Singapore Fintech Festival 2022: Inside Project Guardian

During this first industry pilot, banks executed foreign exchange and government bond transactions against liquidity pools consisting of tokenized Singapore government securities, Japanese government bonds, Japanese yen (JPY) and Singapore dollars (SGD). Furthermore, a direct cross-currency transaction involving tokenized JPY and SGD deposits was conducted, and a simulated exercise was conducted involving the purchase and sale of tokenized government bonds.

DeFi makes it possible for devices to transact directly with each other using smart contracts, without intermediaries. Alan Lim, Head, Fintech Infrastructure Office, MAS, who moderated the session, explored that Project Guardian centers around the creation of open interoperable networks, trust anchors, asset tokenization and institutional-grade DeFi protocols.

Umar Farooq, Managing Director, Onyx by JP Morgan, also highlighted that DeFi projects like these provide an opportunity to rethink how infrastructure works end-to-end and create a future cash flow. “DeFi, blockchain and tokenization give us an opportunity to standardize the actual data representation of these things and possibly be on the same rails.”

Digital assets allow individuals, businesses and banks to create value in ways we have not been able to before today. Farooq went on to say that by virtue of creating an asset of a certain value and trading it, the ability to exchange that token in an instant – atomically – creates new markets and in turn new opportunities.

Han Kwee Juan, managing director and group head of strategy and planning, DBS agreed. “The opportunity we see from tokenized assets is to represent in a digital form that allows blockchain and smart contracts to be built into, thereby getting the efficiencies you see via a blockchain. But clearly, when you look at it from a risk perspective, are there other things you need to get to know.”

He further said that smart contract auditing will be critical as the industry moves towards programmable smart contracts, but also when considering AML CFT risk and anonymized wallets, a bank is not fully aware of who they are trading with. Illegal activity will unfortunately continue despite the DeFi protocol, as he explained, Project Guardian is already working on a solution to this problem.

Fernando Luis Vazquez Cao, CEO, SBI Digital Asset Holdings, added that what blockchain and DeFi innovators are working on now is what the future of finance will look like in 10 to 20 years. “This is the future, and all banks, as part of their computing journey, should be moving towards it. When you try to get your hands dirty and see how we can put this into production, you appreciate the region and suffer from the embarrassment of riches .”

While Asian jurisdictions have the regulations in place and licenses available, projects like these can make it look easy. However, the panelists all agreed that risk controls and a management layer must be established at the top. Farooq also mentioned that as a result of this risk vs. reward paradox, divides the DeFi industry, and while it can cultivate rapid reinvention, it can lead to a cycle of repeated failures.

“I sometimes hope that the innovators also learn from the lessons of history. Not ancient history, but the last 20 to 30 years, how many economic disasters have actually come and gone. I think that’s the real risk, and DeFi, from our point of view, is when these protocols grow, they’re public, they’re open, people play with them, and you can end up with a lot of money for yourself and more importantly for others human beings.”

He went on to say that Project Guardian is unique in that while there are many organizations around the world working on DeFi, the priority for banks is to protect the customer, because if users lose money, they are responsible. Elaborating on this point, Farooq explained that identity is of utmost importance here – to verify the human and without a proper onboarding process the uptake would not be there from traditional finance.

In addition to this, the first step for the success of Project Guardian was to tokenize products that are already well understood – JP Morgan tokenized bank deposits on the blockchain. Using this as an example, the future is in the coexistence of different digital assets: “you will have CBDCs, you will have stable coins, you will have crypto, you will have tokenized deposits and possibly other instruments. These will come together, and from our point of view, safety, security and cyber protection is the primary goal. Experimentation is a secondary goal.”

Since announcing Project Guardian in May 2022, MAS has engaged the financial services industry to identify areas for collaboration. These include conducting industry pilots, studying regulatory and risk management implications and developing technology standards.

As a result of the industry engagements, MAS is launching two new industry pilots: Standard Chartered Bank is leading an initiative to explore the issuance of tokens linked to trade finance assets. The project aims to digitize the trade distribution market, by transforming trade assets into transferable instruments that are more transparent and accessible to investors.

HSBC and UOB are also working with Marketnode to enable native digital issuance of wealth management products, improving issuance efficiency and accessibility for investors. MAS also welcomes additional industry proposals that address the main focus areas of Project Guardian – open interoperable networks, trust anchors, asset tokenization and institutional-grade DeFi protocols.