Singapore moves ahead with digital currency even as privacy concerns dog blockchain

23 March 2017 12:01pm

14 March 2017. By Tsering Namgyal.

The Monetary Authority of Singapore said last week that it had conducted a test run of a digital prototype of Singapore dollar for interbank transfers, further cementing the nation's position as Asia's fintech leader.

The project, a collaboration between Singapore's central bank and blockchain consortium R3, was first announced in November during a week-long fintech festival in the city state.

The participants in this experiment includes international lenders Bank of America Merrill Lynch, Credit Suisse and JP Morgan, and Singapore banks and financial institutions DBS, OCBC, UOB and Singapore Exchange.

Using the MAS-approved digital currency, banks were able to pay one another directly in digital currency without having first to seek approval from the central bank. The banks deposited cash as collateral with the MAS in exchange for the MAS-issued digital currency.

The MAS said it had successfully connected bank systems to a distributed ledger and also linked its own electronic payment system to the distributed ledger for automated collateral management.

Many countries and regulators say they are looking at blockchain, but Singapore is generally regarded as being at the forefront of pushing digital technology in banking, especially when it comes to creating a regulatory framework.

Singapore's next step will be to test the technology in such areas as investment trading and settlement, using blockchain and transactions through cross-border accounts, the MAS said.

Bourse operator Singapore Exchange is also studying the potential for using blockchain in fixed-income asset trading and settlement.

Blockchain blues

Blockchain is a database of transactions between parties automatically recorded by machines without the need for any supervisory authority. It relies on a vast network of independent computers to verify each other's transactions in a completely transparent process, thereby creating a new economy of machines and a whole new layer of asset transfers between organizations.

The fact that Singapore's authorities are actively experimenting with blockchain when most regulators remain skeptical about it is laudable, said Pindar Wong, a fintech expert who sits on the Hong Kong government's Digital 21 Strategic Advisory Committee.

However, whether Singapore's success can be replicated elsewhere remains to be seen.

The Hong Kong Monetary Authority, for instance, says the large-scale rollout of blockchain is still some way off. In a report released last year, it said it had yet to form a clear opinion on the technology, which powers Bitcoin. The HKMA considers Bitcoin a virtual commodity, not a currency.

In general, regulators remain concerned about bitcoin, as made clear when the US Securities and Exchange Commission last week rejected an application to list what could have been the first US-based exchange-traded fund built to track the unregulated crypto-currency.

Jean Marie Mognetti, who runs a bitcoin ETF based in the Channel Islands, told MLex that the US decision had been expected and that it had dashed hopes for a United States ETF for the foreseeable future. He also wondered how would the industry develop if the regulators do not support it, terming it a "chicken-egg problem" of the bitcoin sector.

Blockchain buzz

Yet the media buzz around blockchain has failed to show any sign of dissipating. The technology's potential to cut the cost of paperwork, cut out intermediaries, and do away with duplication in financial transactions and currency and securities asset transfers, among other things, has been much discussed.

The flipside of all that is that privacy remains a major concern, which explains why many regulators believe blockchain is still a work in progress, according to a report commissioned by R3 last November.

In order to prevent third parties getting their hands on confidential information, banks are building so-called "permissioned ledgers," which are open only to known members of a particular blockchain "community."

But analysts say that does not fully resolve concerns over antitrust issues and insider-trading firewall laws that restrict even personnel from different departments within the same organization from learning about other departments' activities.

Less sympathetic critics say the idea of centralized, permissioned blockchain runs against the very spirit of the technology, which is supposed to be decentralized and open.

It is therefore hardly surprising that the technology has found some of its biggest fans in areas such as supply chain management and trade finance, rather than in tightly-regulated fields like securities trading and settlement. In trade finance, for instance, blockchain is often used to avoid duplicate invoicing; last week Danish shipping and logistics giant Maersk became the first company in the world to use blockchain, in partnership with IBM, to manage cargo.

Most banks however, are still unsure how issues related to privacy can be resolved, according to the R3 report, which was recently made public.

Overall, analysts say blockchain as a technology is still in the trial-and-error stages of its evolution, which means it may result in substantial losses in any case of breakdown. That point is one that is not lost on most regulators.

Fintech Regulation in 2018