The Future of Digital Money in Singapore: MAS Proposes Framework for Purpose Bound Money

I.  Introduction 

The advancement of digitalisation has demonstrated an impact across all industries, changing the way that businesses and commercial systems operate. This is particularly evident in the finance and payment sector, where the manner in which transactions and payments are conducted is undergoing continuous and rapid development.

Digital assets have become increasingly mainstream, buoyed by the growing recognition of their legitimacy and their potential to positively reform the financial ecosystem. However, the use of digital money at a more widespread level is not without its challenges, including structural concerns over the fragmentation of payment systems and the fungibility of digital money, and practical concerns over security and privacy. An institutionalised framework would aid in ensuring the organised development of digital money usage and in addressing the key issues.

While the establishment of such a framework may still be some distance away, the Monetary Authority of Singapore ("MAS") has taken formative steps by issuing a Purpose Bound Money ("PBM") Technical Whitepaper ("Whitepaper"), available here. The Whitepaper provides a technical overview to the concept of PBM, which is a programmability model for digital money, enabling money to be directed towards a specific purpose, without requiring money itself to be programmed. It proposes PBM as a common protocol for interacting with different forms of medium of exchanges, and highlights how digital money can be used to support commercial and policy objectives.

This article highlights the challenges of digital money, the key points of the MAS Whitepaper and what it might mean for the future of digital money in Singapore.

II.  Digital Assets

Digital assets refer to any digital representation of value, but for the purpose of the Whitepaper, MAS has considered central bank digital currencies ("CBDCs"), tokenised bank liabilities and well-regulated stablecoins (as opposed to more volatile cryptocurrencies) as potential mediums of exchange for the new digital asset ecosystem.

These forms of digital money are already in use in e-payment systems such as domestic instant payment systems. However, this is but the tip of the iceberg in terms of the scale and scope of potential use cases of digital money.

While advancements have been made towards the implementation of digitalisation in the financial sector, the Whitepaper highlights certain challenges in this regard:

• Fragmentation – The proliferation of payment platforms creates additional complexity for merchants and users. A framework for digital money usage should thus look towards interoperable payment systems to avoid further fragmentation.

• Fungibility – Digital money allows for the programming of unique characteristics to dictate how the digital money is to be used, However, this modifies its properties and fungibility as a medium of exchange.

• Models of programmability – There are different models of programmability of digital money. In this Whitepaper, MAS has explored the PBM model to address the issues above.

These challenges are apparent in the current state of adoption of digital money. For example, while some countries have initiated CBDC programmes, the uptake has thus far been fairly low. In Singapore, digital banks have recently entered the financial market, but are still in the process of establishing a wider customer base. Part of this may have to do with the inadequate infrastructure integration, leading merchants and users to lean towards the comfort of existing payment systems.

The Whitepaper may thus prove to be instrumental in its ambition of developing a framework that allows for the organised, integrated and secure implementation of digital money. While other jurisdictions have sought to establish frameworks addressing digital assets, the Whitepaper has gone the further step of exploring technical implementation recommendations. For example, the EU has adopted the Markets in Cryptoassets Regulation, which sets out more of a regulatory framework for protecting consumers and investors. Similarly, the US has issued an Executive Order for Ensuring Responsible Development of Digital Assets, which is a framework more geared toward future policy direction. On the part of the International Monetary Fund, it has announced that it is working on a platform to enable transactions and interoperability between countries, but specifically for CBDCs.

III.  Overview of PBM

A PBM consists of two main components: a wrapper that defines the intended use; and an underlying store of value that serves as collateral.

Under a PBM protocol, underlying digital money is programmed with specific conditions upon which it can be used. Once the conditions are met, the digital money is released. The digital money issuer retains control over the digital money, preventing fragmentation and ensuring easy maintenance.

The stages in the PBM lifecycle are as follows:

• Issue – A PBM smart contract is created, and PBM tokens are minted. The ownership of digital money is transferred to the PBM smart contract.

• Distribute – The PBM tokens are distributed by the PBM Creator to PBM Holders for usage. The PBM Holder receives the PBM tokens in its wrapped form and can only redeem the tokens according to the conditions set by the PBM Creator.

• Transfer – PBM tokens may be transferred from one entity to another according to their programmed rules.

• Redeem – After all the conditions specified in a PBM have been fulfilled, the PBM Holder may redeem the PBM token. The token is unwrapped, and ownership of the underlying digital money token is transferred to the receiving entity.

• Expired – Where one of PBM conditions has been violated or expired, the PBM token is rendered permanently unusable for the PBM Holder.

IV.  Design Considerations

The implementation of a PBM protocol is less than straightforward, with complex issues having to be addressed for effective widespread deployment. The Whitepaper seeks to address this by setting out some design considerations for the implementation of a PBM, providing guidance for its design and execution:

• Interoperability – PBM technology should be designed to be interoperable across different platforms, wallets, and payment systems. Notably, the PBM design in this Whitepaper is designed to work across a variety of different ledger types.

• Digital money – As PBMs derive their value from the underlying digital money, it is important to consider the reserve assets backing the digital money. This would include an assessment of their regulatory implications and compliance requirements.

• Privacy – To protect the privacy of the user, the role of the PBM Creator and digital money issuer may be separated so that the amount of data held by individual institutions is limited to the performance of its authorised function.

• Digital readiness – The digital savviness of the stakeholders should be factored into the design of the PBM scheme, as it would determine the consequent uptake.

• Security – The software deployment process should include a governance framework that ensures the safety of the code.

V.   Potential Uses of PBM

The viability of a PBM framework depends to a large extent on its uptake, which in turn relies on the ways it can be used.

The Whitepaper sets out the following potential use cases of PBM:

• Pre-paid packages – A PBM may address the risk of non-performance by including conditions for payment, ensuring performance is fulfilled before "drawdown" on the amount pre-committed by the consumer.

• Online commerce – Similarly, PBM may address the risk of non-delivery or non-payment by including delivery as a condition for payment, providing assurance to both merchants and consumers.

• Contractual agreements – For contractual arrangements where performance occurs in stages, such as construction projects or property purchase, PBM terms could be defined such that funds are released at different stages of performance or when milestones have been attained.

• Commercial lease – PBM could fulfil the role of security deposits.

• Trade finance – Trade finance instruments could be modelled as PBMs whereby payment is automatically made upon fulfilment of service obligations.

• Cross-border payments – AML and CFT requirements may be embedded as conditions into PBMs for cross-border payments. Automating such compliance checks would reduce costs and increase efficiency.

VI.  Concluding Words

Digitalisation is strongly propelling the future of finance and payment, and the use of digital money is likely to become increasingly common. To facilitate its orderly implementation, and to ensure that its advantages are fully capitalised on while avoiding its potential pitfalls, a clear roadmap would be essential. In this regard, Singapore has demonstrated its position as thought leader, setting out to develop a framework for the use of digital money.

The Whitepaper provides an insight as to how digital money payments and transactions may take place, and how the underlying programming may be structured. It also sets out the key concerns that regulators are likely to be addressing, and the opportunities that may arise with the implementation of digital money.

AUTHOR INFORMATION

Rajesh Sreenivasan is Partner and Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email; rajesh@rajahtann.com

Steve Tan is Partner and Deputy Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: steve.tan@rajahtann.com

Benjamin Cheong is Partner and Deputy Head of Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: benjamin.cheong@rajahtann.com

Lionel Tan is a Partner in the Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: lionel.tan@rajahtann.com

Tanya Tang is a Partner and Chief Economic and Policy Advisor at Technology, Media & Telecommunications Practice at Rajah & Tann Singapore LLP.
Email: tanya.tang@rajahtann.com