The Monetary Authority of Singapore (MAS) has published a white paper proposing a common protocol to specify conditions for the use of what it refers to as “digital money”, that is, digital assets like central bank digital currencies (CBDCs), tokenized bank deposits and stablecoins on a distributed ledger.
The document was supported by the release of software prototypes that demonstrate the concept of Purpose Bound Money (PBM), which enables senders to specify conditions, such as validity period and types of shops, when making transfers in digital money across different systems.
“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,” says Sopnendu Mohanty, the MAS’ chief fintech officer. “More importantly, it has enhanced the prospects for digital money becoming a key component of the future financial and payments landscape."
The white paper, which was developed in collaboration with the International Monetary Fund, Banca d’Italia, Bank of Korea, financial institutions and fintech firms, covers technical specifications that outline the PBM lifecycle from issuance to redemption, and the protocol to interface with digital currencies backing it.
It also reports on business and operating models for how arrangements could be programmed such that money is transferred only upon fulfilment of service obligations or terms of use.
Building on the MAS’ Project Orchid, the paper aims to encourage greater research among central banks, financial institutions and fintechs to understand the design considerations in the use of digital money.
And to support ongoing development and learning, PBM source codes and software prototypes developed under Project Orchid have been released for public access. The open-source codes and prototypes demonstrate how PBM can be used to embed digital money in escrow arrangements.
PBM trials
The PBM protocol is intended to serve as a reference model to foster interoperability across different platforms. Policymakers, businesses and financial institutions can tap into the open-source codes and prototypes to facilitate their experiments and research.
The protocol is designed to work with different ledger technologies and forms of money. It enables users to access digital money using the wallet provider of their choice.
With a common protocol, the same infrastructure can be used across multiple use cases. Stakeholders using different wallet providers can transfer digital assets to one another without the need for customization.
Financial institutions and fintech firms, the MAS states, are launching trials to test the usage of PBM under different scenarios.
Singapore lender DBS, along with Grab, FAZZ, NETS and UOB, will 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 the time needed to onboard new sales campaigns.
Amazon, Southeast Asian digital financial services group FAZZ and Grab are collaborating on a pilot use case involving escrow arrangements for online retail payments. This pilot allows payment to be released to the merchant only when the customer receives the items purchased, thus providing greater assurance to both parties.
