The Taiwan Banker

Singapore's ambition in digital assets is well established. The Payment Services Act (PSA), enacted in 2019, provided a clear legal framework and comprehensive regulatory oversight for digital assets. To stimulate its burgeoning virtual economy, the Monetary Authority of Singapore (MAS) has attracted leading global virtual asset exchanges to establish a presence in the city-state. These initiatives have fostered a thriving digital asset ecosystem, drawing significant interest. However, the virtual asset market remains inherently risky, susceptible to speculative arbitrage and illicit money laundering. As Mr. Ravi Menon, former Managing Director of MAS, emphasized at the FinTech Festival, "Singapore is committed to becoming a hub for digital assets, not a center for cryptocurrency speculation." MAS has adopted a strategic approach that prioritizes innovation without compromising stability, underscoring the necessity for balanced development and robust regulation. From the outset of its Central Bank Digital Currency (CBDC) research, the Singaporean government opted for decentralized ledger technology (DLT) as the underlying infrastructure for diverse application scenarios. Widely employed by global virtual asset transaction protocols, DLT enhances CBDC liquidity. Beyond these advantages, the government’s primary objective is to understand how a centralized currency can function within a decentralized network, and to explore potential applications within the traditional financial system, thereby improving transaction efficiency and seamlessly integrating the physical and virtual economies. Among the numerous domestic applications of DLT, including payments and securities transactions, cross-border financial transactions stand out as a compelling use case. Consider traditional international bank transactions: disparate clearing systems impede direct transactions, necessitating reliance on intermediary institutions, which are often costly and time-consuming. DLT eliminates these intermediaries, reducing expenses and streamlining the process. Singapore's experimental project, aimed at utilizing CBDC as a clearing asset for cross-border payments, encountered significant technical challenges. A crucial hurdle involved the seamless conversion between foreign CBDCs and Singapore's domestic CBDC, which would require not only a shared ledger that interfaces with various national systems and a dedicated foreign exchange liquidity pool, but also substantial recalibration of existing domestic DLT-based fund settlement systems, such as the Real-Time Gross Settlement (RTGS) system. Moreover, when cross-border payments involve financial commodity trading, synchronized updates to corresponding securities settlement systems are essential for frictionless connectivity. This complex endeavor highlights the intricate technical coordination required for successful CBDC-driven cross-border payments. Recognizing this, Singapore has implemented a phased CBDC deployment strategy. Initially, focus will center on domestic transaction settlement. The program will then progressively expand in its second phase to encompass cross-border payments, including financial securities trading and trade financing. Pilot testing will commence with a model facilitating the coexistence of traditional RTGS and DLT-based settlement. Subsequently, the pilot program will extend into financial securities trading, culminating in the integration of fund clearing and securities settlement processes via DLT. Then, in the fifth phase, a cross-border/cross-currency payment platform prototype will be built utilizing DLT, compatible with diverse scenarios such as inter-bank cross-border payments, international financial and securities investment, trade, and insurance. Beyond assessing technological feasibility, this phase aims to evaluate the value of decentralized trading in financial markets and beyond, quantifying the economic benefits of DLT. The economic advantages of cross-border payment platforms are contingent upon network scale and platform scalability. Consequently, Singapore has actively collaborated with other central banks through international organizations like the Bank for International Settlements (BIS) to develop a universally accessible international payment platform. Project Mariana exemplifies this collaborative effort, leveraging smart contracts and automated market makers (AMMs) to streamline cross-border CBDC exchange. These AMMs manage a liquidity pool comprising three CBDCs: the Singapore dollar, the euro, and the Swiss franc. Participating AMMs act as liquidity providers, with exchange rates determined algorithmically within the liquidity pool based on the principle of constant product. As the AMM functions as a counterparty rather than a specific trader, and trading parameters like minimum exchange volume and duration are pre-programmed into smart contracts, AMMs effectively mitigate capital delivery and settlement risks, enhancing foreign exchange trading efficiency. Despite the pilot program's limited participation, it successfully deployed a platform enabling CDBCs from numerous countries to access liquidity pools. This architecture fosters future interconnectivity and international cooperation, amplifying the platform's economic impact. Nearly a decade into its CBDC experimentation, Singapore has achieved initial progress, but the readiness of DLT architecture for widespread financial payment system adoption remains to be seen. Singapore continues to rigorously assess the program’s technological viability, with evaluations forthcoming to focus on risks, regulatory frameworks, and management protocols, all of which are prerequisites for broader implementation. For instance, security presents a significant challenge. Automated transaction flows on decentralized platforms are vulnerable to cyber-attacks, prevalent in recent years, which can inflict substantial losses without robust defenses. Compromised nodes in peer-to-peer networks can manipulate data and propagate it, affecting adjacent nodes, and eventually the entire system. As such, the unique characteristics of decentralized platforms necessitate tailored supervision to address their distinct transaction flows, risk profiles, and participant roles. Mastering cross-border financial flows will be pivotal for international competitiveness in the financial industry. Singapore’s CBDC initiative prioritizes international payments. It has demonstrated the technical feasibility of a decentralized cross-border CBDC model, helping solidify Singapore's leadership in the Web 3 economy. However, the decentralized model still has significant hurdles to overcome related to security, legal framework, and regulatory oversight. MAS has made the CBDC pilot project prototype available for public testing and application. The next phase will be built upon the insights gained from this experimental project, fostering international collaboration to explore cross-border payment structures and integrate other tokenized asset trading platforms with CBDCs.The author is a research fellow, Institute for Financial Research, Taiwan Academy of Banking and Finance