MAS MD Menon equates fintech transformation with Wu Xing

According to Menon, the Covid-19 pandemic and subsequent shutdowns led to “a delayed purge of unsustainable business models, highly risky practices and unviable use cases.” He went on to say that “the digital asset industry will emerge leaner and stronger.”

Singapore has seen unprecedented collaboration in recent years, across businesses, financial institutions, fintech startups and central banks. Fintech investment in the nation-state reached US$3.9 billion, a staggering jump from US$0.9 billion in 2019.

Menon’s speech focused on what’s next for fintech in Singapore, and he explored five issues that continue to pervade. To solve these problems, he turned to the Chinese philosophy of Wu Xing, in which “there are five basic elements that act as cosmic agents of change: water, metal, fire, wood, earth.”

He added that the five key outcomes we want to achieve through our collaborative fintech projects are:
– Instant transfer
– Nuclear settlement
– Programmable money
– Tokenized assets
– Reliable sustainability data.

Instant remittance = water

Alongside the connection between Singapore’s PayNow to Thailand’s PromptPay and the work towards the same for India’s Unified Payments Interface and Malaysia’s DuitNow, Menon explained that each new link “requires a refresh in technical alignment between the two payment systems. It also involves accommodating domestic guidelines, such as for privacy and security, sanction control and capital control.”

MAS has been working with the BIS Innovation Hub on Project Nexus, a multilateral solution to connect countries’ real-time payment systems. “With this solution, each country only needs to connect its real-time payment system once to a Nexus gateway, which in turn provides direct connectivity to all the other countries already within the network.

“Additionally, Nexus is a unified solution that coordinates payment, currency conversion, message translation as well as compliance, which will streamline the entire payment process across borders,” Menon said.

The ten members of ASEAN have a shared vision of a multilateral network of payment links across the region by 2025.

Nuclear settlement = Metal

Although Project Nexus will solve problems around clearing, it does not solve the settlement problem, and the actual transfer of funds between banks is still not instantaneous on a global scale because there are too many intermediaries and ledgers that the transaction has to go through. Nuclear settlement is the perfect solution and what MAS has been working on with Project Ubin since 2016.

Project Ubin has paved the way for other collaborations such as Partior and Project Dunbar, but MAS will launch Project Ubin+, “a global initiative for cross-border exchange and settlement of foreign currency transactions using CBDCs.”

Menon explained that MAS will also work with the French and Swiss central banks to test the exchange and settlement of wholesale CBDC with an automated market maker. In addition to this, MAS will work with Swift to enable interoperable, instant, cross-border payment and settlement across DLT-based systems and existing payment infrastructure.

Programmable Money = Fire

Despite digital money accounting for 92% of the money supply in Singapore, money is not programmable. Menon defined programmable money as “built-in rules in the medium of exchange itself that define its use. These rules are retained even when the money is transferred.”

Using charitable donations as an example, Menon stated that with programmable money, “we can have better assurance that donations reach their intended recipients and the funds are used for their intended purposes. We can program the recipients and purposes into the money itself. The programmability comes from to tokenize the money and place it on a distributed ledger.”

There are four options for programmable money. “Cryptocurrencies are a non-starter,” but “stablecoins are more promising,” Menon said. Tokenized bank deposits are also a viable option as they are a digital representation of commercial bank deposits that can be used as digital cash. Similarly, CBDCs – which are direct obligations to the central bank – combine the advantages of issued cash with the advantages of the blockchain.

MAS “discourages retail investment in cryptocurrencies; facilitating stable coins through proper regulation; allow tokenized bank deposits; and experiment with CBDC.” Menon explained that: “MAS expects all stablecoins and tokenized deposits issued in Singapore to meet a minimum standard with respect to the guarantee of value,” as seen with Project Orchid.

Tokenized assets = three

Menon believes that “asset tokenization has transformative potential, not unlike securitization 50 years ago.” He added that “DeFi is still in its infancy and is not without significant risks.” Through Project Guardian, MAS is laying the protocols that will help leverage the benefits of tokenized assets and DeFi while managing their risks.

Summarizing the four points, Menon stated that “the real value in the crypto industry comes not from speculating in cryptocurrencies, but from tokenizing assets and placing them on a distributed ledger for use cases that increase economic efficiency or increase social inclusion. The question is often asked: does Singapore want to be a hub for cryptoassets?

“If a crypto hub is about experimenting with programmable money, yes, we want to be a crypto hub. If it’s about using digital assets for use cases like nuclear settlement, yes, we want to be a crypto hub. If it’s about tokenizing real and financial assets to increase efficiency and reduce risk in financial transactions, yes, we want to be a crypto hub. But if it’s about trading and speculating in cryptocurrencies, that’s not the kind of crypto hub we want to be,” Menon explained.

Reliable sustainability data = Earth

While the industry recognizes that good data is critical to driving the green agenda and transition finance, the ESG data collection process is often manual, tedious and costly, and this challenge continues to pervade. Fintech can support the solution to this problem, and MAS has launched Project Greenprint to build digital tools that streamline the collection, access and use of climate and sustainability data.

Menon said: “Through Project Greenprint, we want to make Singapore an entry point for ESG fintech solutions that will help drive Asia’s and the world’s transition to zero.”

He concluded: “The five desired outcomes – instant remittance, nuclear settlement, programmable money, tokenized assets and reliable sustainability data – remind us that everything we do in finance, technology and fintech must have a greater purpose. We want to expand economic opportunities, strengthen social inclusion, reduce risks and protect our planet.

“The essential thing about the five fintech projects to achieve these desired results is collaboration – collaboration between the public and private sectors; cooperation between established financial institutions and new fintech firms; and cooperation across national borders. Like the five elements of water, fire, earth, metal and wood, it is exchange and interactions that generate growth and new possibilities.”