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How Central Banks can support sustainable growth through green finance and enhance cross-border payments

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Monetary Authority Singapore

Ms Jacqueline Loh, Deputy Managing Director (Corporate Development), Monetary Authority of Singapore, spoke at the BIS Innovation Summit yesterday, 25 March 2021 on “Innovation in Central Banking – Seizing Opportunities, Securing Our Future”.

She outlined why central banks should embrace innovation and how central banks can facilitate and lead innovation while managing risk. And how central banks can channel innovation capabilities to address two key challenges – improving sustainability and enhancing cross-border payments.

How central banks can support and facilitate innovation by the industry

She said that the central banking community has already been generally facilitative towards innovation while managing the inherent risks.

Ms Loh said that “some central banks including MAS have deliberately provided room for emerging technologies to be explored deeply, and their benefits and risks to be properly understood. We have avoided having regulation front-run innovation, so as not to stifle new ideas.

Beyond experimentation, such exploration may also require testing of use cases in the market to assess their technical functionality and commercial viability in a production environment.

She added that central banks can play an important role in leading innovation, by being at the centre of experimentation.

The private sector is good at leading innovation, subject to the return on investment providing a clear incentive. When this is the case, they do an excellent job. They drive applied research, apply technology in an agile fashion, and deploy solutions to markets quickly.

However, private sector firms are less incentivised to innovate in cases where the return on investment is unclear and the benefits may not accrue primarily to them. Hence, when there is a need for innovation to develop essential industry infrastructures that benefit the entire financial system, central banks can step in to provide these public goods.

Green finance and enhancing cross-border payments

Looking ahead, central banks can play an active role in two key challenges: supporting sustainable growth through green finance, and enhancing cross-border payments to facilitate trade and investment.

Harnessing innovation to support Green Finance

Green finance today is hampered by challenges that reduce the incentive for investors to invest in green projects. Technology can be an enabler to overcome two of these challenges.

First, to accurately verify and monitor the carbon footprint and resource consumption across an entire supply chain. This is necessary to address greenwashing and to build trust.

Second, to measure and quantify the ESG impact of potential investments and loan portfolios, which is necessary to incentivise firms to make sustainable investments that meet their sustainability commitments.

MAS announced in December last year that they are embarking on Project Greenprint.

Project Greenprint aims to deploy technology at different stages of the supply chain to better monitor commitment to the relevant green standards and requirements. For example, Internet-of-Things (IoT) devices could be deployed on-site to directly capture and assess relevant real-time data, such as energy and water consumption, by borrowers, portfolio companies, and suppliers.

It will also explore the application of AI and other technologies on third-party data sources, to quantify the ESG impact of potential investments and loan portfolios.

MAS will work with a consortium of financial institutions, FinTech firms, and industry players with expertise in Green FinTech, and look to partner with like-minded central banks who are committed to harnessing the power of innovation to support sustainable finance.

Multilateral connectivity to enhance cross-border payments

The G20 is leading a concerted global effort to make cross-border payments less expensive, faster, more transparent, and more inclusive, while maintaining their safety and security.

Ms Loh explained how “MAS has embarked on a pioneering journey with the Bank of Thailand to link up respective national retail faster payment systems – PayNow in Singapore, and PromptPay in Thailand. This linkage between the two countries’ faster payment systems will go live in the middle of 2021.”

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