19/05/23

SINGAPORE: Digital cross-border payment trial with US shows potential, but scaling up needed.

As published on businesstimes.com.sg, Friday 19 May, 2023.

A cross-border digital payment experiment between Singapore and the US has shown that distributed ledger technology – a cryptographic way of recording transactions, can improve the efficiency of cross-border payment and settlements.

The Monetary Authority of Singapore (MAS) on Friday (May 19) published a report jointly with the Federal Reserve Bank of New York’s New York Innovation Center (NYIC), titled Project Cedar Phase II x Ubin+.

The initiative revealed that technology could hasten payments safely between parties without the need for a central authority. This is different from the existing payment structure, where fiat-based settlements must go through a central authority such as a bank, and can take up to days to process.

However, MAS added that there were more areas to be explored, such as whether the technology can be scaled up to handle large volumes of transactions at an even faster pace, and whether it can handle more currencies on the respective central bank ledgers.

The experiment was built upon earlier efforts between MAS and NYIC.

It examined a cross-border multi-currency use case in which vehicle currencies are used as a bridge to exchange currency pairs that are not widely traded.

Leong Sing Chiong, deputy managing director (markets and development), MAS, said: “The Cedar x Ubin+ experiment envisages a future digital currency landscape where central banks can enable interoperability of wholesale CBDCs to facilitate more efficient cross-border payment flows including for less liquid currencies, without requiring a common infrastructure.”

CBDCs refer to central bank digital currencies, which are a form of digital currency issued by a country’s central bank.

It can also be seen as the digital alternative to a country’s fiat money.

The digital currency has been touted as a quicker and more secure means of digital payment and remittance, but actual use of the currency is still under experimentation.

Singapore has not issued a CBDC at the moment, but is exploring the currency’s use cases, like many other countries in the world.

MAS said it conducted the latest experiment in a “test environment”, where hypothetical payments were settled using simulated wholesale CBDCs.

All of the test payment transactions conducted in the experiment were completed in under 30 seconds, compared with the two-day period it usually takes to settle transactions between illiquid currencies. The most complex transactions were completed at an average rate of 17 seconds.

Despite the successes of the trial, both MAS and the New York Fed said this was but one potential solution in digital cross-border payments.

No decisions as to optimal technical design have been made by the Federal Reserve System, the central banks said.

“While these initial results show potential, performance enhancements and optimisation would be required to demonstrate the viability of this solution’s architecture at a larger scale, including increased payments per second and the involvement of additional distinct currency ledgers,” they added.

Ubin+ is an MAS initiative focused on wholesale digital currency connectivity with international partners to improve the efficiency in cross-border foreign exchange settlement.

Project Cedar is a multi-phase technical research effort evaluating the potential applications of financial technology solutions to improve the efficiency of wholesale cross-border payments.

The central banks said that the report is not intended to advance any specific policy outcome, nor to signal that MAS or the Federal Reserve will make any imminent decisions about the appropriateness of issuing a CBDC, nor to indicate how one would necessarily be designed.