CBDCs Have Potential But Not in 2022: Monetary Authority of Singapore Pumps the Brakes

CBDCs have the potential to make a significant impact on global finance, but appropriate safeguards need to be in place, an official from the Monetary Authority of Singapore (MAS) said today.

The industry gathered for the Singapore FinTech Festival, where one of the presenters was MAS managing director Ravi Menon.

Central Banks’ Roles in Managing Finance

The form fiat money has taken has constantly evolved ever since it was introduced, so there’s no surprise it is changing now, Menon reminded the crowd. Forty years after the Internet was introduced in one form, it’s no wonder money has been adapted to the digital realm, with most money created privately by commercial banks in digital form. In Singapore, 92 per cent of the money supply is bank deposits. Commercial banks place their reserves with central banks, so interbank transactions originating from electronic payments of various kinds can be settled.

Central bank conduct is the key factor behind how much confidence is shown in a nation’s currency system, Menon said. By taking steps to ensure low but stable inflation they protect its purchasing power. They of course also regulate commercial banks, and the interaction between the two preserve its value.

The Risk and Reward Posed by Digital Assets and CBDCs

Digital assets, whether they be cryptocurrencies, stablecoins or central bank digital currencies, take aim at this fundamental relationship, Menon admitted. Yet they cannot be considered money for several reasons, he said. Their performance as stores of value, units of account and as media of exchange is poor; technically they are best described as crypto tokens.

Those used for payments are deemed payment tokens, and should be licensed and supervised by the MAS, Menon stated, because of their potential to be used for money laundering and terrorist financing. Such guidance will bring greater clarity and protection for retail investors and until that time comes, such investors should stay clear of investment vehicles that are not underpinned by clear economic fundamentals.

But their underlying technology holds much promise, Menon admitted.

“The blockchain is suited for applications where it is important to know the history of ownership and transfer of value but there is no trusted central party or reliance on a central party is too costly,” he said. “A potentially strong use case of crypto tokens is to facilitate cheaper and faster cross-border payments and trade finance.”

But before they can be used as money, cryptocurrencies need more stability and the backing of central entities, he advised. That’s where stablecoins come in. Most are pegged to the US dollar, and companies such as Visa and Mastercard are incorporating the technology into their payment systems.

While stablecoin issuers may look like banks in that they take money and offer to return it when requested, if they do not intermediate credit then bank regulation may be inappropriate. That is uncertain.

What is more certain, however, are the risks posed by stablecoins, Menon believes. If an issuer is hit by a run, contagion could spread across markets.

CBDCs Have Good Potential

Private money without public backing has a poor track record, Menon cautioned, so a better way to leverage the potential benefits of distributed ledger technology is through central bank digital currencies (CBDC). The MAS strongly believes in wholesale CBDCs, which can radically transform cross-border payments, he believes. But because they are not meant for general public use, they are not money in essence, he said.

Retail CBDCs, on the other hand, are increasingly being considered, with 60 per cent of central banks experimenting with them, according to the Bank for International Settlements. The MAS sees three reasons to publicly issue a CBDC, Menon said.

The first is to make the benefits of central bank money available for online transactions.

“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,” Menon said

A digital dollar could also possibly foster an efficient and inclusive payment ecosystem, he added. Smaller companies could more easily build payment and associated digital services by integrating with a retail CBDC and not have to worry about creating a house crypto.

“This financial inclusion rationale has been a key motivation for countries like Cambodia and the Bahamas to adopt retail CBDCs,” Menon said.

A digital Singapore dollar could protect against the effects of increasingly available private stablecoins and CBDCs.

“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,” Menon said. “A digital Singapore dollar issued by MAS that is congruent with the needs of a digitalized economy could go some way to mitigate this risk.”

But retail CBDCs pose risk to national economies, Menon cautioned. To prevent loss of central bank control over the economies, retail CBDCs need to be designed with appropriate controls so those banks maintain their ability to make loans.

The Current Climate in Singapore on CBDCs

Overall, there is no strong sentiment either for or against a retail CBDC for Singapore, Menon said. Physical cash isn’t going anywhere soon, and most Singaporeans are already active within efficient digital financial systems. He then described currency substitutions by foreign digital currencies as a remote tail risk at present.

This is a socio-economic and not merely a monetary discussion, Menon believes. Monetary policy will not be much affected by the switch to a cashless society.

“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,” he said. “So for now, there is no strong case for a retail CBDC.”

That could change, however, so Singapore is building the digital rails necessary to accommodate such a system, Menon said. The Global CBDC Challenge the MAS launched earlier this year produced more than 300 proposals from 50 countries.

While much of the future remains unclear, what is certain is it will be increasingly digital, Menon said. Real-time cross-border payments and collaborative data platforms will become popular. MAS has been working in both of these areas for more than a half-decade and is collaborating with several large banks on instant settlement and clearing platforms. Collaborative data platforms require proof of the reliability of fintechs, safe ways to share data analytics, and ways to ensure green practices.

Decentralized financial technology is here and is being used in Singapore, Menon said. So are smart contracts. But for all their potential, they need more stringent regulation before their use can be widespread.

“Regulations crafted to manage risks in a world of intermediaries are ill-suited where intermediaries are replaced by smart contracts,”  Menon said. “Enforcement is more challenging when control or governance is dispersed across the blockchain.”

“MAS will follow Web 3.0 and DeFi developments closely, deepen our understanding, and seek to harness the benefits while managing the risks.  We will work with both the financial industry and the broader ecosystem to find the right balance.  It will be a learning journey.”

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