MAS Investigates Retail CBDCs

Until now the Monetary Authority of Singapore (MAS) has concentrated on wholesale Central Bank Digital Currencies (wCBDC), which are used with financial institutions. The implications of introducing a retail CBDC (rCBDC) are much greater. MAS has decided to make an assessment of the economic case for a Singaporean rCBDC looking at the implications for financial stability and monetary policy in particular.

Overview

In overview MAS has established two related inferences. First, its literature review and assessment of the current payment landscape in Singapore do not suggest a strong economic motivation for an rCBDC. At the same time nor do they suggest intractable monetary and financial stability considerations against one.

Second, emerging digital complementarities and global competitive forces could shape a future monetary arrangement that does include a digital form of the Singaporean Dollar issued by MAS for general use.

MAS notes that the payment is dynamic, that public preferences are changing, and that technology is changing fast, and that there could be nascent technology solutions that change the current situation.

In this context, MAS sees it as prudent to explore the development of technology and policy capabilities of a possible rCBDC.

Observations and context

Today MAS issues cash to the public and reserves to financial institutions and these are held as liabilities of MAS. The banks issue deposits and these are liabilities on their balance sheets. The deposits are used in transactions, and these are settled with MAS.

New technology means that today’s central payment intermediaries could be bypassed. The rapid and widespread move online increases the need for quick, seamless and low-cost digital payments.

As a result, the global monetary and payments landscape appear to be on the cusp of far-reaching change.

MAS notes that the relevance of cash as a means of payment is diminishing because of this digital revolution and cash’s incompatibility with it.

Non-bank solutions. Payments are no longer the sole preserve of banks because technology firms are integrating their digital services with payments. As a result, the link between lending and deposit taking and payments is being broken. The tech companies have data driven business models and their scale and network effect creates a risk of excessive market power. Closed-loop ecosystems reduce contestability and increase the fragmentation in payments. Consequently, the market structure of payments may undergo a fundamental change.

Cross-border risk. New forms of digital money are being created. Some of these are foreign government CBDCs, some stablecoins from large firms. They seek to meet unmet needs of today’s bank-centric payment options. They are specifically targeted at retail payments, and they have some potential to be used across borders. There is a risk that these could be available in Singapore and, with their convenient ecosystems and high levels of payment efficiency, there is the risk they could displace the Singapore dollar.

Singaporean rCBDC: a solution?

A Singaporean rCBDC is one possible response to the changing payment landscape. It would preserve the relevance of generally accessible central bank money as the economy becomes increasingly digitised.

Today cash provides an option if private sector payments fail to deliver the desired levels of payment attributes such as cost, speed etc. Even with cash, merchants face high transaction costs for digital payments. One solution is to turn to regulation with fee caps or privacy protection. MAS is concerned that highly prescriptive regulations could constrain business models and stifle innovation reducing consumer choice.

Rather than regulate, MAS has in recent years worked with the private sector to introduce FAST, PayNow and SGQR, all of which have increased interoperability and worked against ‘walled gardens’ that reduce competition. In addition, FAST and PayNow are open to eligible non-bank financial institutions. In 2020 four new digital bank licences were awarded.

Advantages of a Singaporean rCBDC. A Singaporean rCBDC would be a universally accepted digital medium of exchange in Singapore. It would be safe, liquid and widely accepted. This would reduce the need for other types of e-money. The private sector would be able to innovate and offer new digital services based on it and based on access to payment data, ‘payment adjacent’ digital services.

Disadvantages of a Singaporean rCBDC. If the rCBDC was made available in the same way as cash, ie. with universal accessibility and supplied in volumes to match demand (elastically supplied), it could impact credit creation and financial and monetary stability. While there is uncertainty about the possible take up, it may be seen as an attractive store of value. If it were, and this led to an outflow of deposit money into the rCBDC, this could lead to higher funding costs since banks may cut back lending and/or increase interest rates to protect their profits. This could introduce liquidity risk into the banking system.

Alternatively, banks might reduce their profits leading to volatile capital flows because the banks might be less financially able to withstand shocks and/or foreigners may be attracted.

Possible mitigations. MAS believes that there are credible regulatory safeguards against these macro financial risks. Financial disincentives, hard limits and non-resident restrictions can limit rCBDC holdings. In addition, it is possible innovative design and technology solutions may be used to make an rCBDC less attractive as a store of value.

What next?

MAS sees no pressing need for an rCBDC. Cash use is some way away from being at a minimum threshold. Retail payments are, generally, competitive, efficient, cheap and innovative. The Singapore dollar used today is dominant in the country providing a bulwark against a rapid substitution by a foreign currency.

The rapid uptake of digitisation though, means there is future potential and need for an rCBDC, particularly if the market structure of electronic payments becomes more concentrated and ‘rent seeking’ behaviour emerges. As a result, MAS sees the need to build expertise and capabilities around an rCBDC.

MAS also thinks the acquisition of this expertise and capability could create transferable knowledge that could benefit payment innovation more broadly. The requirement for an rCBDC to be scalable, extendable and reliable is at the highest level, creating a highwater mark for other payments.

There are non-economic considerations to consider, particularly payment privacy and access to public money. MAS thinks an rCBDC has the potential to cover anti-money laundering, counter terrorism financing and combat tax evasion better. It will also need to look at regulatory, legal and operational aspects.

As MAS embarks on its rCBDC evaluation and work, it will continue in parallel to work on other solutions such as privately issued Singapore dollar denominated stablecoins and synthetic CBDCS.