Viewing Financial Technology Innovation from the Perspective of the Five Elements, Singapore Aspires to Become the Hub for Cryptocurrency Assets

In 2022, Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS), detailed five key outcomes of financial technology innovation collaboration at the Singapore Fintech Festival, using the five elements of Chinese philosophy as a metaphor. These outcomes include instant payments, atomic settlement, programmable currency, tokenized assets, and trustworthy sustainable data. He emphasized that Singapore aims to become a hub for cryptocurrency assets based on these financial technology innovations.

Seamless Flow Like Water – Instant Payments

Menon mentioned that the most basic function of instant payments must flow seamlessly like water. In recent years, the emergence of real-time payment systems has seamlessly connected domestic payment processes in many countries, such as Singapore's PayNow, which allows 24/7 instant transfers using just a phone number or unique entity number. However, for cross-border payments, reliance on outdated correspondent banking networks still results in slow, costly, opaque, and inefficient transactions. According to World Bank data, the global average cost of remittances amounts to 6% of the remittance value.

One way to achieve this goal is to establish connections between real-time payment systems in different countries. Singapore connected PayNow with Thailand's PromptPay last year and is currently in the process of linking it with India's Unified Payments and Malaysia's DuitNow systems. However, each new connection requires updating the technical consistency between the two payment systems and adapting to domestic policies such as data privacy and security, sanctions screening, and capital control issues, which can consume significant time and resources.

The MAS and the Bank for International Settlements (BIS) Innovation Hub's Project Nexus is a unified solution where each country only needs to connect its real-time payment system to the Nexus gateway once, and the Nexus gateway can then directly link to other countries in the network. This will simplify the entire cross-border payment process, coordinate payments, foreign exchange conversions, message translations, and compliance. The project aims to complete transactions within 60 seconds and reduce remittance costs to 3% of the remittance value.

Robustness Like Metal – Atomic Settlement

Project Nexus solved the payment issue but did not address the settlement problem. The actual movement of funds between banks is not instantaneous; it involves many intermediary institutions, passes through different ledgers, and can take two to three days to complete. This is where atomic settlement is needed. Atomic settlement allows for the instantaneous simultaneous exchange of two related assets. One of the most effective ways to achieve atomic settlement is through tokenized assets that can be exchanged simultaneously on a distributed ledger, a concept MAS has been experimenting with through Project Ubin since 2016.

Building on past success, MAS has further initiated Project Ubin+, a global initiative for cross-border foreign exchange trading and settlement using wholesale Central Bank Digital Currencies (CBDCs). In addition to collaborating with other partners of the BIS Innovation Hub on Project Dunbar and Project Jura, MAS is working with SWIFT to explore different interoperability models to achieve real-time cross-border payments and settlements based on distributed ledger systems and existing payment infrastructures.

Reshaping Like Fire – Programmable Currency

Currently, currencies exist in two forms: physical cash issued by central banks and digital currencies existing in the form of commercial bank deposits. Digital currencies currently account for 92% of Singapore's money supply, and many apps now allow users to make payments, transfers, etc., to merchants through digital currencies with just a few taps on their phones, making it very convenient.

However, these currencies are not programmable. Programmable currency means embedding rules within the exchange medium itself that define its purpose, even retaining these rules during transfers. For example, charitable donations can be programmed to ensure they reach the intended beneficiaries and are used for specific purposes. MAS's Project Orchid introduces the concept of purpose-bound money (PBM) and enhances user experience, security, and privacy through mechanisms like vouchers.

Growth Like Wood – Tokenized Assets

Cryptocurrencies had their moment, but tokenization is the real innovation with enormous potential. Tokenization allows high-value financial and physical assets to be divided and exchanged on a peer-to-peer basis, enabling assets to be traded securely and seamlessly without the need for intermediaries and executed autonomously through smart contracts, thus enhancing the efficiency and accessibility of financial services.

Just as saplings have the ability to grow into towering trees, MAS is nurturing an ecosystem of tokenized assets through the Guardian program. In this initiative, MAS and the financial industry work together to establish structures and protocols, leveraging the advantages of tokenized assets and DeFi while effectively managing risks.

Stability Like Earth – Trusted Sustainable Data

Just as the earth provides a solid foundation for us, MAS aims to create a trusted data ecosystem to lay a solid foundation for sustainable finance. MAS has collaborated with the financial industry on a project called Project Greenprint, using digitalization to simplify the collection, viewing, and utilization of climate and sustainability data. In today's emphasis on corporate sustainability and ESG, listed companies can conduct foundational sustainability reporting based on a set of 27 core indicators. Distributed ledger technology is used to record and maintain green certification sources issued by various institutions. The unified platform also facilitates connections between suppliers and investors, financial institutions, and businesses. Through Project Greenprint, MAS envisions Singapore becoming a launchpad for ESG fintech solutions and driving Asia and the world towards net-zero emissions.

Singapore Aims to be the Hub for Cryptocurrency Assets

In his speech, Menon mentioned cryptocurrencies multiple times. He believes that cryptocurrencies do not perform well as a medium of exchange and store of value, and their volatility and speculative nature are not endorsed by MAS. However, stablecoins, due to their combination of stability and programmability, have potential worth exploring if they operate in a well-regulated environment and have secure reserves. MAS will develop more detailed regulations to ensure stablecoins are appropriately supervised.

When asked if Singapore aspires to be the hub for cryptocurrency assets, Menon used the analogy of the Chinese Five Elements to paint a grand and detailed blueprint for the fintech sector, which Singapore aspires to be the hub for! Traditional cryptocurrency trading and speculation are not what Singapore aims for.