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We like We foresee adoption of Blockchain not Bitcoin Digital Currencies not Cryptocurrencies Stable Coins not CBDCs Blockchain not Bitcoin LIBRA not Cryptocurrencies CBDCs from China & the BRICs not the US These are picks of business media talk from the past and the present. As Ajit Tripathi, said to me in a conversation […]
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The Monetary Authority of Singapore (MAS) have been piloting several Blockchain use cases over the past few years. Central Bank Digital Currency (CBDC) was one of the key focus areas of Project Ubin – MAS’ Blockchain initiative. In September 2018, I had published my post on Singapore and their efforts around Blockchain.
With the five phased approach to Project Ubin, we may soon see a state issued digital currency. That would not only put Singapore ahead of its Asian peers, it may be a Global first.
We now have a global first. Just over a week ago, MAS and the Central Bank of Canada made an announcement that a transaction between digital currencies of the two central banks was executed successfully. The trial was performed with the help of Accenture and J.P.Morgan.
As the Blockchain narrative developed over the years, one of the key buzzword was decentralisation and disintermediation. However, in the last two years, we have seen permissioned Blockchains gain popularity.
The three dimensions of the Blockchain Trilemma proposed by Vitalik Buterin were, Scalability, Security and Decentralisation. Designers of Blockchain systems have to choose between these three dimensions. The rise of permissioned Blockchain indicates that Decentralisation would be the first to be compromised amongst the three dimensions.
There are several reasons why a central bank would launch a digital currency. In the case of the Petro, the rationale was largely to stay clear of sanctions and raise capital to pay back some of their debt.
Reserve Bank of India on the other hand is exploring CBDC as it would be a low hanging fruit after the mass (forced) adoption of the nation’s identity system – Aadhaar. A good model would be to link a CBDC to Aadhaar verified wallets to create accountability and traceability of cash in the economy.
RBI was also spending 7 Billion Rupees ($100 Million) per year in just creating and managing the Rupee. There would be huge savings if they launched a CBDC.
Getting back to the SGP digital currency. Some key points to note are the following,
The picture above explains the HTLC framework used by this model. A report was published at the back of this initiative, describing several models that cross border settling systems could use.
The next wave of central bank blockchain projects can make further progress by bringing technology exploration together with policy questions about the future of cross-border payments
Sopnendu Mohanty, Chief Fintech Officer, MAS
The report also goes into the depths of the challenges in using HTLC and the potential alternatives being worked on by the Blockchain community. Like in most other Financial Services use cases of Blockchain, this transaction was also executed in a controlled environment.
CBDC are still in their infancy. This pilot could be followed up by collaboration across several central banks at the policy, governance, process and infrastructure levels. This would benefit the global economy at a scale never seen before. Let’s take stocks in a year. Watch this space.
Arunkumar Krishnakumar is a Venture Capital investor at Green Shores Capital focusing on “Sustainable Deeptech Investments” and a podcast host.
I have no positions or commercial relationships with the companies or people mentioned. I am not receiving compensation for this post.
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Most people in Blockchain whom I talk to, feel tokenizing real world assets is an amazing concept with huge potential. I have often thought that the real difference that tokenizing offered, as an economic model, is the ability to tag a number value to something abstract. Like attention, brand value, popularity, karma etc.,
There have been no lack of attempts to tokenize platforms that act as market places for creating abstract value. In the last year or so, I have come across several firms that act as market places for people to help each other, give and receive points and eventually turn them to tokens.
However, as we create this new value system using Blockchain, it has to be through a logical roadmap. One has to walk before running. And, cryptos have struggled to answer the question “Whats your intrinsic value?” – there are several consensus based answers, but the traditional world typically don’t recognize that. And when the market collapses, the talk about creation of value digitally, often times look baseless.
However, as the Blockchain era turns a new page, we will need security tokens to act as the bridge between the old and the new capital markets.
I still believe value can be created digitally, and there is a market for that. We are at a point, where most of the world agree that Blockchain as a new economic paradigm is here to stay. As institutions plan their entry into this space, the economic model should stand its ground even in a quasi-traditional sense. Security tokens are exactly enabling that. They are beneficial across several dimensions, and some of them are:
We have had several headlines over the last few months on real world assets backed tokens. Especially from emerging market countries and their central banks. I am closely following India especially. But, Singapore is perhaps the world leader when it comes to their position on tokenized assets.
Earlier this week, the Monetary Authority of Singapore (MAS) and Singapore Exchange (SGX) announced that the Delivery vs Payments (DvP) app they were prototyping was working successfully. I had written about it earlier on Daily Fintech too, and was looking forward to this announcement.
“Based on the unique methodology that SGX developed to enable real-world interoperability of platforms, as well as the simultaneous exchange of digital tokens and securities, we have applied for our first-ever technology patent,”
– Tinku Gupta, Head of Technology, SGX
Through this prototype, the consortium of MAS, SGX, Deloitte and Nasdaq have tested the functionality where financial institutions can exchange and settle tokenized assets across different Blockchain platforms.
Most of these prototypes are conducted in a controlled environment with minimal risk. Thats because the technology and its viability in a global enterprise still needs to mature. But the concept of tokenising assets, and allowing access to a global consumer base would create new business models (and regulatory headaches).
Arunkumar Krishnakumar is a VC investor focusing on Inclusion, a writer and a podcast host.
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Regtech is a £50 Billion per year opportunity, and that is just in the UK. That is due to the hundreds of millions of pages in regulatory texts that firms have to deal with, to be compliant. It is critical that firms equip themselves with technology solutions that will help them navigate through the complex world of regulation.
Please note that while Regtech covers regulations across industries, I am taking the liberty of using this term loosely to refer to FS based Regtech use cases.
During my time at PwC, I was involved in evaluating AI products for their Legal and Regulatory offerings. We were looking into IBM Watson, and had some interesting conversations on sending Watson to school to learn Legal and Regulatory language (in English). The AI engine (deep learning, NLP) would then be able to provide guidelines to firms in plain English on what was needed for regulatory compliance.
It has been almost five years since then and we have seen various developments across the globe. Regtech has never been more relevant. US and Europe have more than 200 Regtech firms, as these two regions are clearly seen as the pioneers of financial services regulation.
‘The FCA is the most innovative regulator in the world in terms of using new technologies and the other regulators look up to them”
In my opinion, Europe and in particularly the UK’s FCA are world leaders in working with innovative ways of achieving regulatory compliance. Be it payments, open banking or crypto currencies, they have taken a collaborative approach in nurturing the right firms. 37% of Regtech investments across the globe happen in the UK.
But its the happenings in Asia that I find more interesting from a Regtech stand point.
Fintech India has seen massive growth with digital payments being well backed by policies and technology infrastructure. The rise of PayTM, UPI and more recently Google Tez have all helped in bringing the total transaction volume of digital payments to $50 Billion. But with growth comes greed, and regulations have to kick in. There were tens of P2P lending firms in India until the Reserve Bank of India (RBI) launched their regulatory framework for P2P lending in Q4 2017. There are now only a handful of well capitalised P2P lending platforms.
There is a lot of work to be done around automation of transaction reporting. For example, the Microfinance market in India is still largely cash based and reporting is manual. There are startups trying to disrupt this space with cloud enabled smart phone apps, that allow for real time reporting of transactions, when an agent is on the ground collecting money from a farmer. This allows for massive gains in operational efficiency, curbs corruption, but more importantly helps transaction reporting so much easier.
I see India as a market, where Regtechs can help the RBI develop a regulatory framework across Financial Services.
China’s P2P lending market is worth about $200 Billion. Recent frauds like Ezubao, where about a million investors lost $9 Billion, indicate that the market needs to have strong regulatory controls. The scam led to a collapse of the P2P lending market in China. A regulatory framework that helps bring credible players to this space, well supported by a bunch of top Regtechs will help the status quo.
Singapore is the destination for Regtechs in Asia – without a doubt. After the US and the UK, Singapore attracts the most investments into Regtech firms. The support that Monetary Authority of Singapore (MAS) provides to budding startups is the real differentiation that Singapore has over Hongkong as a Fintech hub.
MAS have recently tied up with CFTC (Commodity Futures Trading Commission) in the US to share the findings of their Sandbox initiative. Such relationships between regulators help keep regulatory frameworks aligned across jurisdictions . So, when a Fintech is looking to expand beyond borders, they don’t have to rethink operational, strategic or technology aspects for the new jurisdiction and they can focus on what matters – the consumers.
As Fintech evolves over the next few years, there are several ways in which Banks, Insurance providers, asset managers and regulators can work in partnership with Regtech firms. In some areas, these firms will piggyback off what the incumbents have or haven’t done.
There is often a rule of thumb in the top consulting firms – build propositions in an area where there is fire. In other words, if a client has a major issue that could cost them money and/or reputation, come up with a solution for that. This is particularly true with Regtech firms, where they focus on an area that has a serious lack of control and governance.
However, in many parts of the world, there is a genuine opportunity for Regtechs to go a step further and define the controls in collaboration with the regulators, and perhaps ahead of the regulators.
Arunkumar Krishnakumar is a VC investor focusing on Inclusion, a writer and a speaker.
Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.
