The Monetary Authority of Singapore hosted a “Global CBDC Challenge”, asking fintechs and banks to come up with use cases for a central-bank digital currency in the retail space.
One of the finalists was a partnership between Xfers, a Singapore-based fintech, and SEBA Bank, a licensed crypto bank based in Switzerland.
Aymeric Salley of Xfers told DigFin about their concept. (DigFin will be profiling more of these solutions in the coming weeks.)
Xfers was founded in 2014 as a regulated payments company. It now has operations in several Asian markets. Its first business was to develop API-based payment products to serve crypto exchanges, so they can collect and disburse customer funds while complying with regulations regarding money laundering and customer identity.
Salley joined in 2020 (from Paxos, a regulated blockchain trust company) and oversaw the launch of a Singapore dollar-backed stablecoin, called XSGD. His title is head of StraitsX, the stablecoin project.
The stablecoin was built on two blockchains, Zilliqa and Ethereum. Zilliqa was a partner for the project, and the MAS was kept in the loop. Since launch, Salley says there has been $1.5 billion transacted with XSGD onchain.
When the MAS announced its CBDC challenge in July, Xfers teamed up with SEBA Bank. Xfers had the stablecoin; SEBA had experience collaborating with central banks in Europe, such as Banque de France.
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The partners presented two use cases for a retail CBDC to MAS.
First, they cited XSGD as evidence that money operations on decentralized blockchains are more efficient for settling transactions: they are instant, operate 24/7, and with enough scale and liquidity, can be almost free. “Stablecoins are better than bank accounts for settling transactions, especially cross-border,” Salley said.
The second use case was using smart contracts to mimic traditional financial services in a superior way, with stablecoins providing the liquidity. Users such as trading companies can buy XSGD, convert to another stablecoin (say, USDC), and then cash out into a U.S. bank account in close to real time – much faster than via bank FX desks or even fintech FX payment apps, Salley says.
The liquidity required to grease these transactions is considerable. What would attract it? The opportunity to place excess liquidity into DeFi apps that generate yields.
This takes the Xfers/SEBA proposal into difficult terrain. On the one hand, depositors are getting nothing from putting money in bank accounts. Corporate treasurers or pension funds have access to securities lending and other tools to generate returns, but small businesses and individual depositors are stuck with zero interest rates.
On the other hand, DeFi-generated yields are risky. They involve the community seeking out the latest hot blockchain projects and investing in those tokens. The space depends on market conditions, with technology protocols substituting for traditional credit risks. The space is not regulated, and there is not yet the equivalent of a credit rating agency, or other trusted third party that can assess these risks.
Stablecoins and/or CBDCs
So what’s the role of a stablecoin like XSGD in a central-bank digital currency?
“XSGD may or may not be relevant to CBDCs,” Salley said, noting that this will depend on a variety of CBDC designs and tech choices. CBDCs could make use of the same blockchain protocols as a stablecoin – or authorities might prefer to operate on different rails. They might opt for compatibility, or separate them.
For a tech player like Xfers, the possibility of riding on a central bank’s preferred rails is alluring. A CBDC represents a token exchanged on a chain connected to the central bank’s ledger. “We don’t have access to this as a money operator,” Salley said. “The question we’ve asked is how could our stablecoin evolve to become a direct liability on the central bank’s ledger?”
But CBDCs also represent a possible risk to such fintechs: digital fiat could render stablecoins unnecessary, or confine them to niche uses.
How could our stablecoin evolve to become a direct liability on the central bank’s ledger?Aymeric Salley, Xfers
The other big question the partners addressed was privacy. Ethereum and Zilliqa are open, transparent blockchains. SEBA’s role was to explore privacy features on top of these chains, so that a CBDC (or a stablecoin) could enjoy cash-like anonymity for small-value transactions. At the same time they will need to be subject to KYC and AML rules.
The best way to manage this is a hybrid model, in which banks or other intermediaries handle a separate layer for transactions and managing identities.
“There’s already been a lot of academic research on this topic,” Salley said. “The MAS Challenge adds a business view.”
MAS intends to announce more details in November during the Singapore Fintech Festival.