The Next Frontier: Singapore's Venture into Wholesale Central Bank Digital Currencies in 2024

The Next Frontier: Singapore's Venture into Wholesale Central Bank Digital Currencies in 2024

Ravi Menon, Managing Director of the Monetary Authority of Singapore (MAS), said that by 2024, Singapore will be a pioneer in the direct issuance and use of central bank digital currencies.

He announced that MAS plans to begin trials of wholesale central bank digital currencies (CBDCs) next year. This decision is in line with global trends, as data from the Atlantic Council think tank shows that 130 countries are currently exploring digital currency initiatives, covering 98% of the global economy.

Menon made the announcement at the Singapore FinTech Festival 2023 earlier this week. The pilot will involve local banks and aims to test the applicability of wholesale central bank digital currencies (CBDCs) in domestic payments. The digital currency is specifically targeted at large transactions between banks and institutional players, reflecting a significant step in the direction of financial innovation.

Wholesale CBDC is a form of digital currency issued by central banks and used exclusively by central banks, commercial banks, or other financial institutions to settle large interbank transactions. In contrast, retail CBDC is designed to meet the needs of individuals and businesses by facilitating everyday transactions.

The foundation for this effort was laid through Project Ubin, which was launched in 2016 with the goal of exploring the use of blockchain technology and digital ledgers in clearing, payment settlement, and securities. Project Ubin was successfully completed in 2021, after going through five phases of trials. Partners involved in the project include leading banks in Singapore, such as DBS, and sovereign wealth fund Temasek.

Following this, MAS announced the Ubin+ initiative in November last year, which aims to accelerate cross-border connectivity with wholesale CBDCs through collaboration with international partners.

During the pilot phase, Singapore's central bank will work with local banks to test the implementation of wholesale CBDCs to streamline domestic payments. Banks will issue tokenized claims on bank liabilities that can later be used by retail customers in transactions with merchants. 

In this process, merchants will credit the tokenized bank liabilities to their respective bank accounts. The definition of tokenization here is the step of issuing assets in digital form, which are recorded on the blockchain. The CBDC is then automatically transferred to the merchant as a form of payment at the time of the transaction.

With the advent of CDBC, it has the potential to drive competition and innovation in the digital currency space. This includes the greater impact of national digital currency adoption efforts on the overall dynamics of the digital currency space.

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