MAS outlines three initiatives to ensure the safe and innovative use of digital money in Singapore

08 Dec 2023

Introduction

1. On 16 November 2023, the Monetary Authority of Singapore (“MAS”) unveiled three initiatives to ensure the safe and innovative use of digital money in Singapore. These are: (1) a blueprint outlining the infrastructure required for a digital Singapore dollar (the “Orchid Blueprint”); (2) the expansion of digital money trials; and (3) a plan to issue a “live” central bank digital currency (CBDC) for wholesale settlement.

Background

2. In 2021, MAS launched Project Orchid as a multi-year, multi-phase exploratory project examining the various design and technical aspects pertinent to a digital Singapore dollar.On 16 November 2023, the Monetary Authority of Singapore (“MAS”) unveiled three initiatives to ensure the safe and innovative use of digital money in Singapore. These are: (1) a blueprint outlining the infrastructure required for a digital Singapore dollar (the “Orchid Blueprint”); (2) the expansion of digital money trials; and (3) a plan to issue a “live” central bank digital currency (CBDC) for wholesale settlement.

3. The objectives of Project Orchid are to develop the technology infrastructure and technical competencies necessary for a digital Singapore dollar (such as Central Bank Digital Currencies (“CBDCs”) and tokenised bank deposits) and to explore potential use cases for a programmable money in Singapore.

4. Building on Project Orchid, on 16 November 2023, the MAS published the Orchid Blueprint and announced plans to expand digital money trials and commence the development of CBDC for wholesale interbank settlement in 2024.

     Initiative 1: The Orchid Blueprint

5. The Orchid Blueprint sets out the technology and infrastructure building blocks that would be required to facilitate digital money transactions in the future and incorporates learnings from the Project Orchid industry trials and industry engagements.

6. According to the MAS, the publication of an industry-wide blueprint helps to ensure interoperability across different infrastructures, platforms, and services, and that without a coordinated approach at the outset, there would be unnecessary duplication of efforts, resulting in each provider needing to invest significantly to ensure compatibility and integration across different systems subsequently. The MAS also noted that the development of multiple proprietary infrastructures could result in inefficiencies and lead to higher costs for consumers and businesses, who might have to utilise several systems and incur additional fees from intermediaries to access financial services from different providers.

7. The Orchid Blueprint has identified the following “building blocks” for digital money infrastructure in Singapore:

• Settlement Ledger – A system for recording digital money transfers, with supporting features such as native programmability and atomic settlement of digital tokens. 
• Tokenisation Bridge – Connect existing account-based settlement systems with ledgers compatible with tokenised forms of digital money. 
• Programmability Protocol – Using Purpose Bound Money (“PBM”) as a common protocol to specify the conditions for the use of digital money. 
• Name Service – A service to translate between unwieldy wallet addresses and alternative name identifiers that are readable and meaningful for verification.

     Initiative 2: Expansion of Digital Money Trials

8. To test the broad applicability of PBM and digital money in Singapore, MAS also announced an expansion of Project Orchid’s digital money trials; four new trials will be undertaken with industry players to examine relevant infrastructure components and commercial models:

• Tokenised bank liabilities: OCBC and UOB are exploring the feasibility of enabling tokens issued by one bank to be accepted for retail payments by another. This will be first trialled at the Singapore FinTech Festival 2023.
• Wallet interoperability: Ant International, Fazz and Grab will be launching a pilot that uses the PBM concept to facilitate payments by Alipay users to GrabPay merchants. The PBM ensures that only verified Alipay wallet users can pay to eligible GrabPay merchants, with transaction limits to deter fraudulent activity. 
• Supplier financing: Amazon and HSBC are exploring the use of PBM in the tokenisation of payables from Amazon to merchants. This will help unlock liquidity for merchants, thereby improving merchants’ access to financing and working capital. 
• Institutional payment controls: J.P. Morgan is exploring the use of payment controls to enable a bank’s institutional clients to hold deposit tokens and transfer them to clients outside of the issuing bank’s direct customer base as long as the banks are part of an agreed trust ecosystem. This ensures adherence to controls set by the issuing bank and the recipient’s bank, enabling peer-to-peer transfer of deposit tokens which are traditionally non-tradeable liabilities.

     Initiative 3: Central Bank Digital Currency for Wholesale Settlement

9. MAS also announced that, to complement the digital money trials by the financial industry involving retail and corporate users, it will commence the development of CBDC for wholesale interbank settlement in 2024. MAS said that it will pilot the “live” issuance of wholesale CBDCs for the first time, after previously simulating issuance within test environments. The first pilot will involve the use of “live” wholesale CBDC to settle retail payments between commercial banks. Future pilots could include the use of “live” wholesale CBDC for the settlement of cross-border securities trade.

Commentary

10. The Orchid Blueprint and the associated initiatives have the potential to change the future of payments and money not only in Singapore but internationally. They represent concrete steps taken by the MAS to achieve its goal of collaborating with the financial industry and international partners to shape the financial ecosystem of the future.

Key point box

11. The three forms of digital money that the Orchid Blueprint is concerned with are: (1) regulated stablecoins; (2) tokenised bank liabilities; and (3) central bank digital currency issued by the MAS.

References