Adoption of Web 3.0 and the evolving landscape with challenges and risks Data and AI-driven transformation in Web 3.0 Growth of cryptocurrencies, CBDCs and next-generation payment systems Increased focus on trust and security The financial service industry innovates and undergoes a transition towards democratisation and decentralised finance as it accelerates the adoption of Web 3.0. With a central theme on the impact of Web 3.0 on financial services, the Singapore Fintech Festival highlighted the emerging innovation that is reshaping the models towards decentralisation, embedded finance, digital currencies and advancement in artificial intelligence (AI), among others. Adoption of Web 3.0 and the evolving landscape with challenges and risks In the past few years, the internet has been transitioning towards Web 3.0, which is characterised by decentralised data that is more open and powered by distributed ledger technology (DLT), AI and machine learning (ML). There is a growing need among institutions to innovate their services and business models and embrace these advancements that have the potential to reshape the future of money, payments and digital assets. Heng Swee Keat, deputy prime minister and coordinating minister for economic policies, Singapore, identified three ways to maximise innovation. “First, by building momentum around technologies that can yield a step-change. Second, by creating the right market factors so that innovation can scale. Third, by doubling down on wielding innovation to improve lives,” he said. He also launched the National AI programme in Finance, which includes NovA!, an industry-wide AI platform for financial risk insights in collaboration with banks and fintechs in the country. On top of the SGD500 million ($365.8 million) budget, Singapore is setting aside an additional SGD180 million ($131.69 million) to accelerate the fundamental and translational AI research. “The potential for AI is huge, and it is critical to ensure that it is ethically used,” he added. The adoption of Web 3.0 and technology developments have led the banks to evaluate and strategise for future business models and roles. Piyush Gupta, CEO at DBS Bank, said that 5G is gaining relevance, and the capacity to have both bandwidth and latency makes meta world possible. He noted that blockchain enables proof of identity and the whole idea of self-sovereign identity is very relevant in the data-driven world. It gives proof of value for the customers and obligation for the banks and financial institutions. They are trying to change the settlement paradigm of transactions. He challenged the more idealistic expanses of Web 3.0 which he referred to as the third level or wild west, as people do not need intermediaries or institutions and would pave the way for smart contracts. “The problem with this argument is when you take it to the next phase you start questioning whether you need a central bank or you don’t need regulators. Even going as far as no longer needing a nation, state or government. It starts to become not a question of technology but of social politics and philosophy,” he said. Mike Wells, group chief executive at insurance company Prudential, said that with Web 3.0, people will see much more data. Consumers will have more control and implement customisation, but will need help with it. Wells discussed that there is an element of disrupting traditional business that changes their role and capabilities, but not the value. Helen Wong, group chief executive at OCBC Bank, said that crypto is a storage value that comes with risk. She cited scams such as the television series-inspired crypto token, Squid Game, and how its value dropped. “There are risks associated with transformation. It also comes down to the players. Are you able to get everyone together? It also becomes a trust issue of who will do the due diligence, eventually, it will rely on who is a trusted intermediary,” Wong said. Data and AI-driven transformation in Web 3.0 The interconnected devices and expanded ecosystems, as well as data volumes that need to be aggregated and stored, pose a challenge for financial institutions. Banks recognise that data will be a critical asset that needs to better monetised for future growth. Jacquelyn Tan, managing director and head group personal financial services, Group Retail at UOB, said that Web 3.0 enables financial institutions to innovate their products and services, and to keep up with the ever-changing consumer trends and provide hyper-personalised experience. It is imperative for the banks to not only invest in digital innovation but also transform consumers’ physical interaction to ensure seamless omni-channel banking. The ability to hyper-personalise the digital banking experience based on digital footprint by integrating consumer lifestyles brings the two-sided market together for a greater network. Banks now need to rethink customer journeys with seamless convergence of key technologies, virtual reality and augmented AI to have more contextualised banking relationships. Mark Smith, managing director at real estate investment trust company Digital Realty, highlighted that as consumers expect a complete digital experience from the enterprise, there is a real necessity to aggressively leverage digitally enabled interactions rather than physical interactions. Data localisation is gaining importance due to legal and regulatory policies that require local data storage. Singapore, Japan, South Korea and Australia have seen a strong data gravity intensity that doubles every year. As data privacy rules gain prominence, consent-based aggregation of data can bring advantages. The Singapore Financial Data Exchange (SGFinDex) initiative gives control and ownership of data to consumers along with the power to decide when to consent to share data. The Monetary Authority of Singapore (MAS) and the Smart Nation and Digital Government Group (SNDGG) recently launched the second phase of the SGFinDex, which enables individuals to view the consolidated financial information of their investment at the central depository. Han Kwee Juan, managing director and group head of strategy and planning at DBS, said, “I am a true believer that technology will allow you to imagine anything, but you need an ecosystem to come together to solve a real pain point”. He highlighted that DBS has done experiments with 5G and IoT, and is leveraging private cloud. Open banking is gaining traction with a steady increase in application programming interfaces (APIs) and cloud banking adoption. This enabled the merger of business goals and technology to create new commercial models. Banks no longer need to be monolithic and have started to specialise. Banking-as-a-service (BaaS) enables banks to focus on scale, openness and customer engagement. Chuck Davis, commercial director at Temenos, said that banks and financial institutions adopt cloud and use service-as-a-service (SaaS) to move away from being infrastructure providers through APIs to create hyper-personalised customer experience. As a result, the industry players can scale and adopt faster to new market trends. Growth of cryptocurrencies, CBDCs and next-generation payment systems New companies building direct to consumer business models have shown significant growth. Kevin O’Leary, chairman of private venture capital investment company O’Leary Ventures, said, “If you want to be part of the digital revolution, it’s all about using technology to enhance productivity. In financial services, that’s crypto. It’s a software that is making the financial markets globally more efficient, with less friction and cost, more transparent and compliant”. The market is exploring the opportunities from blockchain technology and there is a growing need for compliant crypto use cases. However, DLT is still at the developmental phase and faces challenges such as interoperability, scalability and regulations that need to be addressed. There are regulatory concerns on cryptocurrencies, while many explore issuing a central bank digital currency (CBDC). Ravi Menon, managing director at the Monetary Authority of Singapore (MAS), said that the anonymity of crypto has made it well-suited for illicit transactions such as money laundering and fuel ransomware. “MAS frowns on cryptocurrencies or tokens as investments for retail assets. The prices of crypto tokens are not anchored on any economic fundamentals, and are subject to sharp speculative swings,” Menon said. He stated that blockchain and crypto tokens can bring many potential benefits such as faster and cheaper cross-border payments and trade finance, but they need to be more stable in value and have a credible backing. “MAS sees much promise in wholesale CBDC,” Menon said. However, there are neither strong reasons for nor against retail CBDCs in Singapore. Patrick Njoroge, governor at Central Bank of Kenya, discussed the public-private partnership, the potential uses of CDBCs and the need for greater collaboration. “We cannot do it alone. You need to be working closely with other like-minded institutions and central banks,” stressed Njoroge. Meanwhile, the global payment landscape is evolving rapidly and there is a need to harness Web 3.0 to power the next phase of developments. Customers expect standards of speed, price, convenience and transparency in payment experience, and banks need to build embedded payment as part of an integrated journey. Michael Miebach, CEO at Mastercard, said that under Web 3.1, there needs to be seamless commerce. Payment needs to recede to where it is not seen and completes all needs intuitively. He pointed that the question of identity in seamless commerce is fundamental while digital identity is a game-changer. Banks are exploring new models of embedded finance in payments. There is a need for greater public-private partnerships to maximise financial inclusivity. Cross-border payment needs greater collaboration and solutions to connect countries and regions. There are also new bilateral arrangements that are emerging. MAS and the Bangko Sentral ng Pilipinas recently signed an agreement to facilitate interoperable payments between Singapore and the Philippines. Increased focus on trust and security The pandemic has resulted in greater convergence of physical and digital and the way organisations operate remotely. These have brought a greater focus on safety, digital identity, zero trust and security of data. Marc Benioff, chairman and CEO at Salesforce, said, “Nothing is more important than trust — the trust we have with all of our stakeholders, that is our customers, employees, partners and public shareholders”. Web 3.0’s decentralised architecture addresses the issues such as user trust, privacy and transparency by integrating blockchain networks of decentralised nodes that can validate cryptographically secured transactions. As a result, consumers do not need to rely on a single centralised entity. Oki Matsumoto, CEO at financial services company Monex Group, said that Web 3.0 is a trusted network that can create a new nation in cyberspace. It has a variety of ways of doing business in this nation such as the introduction of smart contracts. A smart contract is a decentralised app that executes business logic in response to events. Its execution can result from the transaction of funds, delivery of services, unlocking of content protected by digital rights management, or other types of data manipulation. It can be used to enforce privacy protection by facilitating the selective release of privacy-protected data to meet a specific request. The discussions also highlighted the need for governance of AI, managing models and security of data. Ben King, chief security officer for Asia Pacific, Europe, Middle East and Africa at software company Okta, said, “We will see more ‘zero trust’ and using that in how we structure security programmes. We will see more reliance on multi-factor authentication. It is probably the single strongest control we have to secure what we do, and we will see more application of password-less”. There is a growing application of ML to analyse large data sets in security. As attackers use ML, there is a need for machines that can respond in seconds. “This is a rapidly growing debate because you can lose a human in the loop if the machine is combating another machine,” King said. The cycle of change is undoubtedly constant, but its speed has certainly accelerated during the pandemic. Web 3.0 and the transition towards decentralisation, digital currencies, ability to monetise data effectively and stronger ecosystem collaborations for customer-centric service will continue to drive the evolution of the financial services industry.
