Singapore’s Central Bank CPF, the Monetary Authority of Singapore (MAS), is working to streamline the global economy by changing how money moves across borders using central bank digital currencies inspired by bitcoin. If successful, the experiment, done in partnership with a consortium of central banks called the Bank for International Settlements (BIS), could reduce fees to such a level that even the lowest income citizens would be able to participate in the global economy.  

Currently, when an individual or institution transfers funds across borders they rely on an intricate network of correspondent banks coordinating across different time zones and currencies. This old-school network including JP Morgan, Deutsche Bank, and Credit Suisse, currently rely on middlemen like SWIFT for wholesale transactions (fund transfers between banks), frequently resulting in limited operating hours and settlement delays. 

However, if there were a system where multiple central banks were directly connected, or where banks were able to interact instantaneously on a single network, it would enable 24/7, real-time settlement of cross-border payments. In pursuit of this streamlined system, the MAS partnered with BIS in July on a new initiative called Project Dunbar to build a common platform where central banks could directly transfer funds across borders using central bank digital currencies (CBDCs). 

CBDCs are a new kind of money, issued by central banks on blockchains, similar to bitcoin, but where only invited parties can participate. Composed of over 60 central banks collaborating on the development of new technologies and economic analysis, the BIS is currently carrying out CBDC research at three of its global ‘innovation hubs.’ In Switzerland, the BIS is working to link blockchain technology with existing payments systems; in Hong Kong, a team is experimenting with building links between separate CBDC networks in Asia; and in Singapore the BIS is moving ahead with the creation of a common multiple CBDC (m-CBDC) platform through Dunbar. If successful, these projects could help link national economies with less — and mabe no — reliance on correspondent banks, drastically reducing the cost of cross-border payments. 

While China’s central bank has been working in isolation to create a retail CBDC and improve internal payments infrastructure, the MAS is partnering with the BIS to create a more efficient, cost-effective and accessible cross-border payments system. 

“Project Dunbar aims to demonstrate the power and viability of a shared CBDC settlement platform,” Andrew McCormack, Center Head for BIS Innovation Hub in Singapore, says. “A single global settlement platform will be highly efficient, much like how centralized clearing and settlements have enabled domestic payments to be made instantly and often at no cost for consumers.”

Project Dunbar unofficially began earlier this summer, but official partners won’t be announced until September 2, 2021. Dunbar will build upon experimentation which has already been carried out by the MAS and BIS. Last month, Singapore’s central bank completed a simulated cross-border payment and settlement using a CBDC with the Banque de France on a common network. In the experiment, the transaction was nearly instantly converted from a Singapore Dollar (S$) CBDC to a €uro (EUR) CBDC using Brooklyn-based ConsenSys’s permissioned blockchain Quorum, a fork of ethereum acquired from J.P. Morgan, in August 2020. The experiment was also supported by J.P. Morgan’s blockchain and payments infrastructure division, Onyx.

This was not the MAS’ first successful experiment. In 2019, the institution’s CBDC-focused Project Ubin carried out a cross-border transaction with the Bank of Canada’s CBDC initiative, Project Jasper, sending SGD $105 from a local bank in Singapore to a local bank in Canada, which received CAD $100 at a foreign exchange rate of 1 SGD to 0.95 CAD. At the time of the transaction, Singapore and Canada were using their own networks on the Quorum and Corda blockchains, respectively. The evolution marked by MAS’ transaction with France is the use of a single, shared network between the two central banks, an advancement Sopnendu Mohanty, the chief fintech officer at the Monetary Authority of Singapore hopes will spur the next generation of innovation in cross border payments on a retail level using CBDCs. 

“A retail payment is what we see as ordinary citizens, but what goes behind is a lot of settlement happening between banks, the banks are settling among themselves,” Mohanty says. “Today we don't see a wholesale currency, but that's been used within banks to settle what we see is the retail currency.”

The clearest way to illustrate the true cost of inefficient international payments systems on everyday individuals is by looking at remittances — funds that migrant workers send back to their home countries to support their families while promoting global economic activity and development. In the first quarter of 2021, the global average cost of remittances was 6.38% of the transaction, nearly double the United Nations’ target rate of below 3%. In 2020, remittance funds sent to low and middle income countries was $540 billion, with just over $34 billion in fees attached. In contrast, payment apps like Zelle have pulled the cost of fund transfers within countries to virtually zero. A single CBDC platform where multiple digital versions of fiat money are issued could do the same for cross-border payments, according McCormack.

“A regional settlement platform can enable direct transactions with different currencies, improving [foreign exchange] liquidity and allowing faster and cheaper regional payments,” McCormack says. 

Currencies belonging to emerging economies have limited liquidity because there is little transaction activity between them. When individuals want to make cross border payments from a developing economy, they often have to go through a more liquid currency like the U.S. dollar, adding both time and expense. By removing intermediaries and the need to move through currency exchanges, the hope is that a single shared CBDC platform could bring increased liquidity between local currency pairs and by extension spur economic activity in these nations. 

The high fees attached to remittances are driving Mohanty to steer MAS towards building out cross-border payment infrastructure to reach his goal of “sub-dollar” costs attached to international payments. That means that rather than spending 6% of the transaction value on a cross border payment, an individual could instead spend mere cents. In 2020 the value of all remittances sent to low and middle income countries stood at $445 billion, a 19.7% fall from $554 billion in 2019, an indicator of the cut to migrant workers’ wages during the COVID-19 pandemic. In 2021, the World Bank estimates that remittances will begin to recover and reach $470 billion. By optimizing cross-border payments between banks using central bank digital currencies, the aim for Mohanty is that cutting out corresponding banks while reducing costs to comply with anti-money laundering and know-your-customer regulations will bring down fees associated with remittances and other cross border payments. Developing robust digital infrastructure has been a pillar goal of the MAS. 

“I think that’s why Singapore is deeply interested in this space, because we truly want to reduce the cost of cross border payment and using the wholesale CBDC experimental structure, that's our motivation,” Mohanty says. 

Singapore already has a well-developed retail payments infrastructure. Through a service called PayNow, people in Singapore can transfer money between each other in seconds with only knowing another person’s cell number. In 2018, Singapore linked this system with a similar one in Thailand called PromptPay, enabling citizens of both nations to send funds almost instantaneously between each other for just S$3 for every S$100, according to Mohanty. In the same way that PayNow and PromptPay were separate retail payments systems which eventually connected, there may be room in the future for different wholesale CBDC projects currently ongoing at BIS innovation hubs in Singapore, Hong Kong, and Switzerland to connect. 

Central bank interest in CBDCs is rapidly increasing. A study in July 2021 conducted by the Bank for International Settlements (BIS) found that 86% of central banks are actively engaging in some form of CBDC exploration. In July, the European Central Bank launched the investigation phase of its digital euro project. Meanwhile in China, the People’s Bank of China is already well into retail digital yuan pilot programs. The nation has activated over 20.87 million individual e-CNY wallets across 10 cities, which have facilitated 70.75 million transactions worth more than $5 billion. 

However, it is unclear whether central bank digital currencies are the best answer to an aged global payments infrastructure. Returning to the remittances example, while the global average cost for sending cash remittances has remained relatively flat since 2013, the global average cost for digital remittances has posted consistent declines. Digital remittances are defined by the World Bank as being sent using an online payment service and received by a bank account, transaction account, mobile, or emoney account. In the first quarter of 2021, the global average for non-digital remittances was 6.85%, but the cost for digital remittances was only 5.08%. This suggests that increasing access to the internet, mobile phones, and banking services may be the quickest way to offer the largest swath of people cheaper international payment options.

The race to improve cross border payments also has heavy participation from the crypto sector. In 2019 Facebook shocked regulators with it’s plan, then called Libra, now Diem, to create a digital currency backed by a basket of different central bank issued currencies. Other private sector companies working to make cross border payments more efficient include Celo and Circle whose teams have developed so-called stablecoins. These digital assets attempt to capture the advantages of digital currencies without the volatility of crypto assets like bitcoin. Earlier this month, Federal Reserve Governor Christopher Waller highlighted these private sector innovations as an argument against the United States developing a CBDC. 

Additionally, the MAS’ vision for a common platform where different central banks issue and transact using a single network is far from close to becoming a reality. Building out the infrastructure is less of an issue than determining how a common CBDC platform would be governed. Before becoming useful the designers of the platform would need to decide how privacy will be maintained and to what extent, who has access to platform data, and how aligned different central banks would need to be on questions of policy. 

“You’re adding one country and another country, but you need the right amount of engagement,” Director of ESG & Impact on investment bank Weild & Co.’s digital asset team, Emergent, Diana Barrero Zalles says. “There are a lot of policy-level specifications to get right and then there are a lot of technical specifications to get right in terms of security, needing the right regulatory standards across different countries, there has to be a sense of regulatory convergence in order for different countries to participate and agree on the same standards and rules.” 

While the MAS is making great strides, Mohanty knows that no single nation can move forward with comprehensive CBDC implementation for cross-border payments without collaborating with other central banks, especially if the goal is onboarding them all to a single system. 

“One is so connected, we want others to be equally interoperable with that system, so we can only go as far as others move along with this process,” Mohanty says. “What we're trying to do from our perspective is to reach out to central banks to see where we can collaborate, share our understanding, and build a common capability to do two things: interoperability and governance.” 

While questions of governance are left unanswered, Mohanty is clear that central banks should always be responsible for ensuring the costs of transactions are affordable, as Singapore and Thailand have done with the PayNow-PromptPay partnership. As for who runs the shared infrastructure, Mohanty believes this is an aspect where the private sector could step into the system. “Central banks should regulate financial activity, not the technology,” he says.