Singapore has quietly been playing host to some of the most advanced explorations into cryptocurrency and decentralized finance (DeFi) ever done by big banks, institutions and regulators.
In particular, Project Guardian, which sets out to test asset tokenization and DeFi for banks, launched in early summer by the Monetary Authority of Singapore (MAS), saw Singapore’s DBS Bank joined by JPMorgan and Japan’s SBI Digital as well as Marketnode, a digital asset platform built by the Singapore Exchange (SGX) and Temasek.
The first phase of testing involved trades in tokenized Singapore government securities, Singapore dollars (SGD), Japanese government bonds and Japanese yen (JPY), which was done using Ethereum public blockchain overlay system Polygon, DeFi lending platform Aave and Uniswap, a decentralized exchange and automated market maker (AMM).
“We wanted to show it was possible to tokenize government securities and cash within a DeFi liquidity pool,” said Han Kwee Juan, group head of strategy and planning at DBS in an interview. “Then using an AMM, and solving for that with price oracles and market data streaming services from Bloomberg or Refinitiv, we wanted to create an institutional-grade DeFi venue which regulators would be comfortable with.”
Banks and traditional financial institutions see opportunities and efficiencies to be gained by copying DeFi’s success in crypto, with the boldest moves involving public blockchains and promising to bring trillions in existing financial instruments to the party.
Explaining some of the protocol choices in Project Guardian, Kwee Juan of DBS pointed out Polygon made sense because of the need for cheap gas fees. Reimagining a trading venue for an immense market such as government securities, and constantly writing that to a public blockchain would otherwise cancel out the collective benefit of atomic trading, clearing and settlement, he said.
DBS also discovered there simply isn’t an AMM currently in existence that can mimic the way pricing is done between traders in the over-the-counter (OTC) institutional space.
“There are many different combinations that can happen when trading OTC, and the AMMs currently out there are not complex enough to provide the kind of dynamic pricing needed if you truly want to achieve trading in a DeFi pool,” Kwee Juan said. “We had to tweak Uniswap to allow the transactions to then take place closest to where the pricing would be based on Bloomberg and Refinitiv.”
Other lessons included how participants should instruct one another when getting out of and settling net positions. “How do we then instruct each other? Through our correspondent bank and custody banks?” Kwee Juan said.
A general hurdle to be crossed concerns how to make a bank’s technology department understand how to launch smart contracts for each trader and then link things back to the core banking system, he added.
“We worked through the flow and the journey to determine what would be required in order to get information back from the DeFi pool,” Kwee Juan said.