MAS launches blockchain project to study decentralised finance potential and how to regulate it

SINGAPORE – Singapore’s central bank will collaborate with the financial industry in a pilot project to explore the economic potential and usefulness of asset tokenisation.

The initiative, labelled Project Guardian, was launched by Deputy Prime Minister and Coordinating Minister for Economic Policies Heng Swee Keat at the Asia Tech x Singapore Summit on Tuesday (May 31).

Mr Sopnendu Mohanty, chief fintech officer of the Monetary Authority of Singapore (MAS), said in a statement on Tuesday that lessons from Project Guardian will serve to “inform policy markets on the regulatory guard rails that are needed to harness the benefits of decentralised finance (DeFi), while mitigating its risks”.

Tokenisation is the process of digitalising high-value assets such as deposits and dividing them into bite-sized securities that are represented and safeguarded on a blockchain.

The digital securities are secured by an underlying asset, which distinguishes them from more volatile tokens such as cryptocurrencies like Bitcoin.

A blockchain is a digital ledger of transactions maintained by a network of computers in a way that makes it difficult to hack or alter. This allows users to deal directly with one another without the need for banks or other intermediaries.

By breaking down the asset, tokenisation enables a larger pool of borrowers or investors to gain access to previously unattainable assets, thereby enhancing economic inclusion and increasing liquidity in the financial markets.

In financial services, smart contracts or computer programs that run on the blockchain enable financial transactions such as borrowing, lending and trading to be performed autonomously on the blockchain without the need for intermediaries.

This is what the industry refers to as DeFi, as opposed to traditional finance, which involves third-party intermediaries.

Project Guardian will test the feasibility of applications in asset tokenisation and DeFi, while managing risks to financial stability and integrity, MAS said.

The project aims to develop and pilot use cases in four main areas. These include enabling digital securities to be traded across platforms like digital exchanges, and examining the tokenisation of deposits.

MAS will also explore working with regulated financial institutions that screen, verify and issue credentials to entities that wish to participate in DeFi protocols, and study the introduction of regulatory safeguards and controls into such protocols.

The first industry pilot under Project Guardian, announced on Tuesday, will explore potential DeFi applications in the wholesale borrowing and lending of tokenised bonds and deposits.

The aim of the pilot, led by DBS Bank, JP Morgan and Marketnode, a digital markets infrastructure operator, is to explore secured borrowing and lending on a public blockchain through the execution of smart contracts.

Mr Han Kwee Juan, DBS head of group planning and strategy, said: “We believe that these early explorations in DeFi solutions will ensure the competitiveness and relevance of Singapore as a cutting-edge financial centre.”

The second Asia Tech x Singapore Summit is organised by the Infocomm Media Development Authority and held at The Ritz-Carlton, Millenia Singapore hotel.