MAS to prepare for digital Singapore dollar, though case for it ‘not urgent’: Ravi Menon

SINGAPORE – The central bank is building the technology infrastructure and technical competencies that are necessary to issue a digital Singapore dollar should the Republic decide to do so in the future.

This comes even as the Monetary Authority of Singapore (MAS) does not yet see an urgent need for such retail central bank digital currencies (CBDCs) – the digital equivalents of notes and coins.

There are two types of CBDCs: Wholesale ones that are used within the banking system and are similar to reserves commercial banks place with a central bank; and retail CBDCs issued by a central bank to the general public.

Interest in retail CBDCs has risen sharply in the last two years, MAS managing director Ravi Menon said virtually at the second day of the annual Singapore FinTech Festival on Tuesday (Nov 9). 

MAS is embarking on Project Orchid in close partnership with the private sector to build the tech infrastructure and competencies necessary to issue a digital Singdollar, said Mr Menon, citing the potential benefits of innovative retail CBDC solutions.

Mr Menon said there are three possible reasons for MAS to issue a digital Singapore dollar to the public.

For one, “like notes and coins, a digital Singapore dollar issued by MAS will be safe, widely accepted and bear the authority of the state”.

The rapid displacement of cash in favour of electronic payments based on bank deposits or e-wallets has spurred countries like Sweden and China to consider retail CBDCs, he said. Six in 10 central banks are experimenting with retail CBDCs, according to a survey by the Bank for International Settlements.

The second reason, said Mr Menon, is that a digital Singapore dollar could also foster an efficient and inclusive payment ecosystem, making it easier for smaller firms to build new payments and related digital services.

“Start-ups, for instance, can integrate with the retail CBDC and not need to build their own e-money and user base. This financial inclusion rationale has been a key motivation for countries like Cambodia and the Bahamas to adopt retail CBDCs.”

Third, a digital Singapore dollar could also mitigate against the encroachment of privately issued stable coins or foreign CBDCs in Singapore’s payments landscape, said Mr Menon.

“As these global digital currencies enter our market and become widely accessible in the future, they could potentially displace the use of the Singapore dollar in domestic retail transactions. A digital Singapore dollar that is issued by MAS and is congruent with the needs of a digitalised economy could go some way to mitigate this risk.”

But retail CBDCs can pose significant risk to monetary and financial stability, especially in “stress periods”.

“Even in normal times, if people held a significant portion of their deposits in the form of digital Singapore dollars with MAS, it would considerably reduce our banks’ ability to make loans,” said Mr Menon, adding that safeguards can help to mitigate these risks.

But, overall, the case for retail CBDCs in Singapore is not urgent as physical cash is likely to remain in use here, he said.

“The financial inclusion benefits of a digital Singapore dollar are not compelling. A high proportion of Singaporeans have bank accounts and electronic payments in Singapore are pervasive, highly efficient and competitive,” said Mr Menon, adding that a possible currency substitution by foreign digital currencies is for now only a remote risk.

“At the same time, MAS recognises there could be potential benefits offered by innovative retail CBDC solutions in the future.”

Mr Menon also announced on Tuesday that MAS will make three enhancements to its FinTech Regulatory Sandbox framework to further catalyse financial innovation and the adoption of financial technology.

The sandbox was launched in 2016 to enable experimentation of technology innovation to deliver financial products and services.

Early adopters of technology will be eligible for the sandbox under the new Sandbox Plus option, which takes effect on Jan 1. A company is currently eligible for the sandbox only if no similar implementations have been observed in Singapore.

Meanwhile, first movers of technology innovation will be able to concurrently apply to enter the regulatory sandbox and receive a financial grant – 50 per cent of qualifying expenses, capped at $500,000 – in a single application.

“The financial grant will help meet the cash flow needs of Sandbox Plus applicants, and allow them to focus resources on technology innovation and market development even while they are still in the regulatory sandbox,” said MAS.

Eligible applicants will also be enrolled in a Deal Fridays programme – a platform for them to network with the external investor community.