Thoughts on the central bank digital currency (CBDC) around Singapore Fintech Festival 2022

by Nadeem Shamim, Global Head of Cash and Liquidity, SmartStream | 4 November 2022

It’s money, money, money today. To be more specific, central bank digital currency (CBDC). Central bank digital currencies are digital tokens, like cryptocurrency, issued by a central bank. Many countries are developing CBDCs, and some have even implemented them. There were much industry talks at the Singapore Fintech Festival 2022, on leveraging Web3 technology (such as DLT, CBDCs etc) to build more efficient, cheaper, and safer payment rails for the future.

Deputy Prime Minister of Singapore, Lawrence Wong reiterated in his keynote speech the central bank’s warnings about the risks involved in the trading of digital tokens, especially for retail investors. He however added “But there should be no doubt at all that we are embracing fully the underlying technologies of distributed ledgers and the potential that they have to transform financial markets.” Wong added the pandemic had been “a significant catalyst” in the push towards digitalisation, and that the city state was “always looking at ways to use digital technologies to streamline and further improve business processes”. In his speech on Wednesday morning, Wong also touched on the Singapore central bank’s trial of a purpose-bound digital currency, which is part of a move to build up the city state’s technical framework needed for what’s known as a retail central bank digital currency in the future.

For the Monetary Authority of Singapore (MAS), the case for a retail central bank digital currency (CBDC) is not compelling at the moment. But Singapore is not putting a stop on it entirely, instead, it plans to continue exploring good use cases for digital currencies. Therefore, MAS has decided to look into the use of purpose-bound digital Singapore Dollar, via Project Orchid.

Some key policy and design questions remain, such as:

  • What is the issuance model? Do central banks issue them or make commercial banks as agents of issuance?
  • What is the distribution model? Do retail customers hold banks accounts with central banks or with commercial banks?

How will the model of commercial banks look like? That ultimately depends on what sort of design a central bank is looking at. Is it retail or is it wholesale? There remains a concern, some would call it fear, that the commercial banks deposits would disappear with CBDC.  What if deposits from commercial banks are considered higher risk than central banks?

Several banks felt that this is no longer the case but, in each market, they need to understand the operating model. What are the drivers? Is it for financial inclusion or financial innovation? And how do they operate with the existing currency. One idea being explored is the size of the wallet with lower KYC requirements. Quite frankly this would have a bigger impact for other compliance that need to be met such as terrorist financing and KYC.

There also appears to be more opportunities moving from domestic to cross border, in the wholesale space. Of course, with that comes different challenges such as KYC, cross border balance money supply, interoperability, geopolitics, taxation, etc to name a few.

So how does this impact, cash and liquidity management? One of the advantages of the CBDC is the speed at which transactions are settled and one of the risks is the potential liquidity between CBDC and Fiat currencies. This would make it even more critical to know exactly how much liquidity is held and where, i.e. in real time. Having a real time liquidity management solution would mitigate some of these challenges.

Needless to say, there are a lot of activities, with various central banks around the world concluding review, research and POCs. This is a fast-changing environment so watch this space.