The Monetary Authority of Singapore (MAS) announced the commencement of Project Guardian, a collaborative initiative with the financial industry that seeks to explore the economic potential and value-adding use cases of asset tokenization.
Tokenization is the process of digitally representing assets or items of value through a smart contract on a blockchain. This allows high value financial and real economy assets to be fractionalized and exchanged over the internet on a peer-to-peer basis. When applied in the context of financial services, such smart contracts enable Decentralized Finance (DeFi), where financial transactions such as borrowing, lending, and trading activities can be performed autonomously on a blockchain without the need for intermediaries. It could potentially enhance the efficiency, accessibility, and affordability of financial services, increase liquidity in financial markets, and enhance economic inclusion.
Project Guardian will test the feasibility of applications in asset tokenization and DeFi while managing risks to financial stability and integrity. MAS aims to develop and pilot use cases in four main areas:
- Open, interoperable networks – Explore the use of public blockchains to build open, interoperable networks that enable digital assets to be traded across platforms and liquidity pools. This includes interoperability with existing financial infrastructure. Open, interoperable networks can mitigate against the formation of walled gardens in digital exchanges and fragmented private markets.
- Trust anchors – Establish a trusted environment for the execution of DeFi protocols through a common trust layer of independent trust anchors. Trust anchors are regulated financial institutions that screen, verify and issue verifiable credentials to entities that wish to participate in DeFi protocols. This ensures that participants trade only with verified counterparties, issuers and protocol developers.
- Asset tokenization – Examine the representation of securities in the form of digital bearer assets and the use of tokenized deposits issued by deposit-taking institutions on public blockchains. The project aims to build upon existing token standards, incorporate trust anchor credentials and enable asset-backed tokens to be interoperable with other digital assets used in DeFi protocols on the open networks.
- Institutional grade DeFi protocols – 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.
The first industry pilot under Project Guardian will explore potential DeFi applications in wholesale funding markets. The pilot, led by DBS Bank Ltd., JP Morgan and Marketnode , involves the creation of a permissioned liquidity pool comprising tokenized bonds and deposits. The pilot aims to carry out secured borrowing and lending on a public blockchain-based network through execution of smart contracts.
Mr Sopnendu Mohanty, Chief FinTech Officer, MAS, said, “MAS is closely monitoring innovations and growth in the digital asset ecosystem and working through the potential opportunities and risks that come with new technologies – to consumers, investors and the financial system at large. Through practical experimentation with the financial industry and the broader ecosystem, we seek to sharpen our understanding in this rapidly transforming digital assets ecosystem. The learnings from Project Guardian will serve to inform policy markets on the regulatory guardrails that are needed to harness the benefits of DeFi, while mitigating its risks.”