Lessons from field testing the tokenised Singapore Dollar

• Although intended to remove the need for intermediaries and central regulation, blockchain or distributed ledger technologies (DLT) are nonetheless useful to the very organisations they are designed to replace: banks and central banks
• Project Ubin is Singapore’s attempt at issuing a DLT-based version of the Singapore dollar
• The trial, now in its third phase, has been successful so far, said Mr Sopnendu Mohanty, chief fintech officer of the Monetary Authority of Singapore

The promise of blockchain-based cryptocurrencies such as Bitcoin and Ether is that peer-to-peer transactions can be done more cheaply by cutting out middlemen like banks, which impose a fee for providing the service of facilitating transactions. Adding to the appeal is the fact that the system is more resilient against attacks because of its decentralised nature.

It might come as a surprise, then, that financial regulatory authorities and banks are interested in using the blockchain—the very technology designed to replace them. In fact, the Monetary Authority of Singapore (MAS) and a consortium of local and overseas banks have been testing out a version of the Singapore dollar on a private blockchain since November 2016.

Called Project Ubin, the ongoing trial is investigating the feasibility of using distributed ledger technology (DLT)—as it is referred to in the financial sector—to transfer money between financial institutions. And the results? So far so good, said Mr Sopnendu Mohanty, chief fintech officer of MAS.

“Intermediary expenses are one of the most significant expenses or cost inefficiencies of the financial sector. We see a remarkable opportunity in DLT, and want to take advantage of this technology to distribute risk by changing to a decentralised way of doing all the checks on the data required to render financial services,” Mr Mohanty said, speaking on 24 January 2018 at a panel on blockchain organised by Singapore Management University.

When dollars go digital

By using DLT, MAS hopes to allow financial institutions to enjoy the benefits of the blockchain—decentralisation, speed, transparency and so on—without exposing them to the risks of a completely unregulated system. The crucial difference between the proposed DLT system and cryptocurrencies like Bitcoin is that the blockchain version of the Singapore dollar has a value backed up by an equivalent amount of money held in custody by the central bank.

In this system, the central bank issues tokens on an Ethereum-based distributed ledger platform, and participating banks then use these tokens to conduct transactions among themselves. Now in phase three, Project Ubin aims to evaluate the technological feasibility and economic implications of using such a tokenised version of the Singapore Dollar.

“The first two stages gave us remarkable insights about the power of blockchain,” Mr Mohanty said. “The first thing we checked was if we could replicate our existing financial payment system on this new platform. Secondly, we wanted to know if we could create a system that would work without a centralised clearing system. In both cases, we could do it.”

But Project Ubin has not been all smooth sailing; it has also revealed some potential problems, one of which is the issue of netting. In centralised banking, netting allows banks to reduce their number of transfers by summing up multiple transactions. For example, if bank A makes three payments of $10 each to bank B but also receives one payment of $20 from bank A, then the only transaction required is a single payment of $10 from bank A to bank B instead of four separate transactions.

However, since one of the properties of the blockchain is anonymity, individual transaction details are not known and netting cannot be done. To get around this problem, Project Ubin engineers used a cryptographic concept called zero-knowledge proofs to allow them to do netting of transactions even while on a distributed ledger platform.

The killer app: cross-border payments

“So we found that DLT can work in the existing realities of the world, but where is the killer app? Why should we bother with this technology when we are perfectly OK with the existing centralised clearing house?” Mr Mohanty asked. “For us, the biggest killer app is the third part of the project: using DLT for cross-border payments”.

When it comes to moving money from one jurisdiction to another, he continued, there are many additional checks that need to be performed to prevent money laundering and other forms of fraud. “Currently, it takes two to three days to move money from one country to another,” Mr Mohanty said. “Can we instead settle overseas transfers instantly and at a fraction of the cost because the counterparty is using a trusted distributed node?”

To test this possibility out, the next phase of Project Ubin involves a partnership with the central bank of Canada, which has a similar DLT platform already in place. Singapore has also partnered with Hong Kong to work on a cross-border DLT tool for trade finance.

“Hopefully, these experiments will help us understand the true power of DLT as well as the risks, and what we as regulators can do to manage the re-architecting of new digital platforms,” Mr Mohanty said. “If we can solve the problem of cross-border payments, as well as the issues of identity and document authentication, then we can apply DLT to the whole value chain of trade and finance, and that’s where the commercial benefit will come in.”