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Singapore cautiously weighs up the future of blockchain – Lexology

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As the world gets to grips with blockchain, what regulatory and industry developments have come with its take up in the Asian financial hub?
Blockchain's future appears bright, with observers such as Marketsandmarkets predicting that the market for blockchain technology and services is expected to grow from USD4.9 billion this year to $67.4 billion by 2026.
Analysts and market readers base this optimism not only on the explosion of public interest in blockchain-enabled cryptocurrencies and crypto tokens but also on growing recognition that blockchain technology could have applications far beyond cryptocurrency transactions.
Blockchain technology
According to Ravi Menon, the managing director of Singapore’s Monetary Authority Of Singapore (MAS), blockchain is “a technology to establish consensus in a decentralised system. It allows diverse entities to collaborate and execute transactions without trusted central parties. It does this by recording and sharing data across all the nodes of the blockchain network so that everyone in the network can see and verify the data.”
Each block in the blockchain is an information packet of transactions. Every new transaction on the blockchain is recorded in every participant’s ledger, with an immutable cryptographic signature called a hash. Hence, if one block in a chain is changed, the tampering would be quickly obvious to that blockchain’s participants.
It is this tamper-proof quality and trustworthiness that underpins blockchain’s utility and attractiveness as an incorruptible digital record of transactions.
Beyond cryptocurrency and tokens
Because of blockchain’s perceived incorruptibility as a distributed ledger, companies, academics, researchers and government agencies foresee blockchain being used in areas far beyond the cryptocurrency realm.
In the fraught times of a global pandemic, blockchain has already been used to rapidly develop digital passports to track Covid-19 vaccinations, as the government of Colombia's quick adoption of VitalPass demonstrated in May this year.
In Singapore and other countries where computer gaming is popular and competitive, players may soon encounter blockchain-enabled games featuring non-fungible tokens (NFTs), as announced by Ubisoft, the French developer of hit games like the Assassins Creed series. In January, Ubisoft's CEO stated that integration of blockchain could imply more “play to earn”, where game developers possibly give away cryptocurrency in exchange for playing a game or allow players to earn or own content.
Blockchain is even going into space. According to the US publication Spacenews, a range of organisations are now exploring how blockchain could enable government space agencies, companies or individuals to “task a commercial satellite to collect imagery of a remote location, receive the imagery with confidence in the integrity of every pixel and transfer payment securely to the satellite operator”.
As a sign of the growing interest in blockchain’s applicability in the space industry, JP Morgan has tested the world’s first bank-led tokenised value transfer in space, which was executed via smart contracts on a blockchain network established between orbiting satellites.
MAS perspective
But is cryptocurrency real money? Despite the hype, most public focus has been on cryptocurrencies. But are cryptocurrencies the same thing as money and how are they and their related ilk likely to evolve?
The Singapore perspective was provided in a speech on 9 Nov 21 by, Mr Menon, who, in his usual erudite manner, explained the role that cryptocurrencies and other blockchain-enabled technologies could play in the world of international finance.
In his speech, Mr Menon was unequivocal that cryptocurrencies are not money. He noted that while the form of money has evolved from bullion coins to paper notes backed by the gold standar to fiat currency backed by central banks and, now, digital money, it had always performed two essential tasks: as a medium of exchange and as a store of value
Mr Menon argued that cryptocurrencies hadn’t performed well as a medium of exchange, store of value, or unit of account. He clarified that cryptocurrencies, as “digital tokens issued and managed within a decentralised protocol, such as a distributed ledger or blockchain”, merely represented “an asset in digital form that can be transferred or traded on the protocol.”
Notably, he declared that “MAS frowns on cryptocurrencies or tokens as an investment asset for retail investors” because “the prices of crypto tokens are not anchored on any economic fundamentals and are subject to sharp speculative swings”, thereby putting investors in these tokens at risk of suffering significant losses.
In another interview with the Business Times on 2 November 2021, he reiterated MAS’ concern that some retail investors were banking on cryptocurrencies purely for speculative investment. He warned of the substantial risks, highlighting that there “is no sovereign backing, and there is no inherent value in these cryptocurrencies. So they are very dubious for a retail investor.”
Dollar-pegged stablecoins
Mr Menon noted that cryptocurrencies’ lack of credible backing has led to the creation of crypto tokens called “stablecoins”, which are typically pegged to the US dollar. Mr Menon noted that some technology firms have integrated popular stablecoins into their payment services and that Visa and Mastercard both allow transactions to be settled using US dollar stablecoins.
However, as the Brookings Institute notes, the value of these stablecoins comes “precisely because they are backed by government issued currencies” like the US dollar. So, while US dollars could conceivably become less important as a medium of exchange in making payments, the primacy of the U.S. dollar as a store of value and reserve currency remains unchallenged.
Central bank digital currencies
Despite his scepticism of cryptocurrency’s current role or the ability of stablecoins to replace fiat money, Mr Menon stated that MAS is open to the creation of central bank digital currencies (CBDCs). However, he differentiated between two types of CBDCs. Wholesale CBDCs would be limited for use only within the banking system, similar to the reserves commercial banks place with the central bank today. Retail CBDCs would be issued by the central bank to the general public as the digital equivalent of today’s notes and coins.
Mr Menon felt that wholesale CBDCs were promising because they could radically transform cross-border payments. Because of this potential, MAS was carefully studying the economic merits and implications of a retail CBDC in the Singapore context. He gave three reasons why MAS might consider issuing a digital Singapore dollar to the public:
Despite these possible advantages, MAS does not appear to have any immediate plan to issue retail CBDCs as the need is not yet urgent. Instead, MAS is doubling down on its initiatives like Project Orchid to build the technology infrastructure and technical competencies necessary to issue a digital Singapore dollar, should it decide to do so in future.
Digital finance
Mr Menon also revealed that MAS had been closely monitoring the possible use of blockchain in two areas of finance: the quest for real-time cross-border payments and the rise of collaborative data platforms.
On real-time cross-border payments, Mr Menon said that, for some years now, MAS had already been experimenting with blockchain technology and wholesale CBDCs through Project Ubin, which aimed to demonstrate through practical experimentation if blockchain technologies could enable cheaper, faster and more efficient cross-border payments.
Mr Menon noted that Project Ubin’s success had inspired Partior – a blockchain-based interbank clearing and settlement network jointly established by DBS Bank, JP Morgan and Temasek. It aims to enable the real-time settlement of cross-border payments in different currencies using either commercial bank digital money or wholesale CBDCs.
Project Ubin was also a foundation for Project Dunbar, a partnership between MAS, the Bank for International Settlements Innovation Hub, the Reserve Bank of Australia, Bank Negara Malaysia, and the South Africa Reserve Bank. Mr Menon described it as “a blueprint for a multi-currency settlement platform that operates across countries using wholesale CBDCs”. He noted that, if Project Dunbar’s prototypes shared platforms succeeded, commercial banks will be able to transact directly with one another using the wholesale CBDCs of their respective countries, cutting out intermediaries and reducing cross-border transactions times and cost.
Collaborative data platforms
The latest development in the field of collaborative data platforms occurred on 9 November 2021 when MAS launched Chekfin, a decentralised credentials platform to support partnerships between financial institutions and fintech firms.
Chekfin enables financial institutions to obtain verified credentials of fintech firms, such as business references, awards, and investor funding records. Mr Menon noted that these credentials are immutably stored on a blockchain as “a golden source of information”. Conversely, fintech firms can decide with whom they want to share their private credentials.
Web 3.0 and decentralised finance
MAS has also been studying how to capitalise on Web 3.0 developments, which Mr Menon defined as the “personal” internet, empowering end-users through applications that allow decentralised sharing of information.
The key enablers of this new paradigm are “smart contracts”, which are computer programmes that automatically execute actions according to the terms of the smart contracts.
Tokenised assets, implemented as smart contracts, are digital representations of real-world assets such as commodities and real estate; or intangible property such as financial assets, patents, or digital music and art. Once tokenised, rights and ownership of these assets could be transferred seamlessly, improving liquidity and efficiency.
Mr Menon noted that smart contracts and tokenisation are already being used to enhance the market infrastructure for financial assets in Singapore. Last year, Olam International issued a digital bond on SGX’s digital issuance, depository and servicing platform. SembCorp through UOB Bank issued a digital bond this year that eliminated manual processes in custody and post-trade administration through smart contracts on a blockchain.
Decentralised finance (defi) is a realm "where end-users perform financial transactions directly with one another using smart contracts, without the need for financial intermediaries". Crypto tokens are bought and sold on decentralised exchanges without needing clearance and recording by intermediaries. An example is borrowing and lending, where anyone could potentially lend and borrow directly to others via a liquidity pool managed by a smart contract.
MAS recognises that defi’s open crypto networks potentially yield significant economic and social benefits by replacing intermediaries and central counterparties. Companies of any size – or even individuals – can directly access financial infrastructure.
However, Mr Menon recognised that defi is not risk-free as its open crypto networks remain immature and they do not yet meet the governance, security and resilience standards demanded by central banks and regulators.
Given the nascent state of defi development, Mr Menon foresees that the existing regulatory framework will need to be adapted to accommodate and guide the development of DeFi, to manage the risks where trusted incumbent intermediaries are replaced by smart contracts.
To keep abreast of and guide Web 3.0 and defi developments, MAS intends to continue supporting live experimentation of fintech innovations through further enhancing its regulatory sandboxes like Sandbox Plus. Through Sandbox Plus, which will take effect on 1 January 2022, MAS can provide financial grants to support the technology, human capital, and market development of innovative first movers.
Blockchain in trade
Beyond the confines of the financial sector, Singapore’s trade regulators have also recognised the potential of blockchain to potentially link up different parties to facilitate the flow of information across the trade value chain. Because current networks are highly fragmented due to the large number of parties involved – such as customs and port authorities, importers and consignees, carriers, freight forwarders, and banks and insurers – they are encumbered by slow and cumbersome legacy processes.
Singapore’s regulators hope that blockchain can break the logjam by linking up the different parties and facilitating a better flow of information across the trade value chain. However, given the complexity of existing trade networks, blockchain experiments in this space have tended to focus on single use-cases.
To get things moving, the Info-communications and Media Development Authority (IMDA), in partnership with Maritime and Port Authority of Singapore, and supported by Singapore Customs and the Singapore Shipping Association, have together introduced the Trade Trust project to accelerate the digitisation of paper-based trade documents using blockchain technology.
According to the IMDA, TradeTrust aims to reduce inefficiencies and complexities of cross-border trade arising from the current paper-based documentation, such as maritime bills of lading. It “comprises a set of globally accepted standards and frameworks that support the exchange of electronic trade documents. This is achieved through a public blockchain offering interoperability to connect governments and businesses.”
Private sector blockchain developments
Beyond government initiatives, blockchain-related uses and opportunities continue to expand within Singapore. Multiple companies and entities have entered or begun to enter the realm of blockchain-enabled activities.
As early as February 2019, Hackernoon reported that it had found that a “staggering” 634 companies were incorporated in Singapore with a combined market cap of approximately $8.3 billion. This flurry of start-ups was also reported more recently in January 2021 by the Business Times, though it noted that, “while far more companies have been formed in the sector in Singapore than in Switzerland, the value of deals in Switzerland has consistently been above those here.” The Business Times followed up on 9 November 2021 by reporting on Singapore blockchain plays to watch on the Singapore Exchange.
Currently, some of the better known blockchain-based companies in Singapore are cryptocurrency trading platforms such as Coinhako and Binance. Yet, Vulcanpost reported on 13 April 2021 that more companies in Singapore are utilising blockchain outside of decentralised finance and financial applications. Three companies were highlighted:
To further encourage and strengthen Singapore’s Blockchain ecosystem, on 7 December 2020, Enterprise Singapore (ESG), IMDA, the National Research Foundation Singapore (NRF), and supported by MAS launched the S$12 million Singapore Blockchain Innovation Programme (SBIP).
Funded by the NRF, the SBIP will engage close to 75 companies including multinational corporations, large enterprises and information and communications technology companies to conceptualise 17 blockchain-related projects within the next three years, starting with the trade, logistics and supply chain sectors.
For example, SBIP will work with Dimuto, a trade-technology service championing "collaborative commerce", on “using blockchain to track and trace high-valued perishables for improving farmers’ credit worthiness”.
The sustainability challenge
What are the potential environmental sustainability challenges for blockchain in Singapore? Despite the promise of increased use of blockchain technologies in Singapore, there are potential issues that could cloud the horizon, such as the enormous energy consumption required by Bitcoin and other cryptocurrency mining. With current fears over climate change now at a fever pitch and governments worldwide trying to mitigate the effects of carbon emissions, these concerns are not trivial.
The New York Times reported on 3 September 2021 that “[t]he process of creating Bitcoin to spend or trade consumes around 91 terawatt-hours of electricity annually, more than is used by Finland, a nation of about 5.5 million.” It added that the energy consumption was more than seven times as much electricity as all of Google’s global operations.
Likewise, Forbes noted that “[i]f Bitcoin were a country, it would rank in the top 30 worldwide for energy use. That’s roughly enough electricity to power countries with populations in the tens of millions, with an environmental burden of an estimated 34 megatons of carbon emissions or more”.
These environmental sustainability concerns led Elon Musk to tweet controversially in May this year that Tesla would no longer accept bitcoin for car purchases. While Tesla has since reported that it may again resume accepting Bitcoin for car purchases, Elon Musk has indicated that this would happen only when “there’s confirmation of reasonable (~50%) clean energy usage by miners with the positive future trend.”
Given the potentially vast energy consumption of blockchain crypto operations, there are fears over blockchain-related operations like cryptocurrency mining conflicting with Singapore’s environmental sustainability and climate change reduction aims.
Singapore is committed to being carbon neutral by 2030. Channel News Asia reported that, in February 2021, Minister for Sustainability and Environment Grace Fu told Parliament that cryptocurrency mining occurs predominantly in markets with a cheap supply of electricity. She noted that “our local conditions are not favourable for cryptocurrency mining," and that “our relatively high land, labour and electricity costs, coupled with our hot tropical climate, make it expensive to operate cryptocurrency mining.”
Yet, given surging energy prices and the fact that Singapore relies on imported natural gas for almost all its energy needs, the government remains vigilant and aware of the potential energy sustainability pitfalls that could result from the uncontrolled expansion of certain blockchain-related uses.
When asked whether authorities have considered restricting cryptocurrency mining in Singapore, Ms Fu said: "The government will continue to monitor the development of cryptocurrencies and the risks they pose."
For now, the consensus seems to be that blockchain technology can co-exist with Singapore's green plans. After all, with no mining and no proof of work, cryptocurrencies like Ripple argue they are eco-friendly.
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