Singapore’s Central Bank Experiments with DeFi to Transform Capital and Bond Markets
An initiative supported by the Monetary Authority of Singapore (MAS) has completed a cross-currency transaction involving tokenized Japanese yen and Singapore dollar deposits. Additionally, the buying and selling of tokenized government bonds were also tested. Dubbed Project Guardian, the project aims to explore potential decentralized finance (DeFi) applications in traditional markets.
Singapore Leverages Polygon and Aave in DeFi Experiment for CeFi Markets
In a press release today, the MAS announced that they successfully conducted a cross-currency transaction involving tokenized Japanese Yen (JPY) and Singapore Dollar (SGD). The pilot, the first of its kind, was completed under MAS’ Project Guardian initiative that explores potential DeFi applications in wholesale funding markets.
Under the pilot, three global banks, including DBS Bank, JP Morgan, and SBI Digital Asset Holdings, conducted foreign exchange and government bond transactions against liquidity pools comprising tokenized Singapore Government Securities Bonds, Japanese Government Bonds, JPY, and SGD.
Ty Lobban, who leads J.P. Morgan’s firm-wide blockchain program, detailed that they leveraged the popular L2 solution Polygon in order to settle on Ethereum for low fees. “Future phases of Guardian will explore other blockchains too given the MAS goal for open/interoperable networks,” he said in a tweet.
Lobban then revealed that the bank used Aave’s permissioned pools concept to deploy “a modified version of Aave Arc so that we could set certain parameters such as interest rate and fx rates.” They also used W3C’s Verifiable Credentials to provide compliant access to Aave.
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DeFi Benefits Attract CeFi Platforms
Courtesy of blockchain technology and smart contracts, DeFi enables financial transactions to be performed by entities directly with one another, removing the need for intermediaries or third parties. Furthermore, trades can be settled “instantaneously” in DeFi. The MAS said:
“The live transactions executed under the first pilot demonstrate that cross-currency transactions of tokenised assets can be traded, cleared, and settled instantaneously among direct participants. This frees up costs involved in executing trades through clearing and settlement intermediaries, and the management of bilateral counterparty trading relationships as required in today’s over-the-counter (OTC) markets.”
In a separate report, Oliver Wyman Forum highlighted the benefits of digital asset interoperability and efficiency that DeFi can bring to financial markets. The think tank said DeFi, combined with “appropriate safeguards,” can help unlock new frontiers. It added:
“Every firm should start by forming a house view on the likely impact of DeFi, which could range from a modest evolution of existing market structures to a parallel development of DeFi and traditional markets to a complete revolution that leaves DeFi structures triumphant.”
The latest announcement by the MAS comes just days after Singaporean financial services firm DBS announced that it is teaming up with Open Government Products, an experimental team of the Government Technology Agency of Singapore, to roll out a live pilot for the launch of “purpose-bound money-based vouchers.”
Singapore, which has become a hotbed for crypto companies after China’s crackdown on crypto last year, ostensibly aims to cement its status as the world’s crypto hub with the live pilots. Mentioning this, MAS chief fintech officer Sopnendu Mohanty said:
“The live pilots led by industry participants demonstrate that with the appropriate guardrails in place, digital assets and decentralised finance have the potential to transform capital markets.”
Notably, the Asian country has also recently ramped up efforts to regulate the crypto industry. That is partly because some of the biggest names in crypto that have failed during the recent crypto meltdown, including Terra and 3AC, were based in the country.
What do you think CeFi platforms dabbling into DeFi means for the crypto industry? Let us know in the comments below.