The Monetary Authority of Singapore (MAS) has recently joined hands with government agencies and fintech industry players to conduct trials on the concept of purpose-bound money (PBM) in Singapore.
These trials include the use of PBM in the the form of commercial digital vouchers, government vouchers, government payouts and managing learning accounts.
PBM is part of MAS’ Project Orchid, and enables senders to specify conditions, such as validity period and types of shops, when making transfers in digital money.
Project Orchid was first announced at Singapore Fintech Festival (SFF) 2021 to explore the foundational technology infrastructure and technical competencies necessary to issue retail Central Bank Digital Currencies (CBDCs).
But how exactly does a PBM work?
The creation of a PBM
The creation of a PBM begins when its backing digital currency, such as a digital Singapore Dollar (SGD), is bound to a smart contract. The smart contract can be considered as a “wrapper”, tying the usage of a PBM to conditions specified by the creator of the PBM.
The backing digital currencies serve as a collateral for the PBM, and can come in the form of CBDCs, tokenised deposits or stablecoins that are properly regulated in a manner that provides confidence in the stability of their value.
The PBM creator then deposits traditional fiat currencies equivalent to the total value of the PBM with the digital currency issuer.
The digital currency issuer — who is a regulated financial institution — mints and provisions the underlying digital currency backing the PBM. The PBM will finally be created according to the terms and sent to the issuer for distribution.
The lifecycle of a PBM
The creator of the PBM will then distribute the PBM, for example, in the form of corporate vouchers, for consumers to use through publicly available channels. The PBM can also be distributed by the creator by engaging a third-party distributor.
PBM wallets are used to send and receive PBM and their respective backing currencies. These wallets refer to cryptographic wallets that hold users’ private keys to grant them access to PBMs.
Once acquired by consumers, the PBM can be spent if the parameters set in the smart contract are fulfilled. Alternatively, if a consumer decides not to spend the PBM, the PBM can be transferred to another person. The transfer will not alter the parameters governing its use.
Consumers will only interact with PBM in its “wrapped” form, and they would not be required to manage or handle its underlying digital currency.
When the PBM is spent at participating merchants, the PBM will be “unwrapped”, allowing its underlying digital currency to be redeemed. The ownership of the digital currency will now be transferred to the merchant’s wallet address.
However, in the case where at least one of the parameters set a PBM’s smart contract is violated or expired, such as its time constraint or designated purpose of spending, a PBM will be lapsed.
The PBM creator can either decide to aggregate and destroy the PBM to return the underlying digital currency back to him/her, or pause the PBM for an indefinite amount of time to prevent the public from further interacting with the expired PBM.
With the basics of PBM out of the way, here’s a look at how the government is currently testing out practical usages of PBM.
PBMs can address gaps in existing commercial voucher schemes
Existing voucher schemes tend to be manual, and paper-based.
While efforts are underway to digitise vouchers and consolidate rewards programmes, the customer experience remains fragmented. Consumers often do not have a choice on the channel to view or use these vouchers.
To compound issues, users and merchants could be overwhelmed with different vouchers, having to read and understand the terms and conditions for each scheme. PBMs can be the key to solve this pain point and address the gaps in existing commercial voucher schemes.
This is what prompted Singaporean fintech company StraitsX and Grab to roll out a trial for the usage of PBMs in the form of commercial digital vouchers at this year’s SFF.
During SFF 2022, 5,000 selected trial participants were able to utilise PBMs in the form of digital vouchers through their preferred blockchain e-wallet application. Supported wallets include Coinbase Wallet, Trust Wallet and Sequence, said Liu Tianwei, CEO of Fazz in a technical sharing session at SFF 2022.
The complimentary PBMs were distributed through ‘airdrop’ to trial participants’ wallet addresses.
The vouchers, sponsored by Temasek, can be used to make purchases at selected F&B outlets at SFF 2022, as well as participating Grab’s merchant-partners such as Ishiro at Expo, Flash Coffee, Han’s, Hotpot by Seoul Garden, and LiHo at Changi City Point, simply by scanning QR codes at the outlets.
GrabPay, Grab’s payment service, worked with StraitsX and digital currency payment gateway TripleA to support the last-mile settlement of PBM.
This was achieved by accepting StraitsX’s XSGD, stablecoins pegged to the Singapore Dollar (SGD), on the Polygon chain, and reflecting the SGD pegged stablecoin as SGD in the participating merchants’ GrabPay accounts.
GrabPay was also the main merchant payments processor for the PBM pilot at SFF 2022. It paid out to participating merchants in SGD on an on-demand basis, and removed any need for merchants to invest in end-of-day reconciliation between two accounting systems.
Leveraging blockchain to create PBM in the form of gov’t vouchers
Governments curate various types of disbursement programmes in order to boost their economy and support target segments of the population. These programmes target different stakeholders and have multiple objectives.
In Singapore, for example, CDC vouchers were created to uplift the economy during COVID-19, and were made to be spent in a set amount of time.
With the varying objectives of these programmes and vouchers, a host of implementation details have to be formulated from scratch, such as the methods of voucher payout, and the methods of reconciling transactions after vouchers are redeemed. This can take months, or in some cases, years.
Open Government Products (OGP) has built a voucher system called RedeemSG to facilitate the issuance and creation of digital vouchers by government agencies. RedeemSG also allows participating merchants to easily accept government-issued vouchers.
While this has eased processes, participating merchants still need to sign separate contracts with respective campaign organisers, such as CDC, before taking part in the campaign.
On top of that, both the government and merchants still face a barrage of issues.
Long settlement processing times resulting from ensuring an accurate and correct net cash flow between parties (campaign organisers, merchants, the banks of voucher issuers and the merchants’ banks), high implementation costs from commissioning voucher systems, and scammers targetting government payouts are just the tip of the iceberg.
A potential solution to this could be through the usage of PBMs. Government agencies can specify the terms and conditions for where and how digital vouchers should be used, creating a “wrapper” for the PBM, and distributing them to eligible citizens.
To explore the use of PBM in the form of government vouchers, DBS has since launched a live pilot with OGM.
Starting from October 27, the four-week pilot involves up to 1,000 selected consumers and six merchants, including popular F&B outlets such as Nanyang Old Coffee, Sarnies, Pickleville, The Working Class and The Three Anchovies at the central district.
The PBM vouchers will be created using programmable digital Singapore dollars (DSGD) issued by DBS, with smart contract capabilities enabled by OGP. This will enable issuers to program and self-execute the distribution and usage of the voucher to designated recipients.
For SMEs and businesses with retail shopfronts, this means that they will be able to benefit from instant settlement, payments and collections with their banks when customers use digital vouchers.
This will help time and resource starved small businesses increase cashflow and save time on administrative backend tasks.
At SFF 2022, DBS Bank and OGP tested the use of PBM for disbursements to selected individuals. Trial participants can use RedeemSG vouchers at participating food and beverage outlets, and these vouchers have been programmed to expire on the last day of SFF 2022.
Integrating PBM into CPFB funds disbursement
Last year, OCBC Bank supported the Central Provident Fund Board (CPFB) in launching the GovCash cheque replacement service.
GovCash enables Singaporeans who are unable to use direct bank crediting to receive government payments via facial recognition at OCBC ATMs without needing to have an OCBC bank account.
As part of GovCash, OCBC has collaborated with GovTech on the LifeSG app which enables Singaporeans and Singapore PRs to view government payments deposited into GovCash via the LifeSG app.
The service will also enable users to transfer payments into their PayNow-linked bank accounts and pay merchants by scanning the QR codes.
Building upon these efforts, OCBC Bank and CPFB aim to take the national digital payment services to new heights by designing and testing a solution that utilises the digital SGD and PBM smart contract.
The solution is aimed to reduce the overheads of the fund disbursement process from CPFB to intended recipients.
The trial will be conducted through a test disbursement scheme in a controlled environment with selected participants. These participants comprise a small group of CPFB recipients who are also OCBC customers.
The pilot will only allow recipients to receive the disbursement from CPFB through the existing payment rails, such as funds transfer to PayNow NRIC-linked bank accounts or cash.
In the future, recipients would not be required to have a bank account to receive the funds, as the government aims to support extended use cases.
Managing learning centres with PBM
Similar to the issuance of government vouchers, the government’s grant schemes provide support to target citizen segments in Singapore to simulate the economy.
In working through grant schemes, the public sector will need to address challenges such as the cost of implementing grant schemes, long settlement processing time, fraudulent claims, exploitation of government payouts, among other issues.
These grant schemes could also be in the form of supporting the learning and skills mastery of the population such as the provision of learning accounts to eligible citizens, businesses and training institutions.
For example, SkillsFuture Singapore (SSG) may provide fiscal transfers to citizens and businesses
in a controlled, efficient, and secure manner. The government issues SSG credits to eligible individuals, allowing them to take up classes to reskill and upskill their abilities in the workforce.
To facilitate the process, a trial will be conducted by UOB — in collaboration with OGP — to ensure that the intended segment of Singapore’s population utilises their SSG Credits. This will enable SkillsFuture grants to automatically be released to participating training providers when eligibility conditions are met.
For this trial, the creator of the PBM will define the conditions for the usage of the learning account, which will be translated into a smart contract code.
The creator will then transfer funds into their UOB account, which will then be minted into digital SGD by UOB to be utilised towards the learning account. The PBM supporting the learning account is now created.
Next, the learning account, in the form of a PBM, will be distributed to eligible citizens and businesses.
The redemption of the underlying digital SGD occurs through a three-step verification process implemented as a smart contract, which checks the following:
- Registration of participants – Through this, eligibility of enrolled participants, and the expiry of the grant is verified
- Participation of individuals – The training institutions will indicate the participation of individuals
If these conditions are met, grants will be released from the wallets of citizens to the training institution. In other words, the PBM will be “unwrapped”, and training institutions will receive the digital SGD.
Finally, the training institution can convert their digital SGD into funds in their deposit accounts with UOB.
PBM is part of MAS’ Project Orchid
As part of Project Orchid, MAS aims to delve into the enablement of PBM for the widespread distribution of money for commercial purposes, and its interoperability with e-wallets, payment systems and rails, and blockchains, through these pilot programmes.
Project Orchid builds on the key learnings from the Global CBDC Challenge, which was organised by MAS and its global partners, including IMF, World Bank and ADB, where innovative solutions were sought to enhance payment efficiencies and promote financial inclusion.
The results from this programme will be used to inform the future phases of Project Orchid in the design and selection of infrastructures for a digital Singapore dollar.
Featured Image Credit: Singapore Fintech Festival 2022