A tap of your credit or debit card at the train gantry. A hover of your smartphone over the payment terminal. Just a few taps to transfer your share of the lunch bill to your friend.

The Covid-19 pandemic has seen more Singaporeans embrace digital payments, with PayNow transactions doubling in both volume and monetary value from 2019 to 2020.

By last October, three-quarters of merchants across the island were using the Singapore Quick Response Code (SGQR) to accept payment. SGQR is a unified payment QR code launched by the Monetary Authority of Singapore (MAS) in 2018.

Certainly, consumers still use cash, especially in the heartland. But MAS noted in a report last November that cash is “generally incompatible” with the digital economy. The demand for cash as a means of payment is set to decline further.

“As Singapore moves towards a fully digital financial system, we see central bank digital currencies (CBDC) as potentially the next step in the evolution of money,” says Mr Heng Koon How, executive director, head of markets strategy, global economics and markets research, UOB.

What is CBDC? How does it differ from the digital payments that we are already using? Put simply, CBDC is digital cash.

But more specifically, it is a form of sovereign digital currency that leverages the decentralised and secure advantages of blockchain.

CBDC is issued by the respective country’s central bank and is one-for-one exchangeable with fiat money, which is physical money that is declared legal tender by a government.

The blockchain technology of CBDCs can enable central banks to programme more precise and efficient transfers of fiscal benefits and payouts from the government.

“For example, Community Development Council vouchers can be programmed to only be used at certain merchants, and to expire by a certain date,” Mr Heng says.


Fostering greater financial inclusion

In a retail setting, CBDC can be used by individuals and businesses to pay each other for goods and services.

For example, when China rolled out its digital yuan, or e-CNY, at this year’s Beijing Winter Olympics, athletes and visitors could store their digital yuan on a mobile wallet app, physical card, or wristband. These were easily swiped to make transactions.

The most immediate benefit of a CBDC is its ability to enable faster, cheaper and more efficient payments – both domestically and internationally.

Besides reducing the costs of making, distributing, and safeguarding physical money, it is also more environmentally friendly. In a report in July, MAS said it issues about 100 million pieces of excess new notes during festive periods such as Chinese New Year.

The carbon footprint of these notes is comparable to the emissions from powering 430 four-room Housing Board flats annually.

With most of Singapore already well-versed in using digital payment platforms – be it PayNow or digital wallets such as GrabPay – CBDCs may not sound like a giant leap in innovation.

Mr Heng explains that the wider benefits of CBDCs can be better felt in emerging market countries. “The ability to readily and cheaply access financial services is largely a privilege of developed economies.”

For countries with less advanced payment systems, CBDCs can help improve the banking process for easier and safer transfer of money.

“Developing economies often carry the burden of poor infrastructure and ‘dis’-economies of scale, thus are commonly underserved or have to pay a higher cost for access. This tends to feed back into a loop which perpetuates the poverty cycle,” Mr Heng explains.

“The use of CBDCs can help improve significant financial inclusion and bring a large fraction of the population to conduct their financial transactions digitally.”


Types of CBDCs

The use cases of CBDC will depend on the architecture that the central bank chooses to implement:

  • In a wholesale CBDC model, CBDCs will be confined to interbank transactions. The CBDCs are used by financial institutions and corporations for trade settlement in financial markets and supply chains.
  • In a retail CBDC model, individuals can hold accounts directly with the central banks. The CBDCs can be used by individuals and businesses to pay each other for goods and services.


Promises of Project Ubin

In 2016, the MAS initiated Project Ubin, a multi-year collaboration with the financial industry.

The project explores the use of blockchain and distributed ledger for clearing and settling payments and securities.

Project Ubin was geared towards developing simpler-to-use and more efficient alternatives to today’s systems, based on central bank-issued digital tokens.

MAS explored the concept of a tokenised Singapore dollar (SGD) for interbank payment in the initial phase. Subsequently, MAS collaborated with the Bank of Canada to study the use of CBDCs for cross-border and cross-currency payments.

One concern about CBDCs is whether the systems set up by individual countries are interoperable – such that the CBDCs can be used for cross-border payments using multiple currencies and across multiple jurisdictions.

MAS’s Project Dunbar seeks to address this issue, partnering with the Bank for International Settlements Innovation Hub Centre in Singapore, together with the Reserve Bank of Australia, Bank Negara Malaysia and South African Reserve Bank.

Project Dunbar explores functional and technical designs, operating models, and governance structures of multiple CBDC or m-CBDC arrangements – with a vision of faster, cheaper and more secure cross-border payments.

When cross-border interoperability of CBDCs between different countries is established, the blockchain technology can allow retail investors to send money to foreign countries in real time. Recipients can receive the money instantaneously.

Mr Heng explains: “This will vastly improve the speed and security of overseas remittances. Remittance fees will also be reduced as the process efficiency improves.”

Last year, the MAS announced that it is embarking on Project Orchid to build the technology, infrastructure and technical competencies that are necessary to issue a digital Singapore dollar. It also aims to explore the potential benefits of retail CBDC solutions.


Regional CBDC projects

China’s e-CNY

In April 2020, the People’s Bank of China started conducting public trials of e-CNY across various key cities, culminating in a large public trial at the Beijing Winter Olympics in Feb. To date, the e-CNY trials have been expanded to more than 20 cities across China.

Singapore’s Project Ubin

Since 2016, MAS has conducted various studies into the use of blockchain and digital ledger technology – from exploring the concept of a tokenised SGD for interbank payment to the use of CBDCs for cross-border and cross-currency payments.

Thailand’s Project Inthanon

The Bank of Thailand (BOT) has experimented with various concepts of cross-border payment using a wholesale CBDC since 2018. Most recently in April last year, BOT initiated a study on retail CBDC, seeking public feedback on a nationwide retail digital currency.

Hong Kong’s Project LionRock

Hong Kong Monetary Authority (HKMA) started its domestic retail CBDC studies in 2017, and collaborated with BOT on a joint wholesale CBDC for cross-border payment in 2019 in a project known as Project Inthanon-LionRock.


Benefits of blockchain tech

“At UOB, we are exploring the practical use of blockchain technology to help improve our banking processes and improve the banking experience for our customers,” Mr Heng says.

To this end, the bank’s focus is on two key pillars of blockchain.

The first is asset tokenisation, which has the potential to use blockchain tech to make fundraising and capital markets more efficient. It does so by fractionalising a high-value asset into investable liquid tokens.

The second is CBDCs. “We believe that blockchain technology has the potential to make our financial system more efficient, especially in cross-border payment. UOB is collaborating and supporting the MAS and various regional central banks in CBDC initiatives.

“From the ancient days of barter trading, to the introduction of money and various innovations in capital markets, and now digital transactions and payments, we have come a long way,” says Mr Heng.

“CBDCs may well be the next innovation in money which may result in transactions becoming fully digital and replacing cash.”

The Future of Finance is a series that explores how digital solutions can empower individuals and businesses, creating a smarter, more sustainable world.

This article was originally published on The Straits Times and was written by Kareyst Lin, Content STudio.


Source: The Straits Times © SPH Media Limited. Permission required for reproduction