AG, Deutsche Bank AG and Banco Santander SA has partnered with other firms and a start-up called Clearmatics to develop a “utility settlement coin” — a currency usable within a blockchain and exchangeable between banks.

Singapore’s DBS Group Holdings, its two local rivals, HSBC Holdings Plc, Bank of America, JPMorgan Chase, Credit Suisse Group AG and Bank of Tokyo-Mitsubishi UFJ are the lenders involved in the MAS program, according to a slide presentation for Menon’s speech. 

The R3 consortium of global financial firms, which is developing blockchain applications for use in financial services including money transfers, record keeping and other back-end functions, is also supporting the effort, Menon said. The MAS said last week it’s partnering with R3 on a Singapore-based centre to develop blockchain.

Singapore will also create a national “know-your-customer” platform that will help banks avoid redundancy in customer data collection and reduce compliance costs, Menon said. The “basic building block” of that system will be the government’s MyInfo service, which collects personal details of Singaporean residents, he said during an event at the Singapore Fintech Festival.

The week-long festival, organised by the MAS, is part of Singapore’s broader effort to position itself as a financial technology centre, as it competes with other global hubs like London, Hong Kong and New York to attract business from established financial firms and start-up ventures.

The fintech festival had lured more than 11,000 participants from over 50 countries, Menon said. Speakers during the week include blockchain cheerleader Blythe Masters, the chief executive officer of Digital Asset Holdings who once ran JPMorgan & Chase’s commodities business, and Peter Sands, former CEO of Standard Chartered Plc.

Bloomberg