Project Orchid: Programmable Digital SGD
Co-authored by: Jian Hao Lim, Shawncky, Desmond Teo & Lau Bao Jie
Brief overview of Project Orchid
Since 2016, the Monetary Authority of Singapore (MAS) has been experimenting with central bank digital currencies (CBDCs) and distributed ledger technologies (DLT) in collaboration with the financial industries, coined Project Ubin. Project Orchid, launched at the Singapore FinTech Festival (SFF) 2021, marks the first extension of these experiments into the domestic retail payment space. The overarching objective of Project Orchid is to build the foundational technology infrastructure and technical competencies necessary to issue a retail CBDC (i.e., a digital version of Singapore dollar cash), should Singapore decide to do so in the future.
MAS has assessed that there is no urgent need for such a system now, given that electronic payments in Singapore are pervasive and householders and firms are already able to transact digitally in a fast, secure and seamless manner via services like PayNow. However, MAS has not ruled out the introduction of such a currency at some stage in the future, especially if innovative uses emerge or there are signs that digital currencies not denominated in SGD are gaining traction as a medium of exchange locally. In its first phase, MAS has partnered with both public and private sectors to investigate the possibilities around the programmability of a digital currency. Programmability is a key enabler of some of the commonly cited use cases for a retail CBDC, even as it is neither an inherent nor unique feature of a retail CBDC. A programmable retail CBDC, together with a set of well-designed smart contracts, could facilitate more efficient disbursement of highly targeted or in-kind fiscal support (e.g., tourism vouchers) and support new business and operating models (e.g., seamless machine-to-machine transactions).
Foundational digital infrastructure such as digital identity, data exchange, and interoperable payments play an important role in enabling financial services to be accessed by a wider set of the population and support economic and social development. One area where significant strides have been made in recent years is the development of the concept of programmable payment and more recently programmable money popularised with the blockchain and peer-to-peer money movement.
Programmable payment refers to the automatic execution of payments once a pre-defined set of conditions are met, while programmable money refers to the possibility of embedding rules within the medium of exchange itself that defines or constrains its usage. Programmable money’s advantage is its ability to define a set of programming logic or conditions that could be applied across a variety of different forms of money. It also has the advantage of being self-contained and transferable on a peer-to-peer basis between parties.
Purpose-Bound Money
Purpose-Bound Money is first introduced in the form of digital vouchers, under the initial phase of Project Orchid. PBM builds upon the concept and capabilities as mentioned above — programmable payment and programmable money. An example would be a transaction between a pre-defined merchant and a consumer, where the PBM has a validity period and does not require intermediaries.
PBM Architecture
There are 4 distinct components of a PBM based architecture:
- PBM Collateral
- PBM is backed by digital currency, in this case, Digital Singapore Dollar (DSGD). However, these collaterals can also come in the form of CBDCs and even regulated stablecoins.
- Currently, DSGD is minted on the blockchain by Financial Institutions such as Development Bank of Singapore (DBS). - PBM Wrapper
- The wrapper operates like a smart contract — it specifies the conditions upon which the PBM-based vouchers can be used.
- These smart contract capabilities are developed and enabled by Open Government Products (OGP), a division in GovTech Singapore.
- However, issuers such as DBS are allowed to program and self-execute the distribution and usage of the voucher to designated recipients. - PBM Infrastructure
- The infrastructure relates to the ownership of the digital currency and smart contracts governing PBM.
- PBM is designed to support DLT and non-DLT based ledger infrastructure. This means that PBM is not necessarily decentralised. - PBM Wallet
- PBM wallets enable users to send and receive PBMs and the associated digital currencies that underlie them. These wallets are considered to be cryptographic wallets, which are essentially software programs that store a user’s private keys, allowing them to access their PBM holdings.
PBM Use Cases
There are several use cases covered in the whitepaper. Here, we will cover the individual use case, where a transaction occurs from Person to Person.
PBM would be useful when the sender wants the recipient to spend the funds under certain specified conditions. For example, parents may grant their children allowances that should only be used in designated bookstores or food-court in school, but not for other purposes. Another example would be in the case of donations, where donors require their money to be used by various NGOs for specific purposes.
From the table of use cases above, here are some of the benefits of PBM:
- Increase transparency once deployed on public ledgers
- Improve efficiency through automated payments
- Transferability since collateral can be released if PBM voucher is not utilised
What will drive the demand for Singapore’s CBDC?
As Singapore is still experimenting with CBDC partly due to the lack of demand, we believe that there are several factors that could drive the demand for CBDC in Singapore:
- Cashless society: Decades in the making, Singapore’s push towards a cashless society began in 1985. Since then, Singapore has become one of the most digitally advanced economies in the world, with a high level of smartphone penetration and adoption of digital payments. CBDC could offer a more convenient and secure form of digital payment, which could further reduce the use of physical cash.
- Interoperability: CBDC can coexist and complement existing digital wallets to provide a more comprehensive and inclusive digital payment ecosystem. Issued and backed by the central bank, CBDC will provide a more secure and stable form of digital payment. Digital wallets, on the other hand, offer various features and services that CBDC may not provide, such as loyalty programs, discounts, and access to a variety of payment networks. With interoperability between digital wallets and CBDC, they can provide a seamless and convenient payment experience for consumers.
- Cross-border payments: Singapore is a hub for international trade and finance, and a CBDC could potentially facilitate faster, cheaper, and more efficient cross-border payments and settlements. On this front, MAS has recently launched Ubin+, an expanded collaboration with international partners on cross-border foreign exchange (FX) settlement using wholesale CBDC.
- Monetary policy: CBDC could offer greater flexibility and control over monetary policy, as it would enable central banks to implement more targeted and efficient monetary policies, such as negative interest rates.
- Innovation and competition: CBDC could also drive innovation and competition in the financial sector, as it could provide a new platform for fintech startups and other innovators to develop new payment and financial services.
Overall, the demand for CBDC in Singapore is likely to be driven by a combination of these factors, as well as by the continued evolution of digital technology and changing consumer preferences.
Current trends in CBDC
As CBDC is still a new form of money, it is a rapidly evolving field where many countries are still experimenting with how CBDC can best fit their financial ecosystem. In the following section, we explore some of the trends in CBDC that are currently emerging:
- Increasing interest: CBDC has gained significant interest from central banks and governments worldwide, as they explore the potential benefits and risks of digital currencies. According to the Atlantic Council’s CBDC tracker, a total of 119 countries have explored the use of CBDC.
- Pilot programs and experiments: Several countries, including China, India, and Australia, have launched pilot programs to test and evaluate the feasibility and effectiveness of CBDC. These initiatives aim to explore issues such as interoperability, scalability, and user experience.
- Diverse design models: There are various design models for CBDC, including token-based, account-based, and hybrid models, each with its own strengths and weaknesses. Countries are exploring different design models to identify one that is the most suitable for their respective economies.
As CBDC continues to develop in design, regulation, and technology, we can expect new trends to emerge and ultimately, benefit the payment ecosystem.
Personal Thoughts from Analysts
Jian Hao: There are two key assumptions made for CBDC as well as Project Orchid. The first assumption is strong technology infrastructure and robust cybersecurity of the network. Most of the programmable payment features so far are developed by a single entity, OGP. Given the track record of hacks in web3, relying on a single entity could mean a potential single point of failure. The other assumption is on interoperability. CBDCs must be interoperable with other payment systems, including traditional payment systems and other digital currencies. The lack of interoperability can lead to fragmentation of the payment system and impede the growth of the CBDC.
Desmond: While there are some benefits for Singapore to have its own CBDC, I believe that there is no strong need for Singapore to implement its own CBDC at this point. This is because existing payment systems such as PayNow and FAST are already meeting the needs of consumers and businesses for a fast and secure form of digital payment. That said, I believe Singapore’s open-minded approach towards CBDC is a strategic one as it ensures that the country continues to keep up with the development in this field and puts the country in a better position to introduce a CBDC in the future.
Shawn: It is hard to predict how CBDC would evolve in Singapore over the next few years. One plus side would be that Singapore is positioning itself as a fintech hub, with a thriving ecosystem and good regulatory environment. It would be able to position itself as a natural fit to establish the development and adoption of CBDC. However, with the current negative sentiments in the market towards crypto businesses, much more regulation and checks need to be implemented before introducing CBDC for retail consumers. Only through creating a safe and regulated environment will CBDC be able to flourish, similarly businesses and consumers will be able to recognize its true value.
Bao Jie: A new international money transfer system that uses CBDC could arise and potentially replace the SWIFT system that is currently used for the international transfer of payments. It could reduce transfer time, keep transactions within government blockchain ledgers to ensure privacy, and lower the fees for the international transfer of money.
