Its “Project Ubin” is systematically investigating what the fintech revolution means for equity and bond trades, cross-border settlements and the banking system, as well as control of money supply and credit creation.
There are well-publicised cases of people carrying out real transactions with Bitcoin – including two recent house purchases in England – but these are essentially stunts that mostly whither under scrutiny.
They do not reconcile the fundamental contradiction facing those e-coins that keep surging in price: either they are a speculative asset or they are a stable currency, but they cannot be both.
Mr Mohanty, recruited from Citigroup to spearhead Singapore’s fintech drive, said Ethereum had some social utility and plausible market value. It can be used for “smart contracts” and to secure access to valuable computing power.
“It at least has economic value. You can exchange ether to run software in the cloud,” he said.
Fintech experts say the higher that Bitcoin soars, the greater the incentive for sophisticated cyber criminals to hack the exchange platforms such as Coinbase that make it practical for people to buy and sell cryptocurrencies. It is only a matter of time before a major exchange is badly compromised.
Speculators would risk seeing paper wealth vanish instantly in a market with little liquidity, and limited legal recourse.
Sir Howard Davies, the former head of Britain’s Financial Services Authority and now chairman of RBS, said people should assume that they would lose everything.
It may be valued at $US18,000 ($23,477) right now but what I want to know is how you convert it into fiat currency and realise that value. The risk comes at the moment of conversion.
Sopnendu Mohanty, fintech chief for Singapore’s monetary authority
The advice should be explicit. “Abandon hope all ye who enter here – I think that’s probably what’s needed,” he said.
To the extent that investors can exchange their Bitcoins directly in “peer-to-peer” trades, they may face trouble trying to deposit the money in a bank. They will risk triggering money laundering or tax evasion inquiries by the judicial authorities once they start to handle large sums.
Central banks and governments have a further pressing concern.
The current value of Bitcoin makes it worthwhile for “miners” to crank up computer power on an industrial scale to act as “auditors” (i.e. solve the mathematical puzzle) and earn the Bitcoin -rewards.
“The energy consumption is insane. If we start using this on a global scale, it will kill the planet,” says Alex de Vries, a PwC analyst and founder of the Digiconomist blog.
These miners are already thought to be consuming energy each day equal to the entire power use of Denmark.
Much of this mining takes place in China where electricity is in effect subsidised and relies heavily on coal – to the point where it is distorting the data used by economists to track underlying shifts in Chinese industrial output.
One Bitcoin mine in Inner Mongolia has 21,000 machines housed in seven buildings that run off power from local coal-fired plants. They are charged four cents per kilowatt/hour, according to an eyewitness report by Quartz.
The carbon footprint of Bitcoin is rapidly becoming a global environmental issue. This in itself is almost certain to lead to a draconian regulatory riposte and has therefore become an added “political risk” for those playing the market.
Singapore’s Project Ubin suggests that talk of impending issuance of e-coins by central banks has run ahead of reality.
“We are struggling to find compelling reasons to issue digital currencies,” said Mr Mohanty.
The MAS has teamed up with the Massachusetts Institute of Technology to explore the idea further and will release its findings next year.
“We’re conducting deep research based on cutting-edge technologies. We’ll make choices on empirical data, not some ‘white paper’,” he said.
Mr Mohanty said the real value of fintech probably lay elsewhere.
“People are overly focused on cryptocurrencies. There are bigger needs out there.”
Singapore is developing a pilot project with Hong Kong for trade finance based on distributed ledger technology that will go live in 2018.
A joint study by the MAS and Deloitte concluded that cross-border payments are currently “marred with expensive and uncertain transaction fees, long processing times and opportunity for fraud”.
Blockchain-style systems could slash costs and time dramatically.
The real worth of fintech probably lies in boring, bread-and-butter changes. The crux is often helping banks and finance houses to move from a “closed-loop” system that cannot easily absorb new technology to a “plug-in” model that is far more flexible.
“The banks have legacy systems and don’t have enough capital to upgrade everything. We’re looking at the magic middle layer that allows fintech to be plugged in,” Mr Mohanty said.
The Daily Telegraph, London