## Making Sense of CRYPTO

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**Canonical URL:** [Making Sense of CRYPTO](https://www.imf.org/-/media/files/publications/fandd/article/2022/september/menon.pdf)

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### Overview
- Central banks and regulators cannot wait for full clarity on crypto-related innovations—digital assets, cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs)—because they are rapidly gathering momentum and already pose risks that must be understood and addressed.
- The Monetary Authority of Singapore (MAS) aims to develop an innovative and responsible digital asset ecosystem and takes a differentiated approach to each innovation, adapting frameworks as technologies, business models, and market practices change.

### Digital assets: definition, features, and use cases
- Definition: A digital asset is anything of value whose ownership is represented in a digital or computerized form; it can be a financial asset, a real asset, or something intangible.
- Three distinct features of the digital asset ecosystem:
  - Tokenization: using software programs to convert ownership rights over an asset into a digital token.
  - A distributed ledger, or blockchain: an immutable computerized record of ownership and transfer of tokens.
  - Cryptography: advanced encryption techniques to ensure transaction security.
- Promising financial services use cases:
  - Cross-border trade and settlement
  - Trade finance
  - Pre- and post-trade capital market activities
- Empirical efficiency improvements cited:
  - Cross-border settlement time reduced from two-to- three days to less than 10 minutes; transaction costs reduced from 6 percent of transfer value to less than 1 percent.
  - Trade finance: processing time for letters of credit reduced from five to 10 days to less than 24 hours.
  - Capital markets: time to clear and settle securities transactions reduced from two days to less than 30 minutes.
- Singapore examples:
  - United Overseas Bank Ltd. piloted the issuance of a S$600 million digital bond on Marketnode’s servicing platform using smart contracts.
  - Project Guardian (MAS initiative, led by DBS Bank, JP Morgan, and Marketnode) pilots a liquidity pool of tokenized bonds and deposits locked in smart contracts to enable seamless secured borrowing and lending.
  - OCBC Bank partnered with the digital exchange MetaVerse Green Exchange to develop green financing products using tokenized carbon credits to ensure provenance and reduce double-counting.
- Tokenization potential beyond finance:
  - Monetization of tangible or intangible assets
  - Fractionalization of ownership
  - Easier, secure, and intermediary-light trading of assets (works of art, real estate, commodities, livestock)
- A tokenized medium of exchange will be needed; main candidates are cryptocurrencies, stablecoins, and CBDCs.

### Cryptocurrencies: assessment and regulatory stance
- Private cryptocurrencies (e.g., Bitcoin) are assessed as failing to perform as money: they perform poorly as a medium of exchange, a store of value, and a unit of account.
- Many widely traded cryptocurrencies are utility tokens tied to blockchain projects but have prices divorced from on-blockchain economic value; extreme price volatility rules them out as viable tokenized currency or investment asset.
- Risks:
  - Easier facilitation of illicit transactions due to pseudonymous e-wallets (money laundering).
  - Fueling of ransomware.
- MAS actions:
  - Consistently warned the public about trading hazards.
  - Banned advertisement or promotion of cryptocurrencies to the general public.
  - Plans to impose further restrictions on retail access to cryptocurrencies.

### Stablecoins: potential and risks
- MAS sees good potential in stablecoins if they are well regulated and securely backed by high quality reserves.
- Definition: tokens whose value is tied to another asset (usually fiat currencies, such as the U.S. dollar), combining stability and tokenization for payment instruments on distributed ledgers.
- Adoption note: Visa and Mastercard allow transactions to be settled using USD Coin.
- Regulatory focus areas to ensure stability:
  - Liquidity, credit, and market risks of reserve assets
  - Auditability of reserves held
  - Ability to redeem stablecoins at par
- Example of failure: TerraUSD relied on algorithms and an unbacked sister cryptocurrency, Luna, rather than secure asset backing, leading to a meltdown and demonstrating need for quality backing.
- Systemic risk considerations:
  - Stablecoins backed by financial assets are more closely intertwined with the broader financial system than unbacked cryptocurrencies.
  - Under liquidity stress, a stablecoin issuer forced into a fire sale of reserve assets could create financial-system repercussions.
  - While current contagion risk is small, regulators (including the Financial Stability Board) are updating guidance; MAS will soon issue proposals to regulate stablecoins in Singapore.

### Wholesale CBDCs: rationale and projects
- Definition: A wholesale CBDC is a direct liability and payment instrument of a central bank, restricted to use by financial intermediaries and similar to commercial-bank balances at the central bank.
- MAS sees a strong case for wholesale CBDCs, especially in cross-border payments and settlements, which today are slow, expensive, and opaque due to multi-bank correspondent chains.
- Potential benefits:
  - Directly linking instant payment systems (e.g., PayNow and PromptPay) enables real-time payments at lower cost, but settlement is still not instant.
  - Wholesale CBDCs on a distributed ledger can achieve atomic settlement (exchange of two linked assets in real-time).
- Project Dunbar: Bank for International Settlements Innovation Hub partnership (MAS, Reserve Bank of Australia, Bank Negara Malaysia, and South African Reserve Bank) exploring a common multi-CBDC platform to enable atomic settlement across multiple countries.

### Retail CBDCs: considerations and MAS position
- Definition: A retail CBDC is digital cash issued by a central bank to the general public; its unique attribute is being a liability of the central bank.
- Three commonly cited arguments for retail CBDCs:
  1. Preserve direct access to public money in a digital economy as cash disappears.
     - MAS view: Differences between central bank and commercial bank liabilities are generally of little practical concern; trust and central-bank backstops may suffice.
  2. Act as a constraint on monopoly power in retail payments.
     - Alternatives to issuing retail CBDCs include:
       - Opening retail payment systems to more participants, including non-banks
       - Capping interchange fees merchants pay on credit and debit sales
       - Setting minimum standards for speed, access, and interoperability
     - Note: Regulations must be weighed against potentially discouraging new entrants.
  3. Offer greater privacy and control over personal information and transactions.
     - Alternatives include regulatory or legislative enhancements to protect privacy and ensure sound data governance.
- MAS stance for Singapore:
  - The case for a retail CBDC is not compelling now given well-functioning payment systems and broad financial inclusion.
  - Retail electronic payment systems are fast, efficient, and cost nothing; cash remains in circulation and is unlikely to disappear.
  - MAS is building technology infrastructure that would permit issuance of retail CBDCs should conditions change.

### Future state and strategic posture
- Central banks and regulators must continually monitor trends and adapt policies and strategies; it is premature to be definitive about outcomes.
- Plausible future configuration:
  - The digital asset ecosystem could be a permanent feature co-existing with the intermediary-based system.
  - Traditional fiat currencies will continue to dominate.
  - Securely backed private stablecoins and wholesale CBDCs could play important roles in cross-border payment and settlement.
  - Retail CBDCs may emerge as a small component of the monetary base—similar to the role played by cash today.

*RAVI MENON, managing director of the Monetary Authority of Singapore.*

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_Source: https://www.imf.org/-/media/files/publications/fandd/article/2022/september/menon.pdf_