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Monetary Authority of Singapore: Common Protocol for Digital Currency

The Monetary Authority of Singapore (MAS) has released a whitepaper putting forward a common protocol that outlines the conditions for the use of digital currencies like central bank digital currencies (CBDCs), tokenised bank deposits, and stablecoins on a distributed ledger.

The whitepaper is also supported by the release of software prototypes that demonstrate the concept of Purpose Bound Money (PBM). PBM is a protocol that specifies the conditions for which an underlying digital currency can be used. Once those conditions are met, the digital money is released, and it becomes unbounded once again.

PBMs are bearer instruments, with self-contained programming logic and transferrable between two parties without intermediaries. It allows senders to define requirements, such as the validity period and types of shops, when conducting digital money transfers across various systems.

The whitepaper, developed in cooperation with the International Monetary Fund, Banca d’Italia, Bank of Korea, financial institutions, and fintech firms, provides technical specifications covering the PBM lifecycle, including its issuance, redemption, and the protocol to interface with the digital currencies supporting it.

Additionally, the whitepaper explores business and operational models for how arrangements could be programmed to ensure money is transferred exclusively upon the fulfillment of service obligations or compliance with terms of use.

The PBM protocol has been designed to be compatible with different ledger technologies and forms of currency. It allows users to access digital money through their preferred wallet providers. By implementing a standardised protocol, the same infrastructure can be used for multiple use cases. This means that stakeholders who employ different wallet providers can seamlessly transfer digital assets to one another without the need for customisation.

A few financial institutions and fintech firms are launching trials to test the usage of PBM in e-commerce by collaborating on a pilot use case involving escrow arrangements for online retail payments. This allows payments to be released to the merchant only when the customer receives the items purchased, providing greater assurance to both parties.

Several industry players will explore the use of PBM for programmable rewards. They have agreed to trial the use of PBM-based cashback and other incentives to improve consumer experiences while reducing frictions faced by merchants, such as manual reconciliation of sales proceeds and time required for onboarding new sales campaigns.

The PBM builds on MAS’ Project Orchid. It intends to foster greater research and exploration among central banks, financial institutions, and fintech companies regarding the design considerations associated with digital money. As part of the commitment to ongoing development and knowledge sharing, the PMB source codes and software prototypes, developed under Project Orchid, have been made publicly accessible.

The open-source codes and prototypes demonstrate how PBM can be used to integrate digital money in escrow arrangements. They function as reference models, promoting interoperability across diverse platforms. Policy makers, businesses, and financial institutes can tap on the open source-codes and prototypes to facilitate their experiments and research.

According to MAS’ Chief Fintech Officer, Sopnendu Mohanty, “This collaboration among industry players and policymakers has helped achieve important advances in settlement efficiency, merchant acquisition, and user experience with the use of digital money. More importantly, it has enhanced the prospects for digital money becoming a key component of the future financial and payments landscape.”

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