Hi Jacek,
First of all, I would like to thank you for inviting me to contribute to your newsletter.
We find ourselves at the nexus of a digital revolution that is fundamentally reshaping the landscape of finance and commerce. From the advent of Central Bank Digital Currencies (CBDCs) to the rise of innovative payment systems, the financial ecosystem is undergoing a profound transformation. Let me bring you on some of pivotal developments in this dynamic space in Asia.
Central Bank digital Currencies (CBDCs).
Let’s begin with Retail and Wholesale Central Bank Digital Currencies or CBDCs. In recent years, countries such as China, Thailand, and the United Arab Emirates have been at the forefront of experimenting with Retail and Wholesale CBDCs. These digital currencies, issued and regulated by central banks, offer a secure and efficient means of transacting in the digital age. China, for instance, has made significant strides in the development of its Digital Currency Electronic Payment (DCEP) system, facilitating seamless retail transactions across the nation. Similarly, Thailand’s Project Inthanon and the UAE’s eDirham initiative underscore the growing importance of CBDCs in modernizing financial infrastructures. Furthermore, collaborations with organizations like the Bank for International Settlements (BIS) are paving the way for international standards and interoperability in the realm of CBDCs, heralding a new era of cross-border payments and financial inclusion. Why do you need Retail CBCD while you have Wechat and Alipay in China, M Pesa in Africa or Pix in Brazil. The most interesting answer lies in the flexibilibilty of smart contracts that leads to DeFi or Decentralised Finance. This is a second-degree problem as compared to the base layer issue of cross border settlements and finality.
Singapore Projects.
Here are some projects of interest to highlight the new developments in Singapore and around the world.
- Project Dunbar – Project Dunbar proved that financial institutions could use CBDCs issued by participating central banks to transact directly with each other on a shared platform. This has the potential to reduce reliance on intermediaries and, correspondingly, the costs and time taken to process cross-border transactions.
- Partior- first use case is for multi-currency cross border payments. This is a sector known for its frictions and delays. That’s partly because it uses messaging, meaning a payment instruction is separate from the money movement. Partior addresses this by using tokenization, which merges the message and the transfer.
- Project Nexus- Nexus is designed to standardise the way that these systems connect to each other. Rather than a payment system operator building custom connections for every new country that it connects to, the operator can make one connection to the Nexus platform.
- Project Ubin 1-5- Project Ubin is a collaborative project with the industry to explore the use of Blockchain and Distributed Ledger Technology (DLT) for clearing and settlement of payments and securities. There had been 5 phases and now into commercialisations.
- Project Guardian- catalyse the institutional adoption of digital assets, with the aim of freeing up liquidity, unlocking investment opportunities, and increasing the efficiency of financial markets. Expand Asset Tokenisation Initiatives
- Project Mandala- explores the feasibility of encoding jurisdiction-specific policy and regulatory requirements into a common protocol for cross-border transactions such as borrowing, foreign direct investment, or payments.
- Project Mariana – tested the cross-border trading and settlement of wholesale CBDCs. Successful trading and settlement of hypothetical euros, Singapore dollars and Swiss francs. DeFi elements tested in the project, specifically automated market makers, could form the basis for a new generation of financial market infrastructures. Curve Finance is an Automated Market Maker, as well as a type of a decentralized exchange. Individuals are able to use the platform in order to swap certain cryptos for one another, but its main functionality (and what it’s best known for, in general) would have to do with yield earning (APY) mechanics.
Purpose Bound Money.
Next, let’s delve into the concept of Purpose Bound Money, a groundbreaking initiative spearheaded by Singapore under Project Orchid. Purpose Bound Money or PBM revolutionizes the way we think about currency by earmarking funds for specific uses or purposes. For example, using smart contracts, government is able to restrict money for the purpose of the grant. However the restricted or purpose bound money will be normal unrestricted money after it is being used for the purpose and reaching the ewallet of the intended education institutions as recipients. This innovative approach not only enhances transparency and accountability but also enables targeted interventions in areas such as healthcare, education, and environmental sustainability. Singapore’s pioneering efforts in this domain exemplify its commitment to harnessing technology for the greater good, laying the foundation for a more equitable and sustainable future. More importantly, it retains the relevance of the SGD in the face of challenges from CBDCs of other larger nations and private issued money such as stablecoins.
Distributed Ledger Technology (DLT).
Moving on to Distributed Ledger Technology (DLT) Payment Systems, we encounter transformative platforms like Finternet and Hyperledger, which are revolutionizing financial transactions. The name Finternet is coined by BIS in a recent paper. Finternet, a cutting-edge DLT or more generally, a uniledger platform, is driving financial inclusion in Cambodia by providing secure and cost-effective payment solutions to underserved populations. Meanwhile, Hyperledger, a global collaborative effort, is empowering businesses across industries to leverage blockchain technology for streamlined and transparent transactions. These DLT payment systems not only enhance efficiency and security but also foster innovation and economic empowerment, unlocking new opportunities for growth and development.
Stablecoins.
Finally, let’s explore the fascinating world of Stablecoins or more correctly Stabletokens as it is created by a smart contract on a public blockchain. Stabletokens or Real World Assets, also known as RWA, digital assets are designed to maintain a stable value relative to a reference fiat currency or asset, such as commodities, bills, bank deposits, transition bonds, or electric vehicles and even rechargeable batteries. In the United States, initiatives like the Gemini Dollar and USDC are gaining traction as reliable mediums of exchange and stores of value in the digital economy. Similarly, in Hong Kong and Singapore, projects such as the Hong Kong Dollar Token and Singapore Dollar Token SGDX are reshaping the payments landscape, offering users a convenient and secure alternative to traditional currencies. By leveraging blockchain technology and smart contract protocols, stablecoins offer unparalleled stability and liquidity, opening up new avenues for low cost cross-border commerce and financial innovation. The daily reporting and rules for e-wallet custodian are interesting stablecoins regulations.
- Project Genesis – The first prototype simulates the life cycle of a typical bond on a permissioned distributed ledger platform, including origination, subscription, settlement and secondary trading.
- Project DESFT- Using ethereum standards ERC3525, Ample Fintech, encouraged by MAS, work with Ghana to use fungible and non-fungible tokens, with identity for international trades. It is more like one wallet for all the projects that are mentioned above. The team we have at Ample Fintech, Zcloak and Solv Foundation have worked with National Bank of Aus, MAS, Ghana Central Bank and potentially BIS.
In conclusion, the emergence of Retail and Wholesale CBDCs, Purpose Bound Money, DLT Payment Systems, and Stablecoins represents a paradigm shift in the way we conceptualize and engage with money and finance. These transformative technologies hold the potential to drive economic growth, foster financial and corporate inclusion, and empower individuals and businesses worldwide.
Risks and Implications.
However, new technology and new money is not without risks. There are implications for financial stability, money laundering, criminal activities, monetary policy implications, banking sector disruptions, capital market structure, portfolio allocation, privacy protection, data security, financial literacy and unknown policy risks of rapid capital flow of which Asia central bankers are familiar with during the 1997 Asian Crisis. The risk, opportunities and challenges are outlined in my paper published Asia Development Bank.
Objectives.
As HE Faith Karahan has mentioned, there are important objectives to achieve, especially with regards to rapid capital inflow and outflow. I would like to point to the ADB research that we have done in respect to currency crisis that can be caused by new DeFi technology. The major question is whether we should be Central Liability Agnostic or Central Bank Digital Currency Jargon Agnostic in the sense that finternet, uniledger, tokenisation and DeFi Agnostic but to focus on the outcome of faciliating Payments versus Payments, Delivery versus Payments and eventually secured, privacy protection and customer centric for inclusion and growth in trade and economics using whatever technology is available to us in the crypto community. Despite the negative sentiments towards the cypherpunks, some of their Web3 technology can be carefully harnessed to ensure trust in data security and privacy protection, and powerful against malicious elements and attacks in an untrusted international environment especially when dealing with digital assets and online transactions. These are especially useful for MENA as some of its economies do not seem to conform to traditional economic theories and international prescriptions. Turkey stands out as one. Also, there is an important question of whether the major currency in the reserve portfolio will ever be frozen and if that is the case, what role does tokenisation play in such instances. I suppose is one of the potential roles of eHKD and eRMB.
Final Thoughts.
As we navigate this digital frontier, let us embrace Web3 innovation, collaboration, and inclusivity to build a more resilient, equitable, and prosperous future for all with reimagine currency, with the future shaped by CBDCs. Mass adoption will probably come when we use these technology in mobile devices, electric vehicles and robots when we can use the tech with a peace of mind, when we use without knowing we are using the tech, and when we use without privacy and security issues.
About the Author:
Professor David Lee Kuo Chuen is a prominent figure in the field of financial technology. He is widely recognised as an authority in the blockchain, FinTech, and Web3 space, holding key positions in academia, industry associations, and advisory roles for major institutions. He has made significant contributions to research, education, and practical applications in this field.
You can contact the Author:
David Lee Kuo Chuen
Professor, Singapore University of Social Sciences, NUS, SUFE
https://sussblockchain.com/about-us/our-team/
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https://www.linkedin.com/in/david-lee-kuo-chuen-李国权-07750baa