The most cutting-edge research into cryptocurrencies and decentralized finance (DeFi) ever conducted by significant banks, institutions, and regulators has been secretly taking place in Singapore.
The Monetary Authority of Singapore (MAS) established Project Guardian early summer to test asset tokenization and DeFi for banks. In addition to Singapore’s DBS Bank, JPMorgan, and Japan’s SBI Digital, Temasek, and Marketnode (a platform for digital assets created by the Singapore Exchange) also participated in the testing.
Tokenized Singapore government securities, Singapore dollars (SGD), Japanese government bonds, and Japanese yen (JPY) were being traded during the first phase of testing. These trades were carried out using the Ethereum public blockchain overlay system Polygon, the DeFi lending platform Aave, and the decentralized exchange and automated market maker (AMM) Uniswap.
According to Kwee Juan, group head of strategy and planning at DBS, the goal was to demonstrate that it was feasible to tokenize both cash and government securities within a DeFi liquidity pool. Using an AMM and addressing that issue with pricing oracles and market data streaming services like Bloomberg or Refinitiv, they aimed to develop an institutional-grade DeFi venue that regulators would be comfortable with.
Kwee Juan further pointed out that Polygon made sense because it offered cheaper transfer fees when he was explaining some of the protocol decisions made in Project Guardian. He claimed that the benefits of atomic trading, clearing, and settlement, would cancel out if a trading venue had to be regularly written to a public blockchain for a market as large as government securities.
DBS also found that the pricing practices used by traders in the over-the-counter (OTC) institutional arena cannot be replicated by any AMM currently in use. The most extensive plans include public blockchains and promises to bring trillions in existing financial instruments to the party. Banks and traditional financial institutions see opportunities and efficiencies to be achieved by mirroring DeFi’s success in crypto.
AMMs currently available need to be more complex to give the kind of dynamic pricing required if you want to achieve trading in a DeFi pool, according to Kwee Juan. Trading OTC can result in a wide variety of combinations. He asserted that changes have to be made to Uniswap to enable transactions to occur as close as possible to the points at which Bloomberg and Refinitiv pricing would be determined.
He further asserted that he had worked through the process and the route to ascertain what would be necessary to obtain information from the DeFi pool. Also, he remarked that making a bank’s technology department realize how to establish smart contracts for each trader and then link everything back to the central banking system is a general barrier that needs to be overcome.