Ideally, such reserves should be accumulated from more permanent inflows such as current account surpluses, FDI and remittances by residents working abroad create. Reserves built from short-term portfolio flows and external borrowings may be less resilient. •  Exchange rate. For EMEs, a floating exchange rate is probably optimal. Combined with adequate foreign exchange reserves, a floating exchange rate broadens the policy options when confronted with capital flows. The current volatility in the exchange rates of EMEs is in many cases unwarranted, but a fixed exchange rate under such circumstances would not be sustainable. •  Capital flow management measures (CFMs). My view is that CFMs are like quantitative easing (QE). They are not your standard policy instruments like QE is not conventional monetary policy, but it is good to have both of these policy instruments in your policy toolkit should you have need for them in a difficult situation. While the IMF has hesitantly moved its institutional stance towards supporting CFMs, many others in the AEs have not. For instance, it is often the case that trade agreements with the AEs still insist on significantly limiting the amount of policy space available to EMEs to undertake measures to manage capital flows. This is even after the post-crisis experience of significant spillovers to EMEs from the policies pursued by the AEs. However, within this region, there has been a  BIS central bankers’ speeches  5  convergence of views.
There have been some unsavoury practices in this space: “flash loans” being used to manipulate prices in the market; bots being used to front-run retail trades. With decentralised governance, who do you approach to recover lost accounts or reverse accidental transfers of money? Existing regulatory frameworks will need to be adapted if DeFi becomes a reality. Regulations crafted to manage risks in a world of intermediaries are ill-suited where intermediaries are replaced by smart contracts. Enforcement is more challenging when control or governance is dispersed across the blockchain. MAS will follow Web 3.0 and DeFi developments closely, deepen our understanding, and seek to harness the benefits while managing the risks. We will work with both the financial industry and the broader ecosystem to find the right balance. It will be a learning journey. Regulatory Sandbox Plus And what better way to learn than by experimenting? We will facilitate experiments for blockchain and DeFi innovation through regulatory sandboxes. Five years ago, MAS launched the FinTech Regulatory Sandbox, to support live experimentation of technology innovations. Two years ago, we enhanced it with Sandbox Express, so that businesses can begin market testing of low risk activities in a pre-defined environment faster. MAS will enhance its regulatory sandbox with Sandbox Plus.We will broaden participation to early adopters of technology, in addition to first movers. We will provide financial grants to first movers of innovation, to support their technology, human capital, and market development.