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The Monetary Authority of Singapore (MAS) has launched a new digital asset collaboration with banking giants J.P. Morgan and DBS Bank as it looks to harness the benefits of decentralised finance (defi).
Project Guardian, as the initiative is known, seeks to develop new financial infrastructure using defi, and the first pilot will explore the potential of defi applications in wholesale funding markets.
Led by DBS Bank, J.P. Morgan and Marketnode — a digital asset joint venture from Temasek and Singapore Exchange (SGX) — the pilot aims to carry out secured borrowing and lending on a public blockchain-based network.
This will involve the creation of a permissioned liquidity pool of tokenised bonds and deposits, which will be transacted with using smart contracts.
“Tokenisation is the process of digitally representing assets or items of value through a smart contract on a blockchain,” MAS said in a statement.
“This allows high-value financial and real-economy assets to be fractionalised and exchanged over the internet on a peer-to-peer basis.”
MAS sees defi as a natural testing ground for tokenisation, as defi platforms can perform transactions such as borrowing, lending and trading autonomously and without intermediaries.
“Defi could potentially enhance the efficiency, accessibility, and affordability of financial services, increase liquidity in financial markets, and enhance economic inclusion,” MAS added.
Umar Farooq, CEO of Onyx by J.P. Morgan, said he sees deposits accessible on a public blockchain as the “next step” in the evolution of digitised commercial bank money.
If successful, he added, the initial pilot would help J.P. Morgan to go one step further than its existing blockchain-based solutions, such as JPM Coin and Partior.
JPM Coin is a permissioned system that serves as a payment rail and deposit account ledger. It allows J.P. Morgan clients to transfer US dollar deposits within the system, facilitating the movement of liquidity funding and payments.
Partior, in contrast, is an open blockchain platform that offers digital clearing, settlement and cross-border payments. It is used by banks, merchants and institutions for trade finance and foreign exchange settlements.
Han Kwee Juan, head of group planning and strategy at DBS Bank, said that Project Guardian will inform policymakers on the regulatory guardrails that are needed to harness the benefits of defi.
“DBS is pleased to lead the charge to explore potential digital assets and the use of defi concepts that will enhance efficiency and scalability in trading, clearing and settlement, while managing risks to financial stability and integrity,” he said.
“Developed on public blockchain, this pilot is also pivotal as it furthers efforts to innovate, advance and scale institutional financial applications on blockchain and their interoperability across different blockchain networks with the long-established rails of the existing financial markets.”
Wider focus areas
Producing open, interoperable networks is the first of four key focus areas for Project Guardian, which will enable digital assets to be traded across platforms and liquidity pools.
The aim is that these networks will be interoperable with existing financial infrastructure, thus helping to prevent the formation of walled gardens and fragmented private markets.
Secondly, Project Guardian aims to establish a trusted environment for the execution of defi protocols through a common trust layer of independent trust anchors.
As noted by MAS, trust anchors are regulated financial institutions that screen, verify and issue verifiable credentials to entities that wish to participate in defi protocols.
This would ensure that participants trade only with verified counterparties, issuers and protocol developers.
Asset tokenisation — as in the initial pilot — is the third focus area. In future, Project Guardian aims to go beyond tokenised deposits and further explore the feasibility and potential of tokenised securities.
As Project Guardian progresses, it aims to build upon existing token standards, incorporate trust anchor credentials and make asset-backed tokens interoperable with other digital assets used in defi protocols on public blockchains.
Finally, Project Guardian aims to produce institutional-grade defi protocols. To do so, it will study the introduction of regulatory safeguards and controls into defi protocols, to mitigate against market manipulation and operational risk.
The project will also examine the use of smart contract auditing capabilities to detect code vulnerabilities.
In April this year, in its report on “fast-moving” fintech, the International Monetary Fund (IMF) also suggested that national authorities could regulate defi platforms using a range of code auditing measures.
For example, defi protocol developers could work with regulators to audit their code for bugs or suitable risk parameters — either before or after the code goes live.
Noting that this would be an incredibly complex task, however, the IMF said that regulators would likely need to rely on public-private partnerships to deliver high-quality, reliable audits.
In addition to Project Guardian, MAS said it will continue to welcome responsible digital asset innovation initiatives, and invites interested parties to submit proposals to its FinTech Regulatory Sandbox.
The sandbox enables fintechs and financial institutions to experiment with innovative financial products or services in a live environment, but within a well-defined space and duration.
