Under this first industry pilot, the banks conducted foreign exchange and government bond transactions against liquidity pools comprising of tokenised Singapore Government Securities Bonds, Japanese Government Bonds, Japanese Yen (JPY) and Singapore Dollar (SGD). Further, a live cross-currency transaction involving tokenised JPY and SGD deposits was successfully conducted and a simulated exercise was performed involving the buying and selling of tokenised government bonds.

DeFi enables transactions to be performed by entities directly with one another using smart contracts, without intermediaries. Alan Lim, head, fintech infrastructure office, MAS, who was moderating the session explored that Project Guardian centres around the creation of open interoperable networks, trust anchors, asset tokenisation, and institutional grade DeFi protocols.

Umar Farooq, CEO, Onyx by JP Morgan, also highlighted that DeFi projects such as these present an opportunity to reassess how infrastructure works end to end and create a future cash flow stream. “DeFi, blockchain and tokenisation gives us an opportunity to standardise the actual data representation of these things and possibly have then on the same rails.”

Digital assets allow individuals, businesses, and banks to create value in ways that we have not been able to before today. Farooq continued to say that by virtue of creating an asset of a certain value and transacting with it, the ability to swap 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 that we see from tokenised assets is to represent in a digital form that allows blockchain and smart contracts to be embedded within in, and thereby getting the efficiency that you see via a blockchain. But clearly, when you look at it from a risk perspective, there are other things that you got to get familiar with.”

He furthered that smart contract auditing will be crucial as the industry moves towards programmable smart contracts, but also when considering AML CFT risk and anonymised wallets, a bank is not fully aware who they are trading with. Illicit activity will unfortunately continue in spite of DeFi protocol, as he explained, Project Guardian is already working on a solution to this issue.

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 data processing journey, should be heading towards that. When you try to get your hands dirty and see how we can put this into production, you appreciate the region and suffer 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 must be established and a governance layer on top. Farooq also mentioned that as a result of this risk vs. reward paradox, DeFi does divide the industry and although it can cultivate fast reinvention, it could lead to a cycle of repeating mistakes.

“I do hope sometimes that the innovators are also learning from the lessons of history. Not old history, but that of the last 20 to 30 years, where a lot of financial disasters have actually come and gone. I think that’s the real risk and DeFi, from our point of view, is as these protocols grow, they are public, they are open, people are playing around with them, and you can end up a lot of money for yourself and more importantly for other people.”

He went on to say that Project Guardian is unique in that while there are many organisations around the world that is working with DeFi, what banks needs to prioritise is protecting the customer because if users lose money, they are liable. Farooq clarified this point and explained that identity is of paramount 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 tokenise products that are already well understood – JP Morgan tokenised bank deposits on blockchain. Using this as an example, the future is in the coexistence of different digital assets: “you will have CBDCs, you will have stablecoins, you will have crypto, you will have tokenised deposits and possibly other instruments. Those will come together and from our point of view, safety, security, and cyber protection is the primary objective. Experimentation is a secondary objective.”

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

Arising from 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 digitise 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, enhancing issuance efficiency and accessibility for investors. MAS is also welcoming further proposals from the industry that addresses the key focus areas of Project Guardian - open interoperable networks, trust anchors, asset tokenisation, and institutional grade DeFi protocols.