A new initiative by Singapore’s central bank and financial regulator (MAS) aims to explore the potential of decentralized technologies such as blockchain and DeFi. In “Project Guardian,” the benefits and risks of digital securities are to be elaborated and a new regulatory framework created.
The Monetary Authority of Singapore (MAS) will work with the financial industry in a pilot project to explore the economic potential and benefits of asset tokenization. The project was unveiled by Deputy Prime Minister and Coordinating Minister for Economic Policy Heng Swee Keat at the Asia Tech x Singapore Summit. The findings from Project Guardian will be used to inform policy forces on regulatory guardrails. These, he said, are needed to reap the benefits of decentralized finance (DeFi) while mitigating its risks.
Tokenization for digital securities
Over the past two years, the central bank has granted licenses and permits in principle to eleven digital payment token providers, including stablecoin provider Paxos. At the same time, MAS has repeatedly warned the public against trading cryptocurrencies and has taken steps to limit the promotion of cryptocurrencies to the public. However, the new tokenization initiative involves digitizing high-value assets such as real estate and deposits. This allows them to be divided into fragments, represented on and managed through a blockchain. The digital securities are backed by an underlying asset, which distinguishes them from more volatile tokens such as cryptocurrencies like Bitcoin (BTC).
By splitting the asset, tokenization allows a larger group of borrowers or investors to access previously inaccessible assets. Thus, it is said to promote economic integration, as well as increase liquidity in financial markets. In financial services, smart contracts, or computer programs running on the blockchain, enable autonomous financial transactions (DeFi). These include, for example, borrowing, lending, or trading without a required intermediary. In the industry, this is referred to as decentralized, as opposed to traditional finance where centralized third parties are interposed.
Involvement of financial institutions
The project primarily aims to develop and test use cases in four main areas. These include enabling trading of digital securities through platforms such as digital exchanges and exploring tokenization of deposits. Through these efforts, MAS will explore collaborations with regulated financial institutions. Among other things, companies wishing to participate in DeFi protocols will be screened by the MAS and credentialed accordingly. With the credential issued, the introduction of regulatory safeguards and controls for such protocols will also be explored.
“We believe these early explorations of DeFi solutions will ensure Singapore’s competitiveness and relevance as a state-of-the-art financial center.” – Han Kwee Juan, Head of Planning and Strategy at DBS Bank
The first industry pilot under Project Guardian is the creation of a liquidity pool. This will explore the potential DeFi application for wholesale borrowing and lending of tokenized bonds and deposits. Expanding these developments in collaboration with the central bank of a major financial center could provide momentum for the adoption of digital assets and blockchain by mainstream financial institutions.