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Central Bank of Singapore explores DeFi, tokenization potential

Updated: Sep 21, 2022

Singapore’s central bank and the Monetary Authority of Singapore (MAS) are tapping into the potential of decentralized finance (DeFi) and blockchain.

The parties are tapping JP Morgan to launch a pilot project on the matter as crypto giants began to move their business to Dubai.

It will be under an umbrella initiative called “Project Guardian”, which aims to explore the benefits of asset tokenization. Deputy Prime Minister and Coordinating Minister for Economic Policy Heng Swee Keat unveiled the project last May 31, 2022, during the Asia Tech x Singapore Summit.

JPMorgan Chase is tapped to unlock the true potential of DeFi in wholesale funding markets. Experts share that MAS started Project Guardian because of tight regulations that are driving crypto businesses away from Singapore.

Han Kwee Juan, Head of Planning and Strategy at DBS Bank, shares, “We believe these early explorations of DeFi solutions will ensure Singapore’s competitiveness and relevance as a state-of-the-art financial center.”

One of the first steps is tokenizing bonds and deposits and creating smart contracts to power trade executions.

Digitizing High-Value Assets

Since 2020, the central bank has granted licenses and permits to digital payment token providers. With the new tokenization initiative, it’s possible to digitize high-value assets like deposits and real estate.

So what does this mean?

Tokenization is a process that involves providing digital representation to items of value through a smart contract on a blockchain. In turn, these assets can be divided into fragments and exchanged over the internet.

In the context of financial services, these smart contracts enable DeFi. In turn, transaction activities such as borrowing, lending, and trading are possible on a blockchain without needing any intermediaries.

When done right, tokenization could make financial services more efficient and increase liquidity in financial markets.

What role do financial institutions play?

Here’s where Project Guardian comes in — it plans to test application performance in asset tokenization and DeFi while preventing risks to financial security. In particular, MAS plans to test cases in four main areas:

  • Open, interoperable networks - Exploring public blockchains can help establish open, interoperable networks that make digital asset trading possible.

  • Trust anchors - Trust anchors help screen and verify credentials of those who want to participate in DeFi protocols.

  • Asset tokenization - Asset tokenization involves examining digital assets to ensure they’re interoperable with other assets used in DeFi.

  • Institutional grade DeFi protocols - Protection of DeFi protocols is necessary to prevent market manipulation and operational risk.

The pilot case under Project Guardian is led by DBS Bank Ltd., JP Morgan, and Marketnode. The goal is to execute smart contracts to ensure secure borrowing and lending on a public blockchain-based network.

In turn, the results of the pilot can help inform Singapore’s policies on crypto. Further developments could promote the adoption of digital assets and blockchain by mainstream financial institutions.

Crypto firms leave for Dubai

The launch of Project Guardian came after the end of the implementation of strict crypto regulations that have led crypto firms to do their business elsewhere. Some companies have decided to move to Dubai because of less stringent crypto regulations.

Singapore was the first to impose regulations on crypto and blockchain. Meanwhile, Dubai — in line with its vision to become a blockchain capital — has made it easier for companies to adopt crypto and comply with legal requirements.

On the other hand, MAS has expressed its apprehensions about crypto because of its potential use for money laundering and terrorism. The Managing Director of Singapore’s central bank shares that as long as Singapore’s crypto licensing regime remains “stringent,” there is hope for a global crypto hub protected by solid risk management.

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