10 October 17 The Business Times by AMIT ROY CHOUDHURY
RAVI MENON, Monetary Authority of Singapore's (MAS) managing director, said on Monday that innovation and technology will be the main drivers of growth in Singapore, especially in its financial services sector.
Mr Menon was delivering a keynote address at a global blockchain business conference in Vishakhapatnam, in the state of Andhra Pradesh in India.
The MAS chief made a strong case for collaboration between Andhra Pradesh and Singapore in fintech innovation, especially in distributed ledger technology (DLT), also known as blockchain. He noted that DLT has the potential to transform many industries and economic activities.
MAS has been working with the financial industry in Singapore to create a Smart Financial Centre, where innovation is "pervasive and technology is used widely". "We want to do this to increase efficiency, manage risks better, create opportunity, and improve people's lives," Mr Menon said.
He noted that trust underpins all economic transactions. In the absence of direct trust among parties, the alternative is to rely on trusted central parties.
"DLT is particularly suited for industry applications where it is important to know the histories of ownership but there is no trusted central party or reliance on the central party is inefficient or costly," Mr Menon said.
A blockchain is a database that provides proof of who owns what at any given moment and an immutable record of all transactions. "It is, in other words, a distributed ledger."
In traditional payments and settlement, there is a central operator that records and updates the balances of the clearing participants, usually a financial institution.
"But trusted central parties are not always available. And even if they are, what if they fail? Single points of failure make attractive attack targets. And what if trust is broken? What if the central party colludes?," Mr Menon said.
"The key breakthrough of blockchain technology is its ability to establish trust in a decentralised system. Blockchain technology allows diverse parties to collaborate without trusted central parties."
He noted that in financial services, DLT is being experimented with for a variety of applications. DLT, he observed, may provide a more efficient alternative to credit bureaus that compile consumer credit information from banks. The insurance industry in Singapore is looking at how DLT can help prevent duplicate insurance claims.
"Probably, one of the potentially more powerful applications in financial services is in customer verification, the so-called 'know-your-customer' or KYC process."
Mr Menon said the "killer app" for DLT is cross-border transactions. Singapore is exploring two specific applications - trade finance and trade documentation.
In trade finance, DBS Bank and Standard Chartered Bank are exploring the use of DLT to prevent the problem of duplicate invoicing while preserving client confidentiality. In trade documentation, Singapore is looking into how DLT can be used to link the National Trade Platform to trade platforms in other countries, such as Hong Kong.
"The DLT-based platform will allow users to exchange digital trade documents across borders with confidence."
He said building a strong DLT ecosystem is part of Singapore's broader fintech strategy. The DLT ecosystem in Singapore has been growing and there are now approximately 50 locally based fintech startups in the DLT space. Local universities are doing research in various aspects of DLT and venture capitalists are looking for interesting DLT ideas to invest in.
"Major technology consulting firms and system integrators have set up in Singapore dedicated practices or teams for DLT. An effective way to develop the ecosystem is through collaborative projects that bring together various parties. And MAS has been an active participant in such projects."
Mr Menon gave an update on Project Ubin, an initiative announced by MAS in November last year to develop a payment system prototype using DLT in which bank users can exchange currency with one another without lengthy processing times, expensive processing fees, or intermediaries. The project is a collaborative effort among MAS, the Singapore Exchange, 10 banks, six technology companies, and six academic institutions.
He said Phase 1 successfully demonstrated that banks are able to transact with one another on an Ethereum-based prototype without going through MAS. Ethereum is an open-source, public blockchain-based distributed computing platform.
He said Phase 2, also recently concluded, successfully produced three software models that achieved decentralised netting of payments in a manner that preserved transactional privacy.
"The next step in Project Ubin is to extend the application to cross-border payment and settlement. We are, therefore, exploring how Project Ubin can be linked up with other central bank DLT projects to facilitate cross-border payments."
He said DLT is a "natural platform" for collaboration between Singapore and Andhra Pradesh. He added that banks could work together on new models of cross-border payments to improve settlement time, allow for round-the- clock operations and reduce settlement risk.