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Singapore authority kicks off asset tokenisation experiments

DBS: the Singapore-headquartered bank is involved in 'Project Guardian' | Credit: aKasakow; Pixabay

The Monetary Authority of Singapore (MAS) has begun a ‘collaborative initiative’ with the private sector to explore the opportunities and risks of asset tokenisation.

Tokenisation is the process of digitally representing assets or items of value through a smart contract on a blockchain. Such smart contracts enable decentralised finance (DeFi), where transactions such as borrowing, lending and trading activities can be undertaken without intermediaries.

MAS states in its announcement of what is called ‘Project Guardian’ that asset tokenisation could boost the efficiency, accessibility and affordability of financial services, increase liquidity in financial markets and enhance economic inclusion.

“MAS is closely monitoring innovations and growth in the digital asset ecosystem and working through the potential opportunities and risks that come with new technologies – to consumers, investors and the financial system at large,” said MAS chief fintech officer Sopnendu Mohanty in the authority’s press release.

“Through practical experimentation with the financial industry and the broader ecosystem, we seek to sharpen our understanding in this rapidly transforming digital assets ecosystem. The learnings from Project Guardian will serve to inform policymakers on the regulatory guardrails that are needed to harness the benefits of DeFi, while mitigating its risks,” he added.

Asset tokenisation applications in four areas

The project will test the feasibility of applications in asset tokenisation and DeFi ‘while managing risks to financial stability and integrity’, with a specific aim of developing and piloting use cases in four main areas.

The first area is open, interoperable networks that enable digital assets to be traded across platforms and liquidity pools, including interoperability with existing financial infrastructure.

The second area is to establish a trusted environment for the execution of DeFi protocols through a ‘common trust layer’ of independent trust anchors. Trust anchors are regulated financial institutions that screen, verify and issue verifiable credentials to entities that wish to participate in DeFi protocols.

The third area is effectively an extension of the first two, with the aim being to ‘examine the representation of securities in the form of digital bearer assets and the use of tokenised deposits issued by deposit-taking institutions on public blockchains’. More specifically, work here aims to build upon existing token standards, incorporate trust anchor credentials and enable asset-backed tokens to be interoperable with other digital assets used in DeFi protocols on open networks.

The fourth area ‘institutional grade DeFi protocols’ aims to study the introduction of regulatory safeguards and controls into DeFi protocols to mitigate against market manipulation and operational risk. This will also examine the use of smart contract auditing capabilities to detect code vulnerabilities.

MAS ‘welcomes further industry initiatives’

The project was launched by Singapore’s deputy prime minister and coordinating minister for economic policies, Heng Swee Keat, at the Asia Tech x Singapore Summit.

The first industry pilot, which will explore potential DeFi applications in wholesale funding markets, is set to be led by Singapore-headquartered bank DBS, JP Morgan and digital markets infrastructure operator Marketnode.

MAS said that it ‘welcomes further industry initiatives that addresses Project Guardian’s four areas of interest’, as well as continuing to welcome ‘responsible’ digital asset innovation initiatives more broadly from the private sector.

The authority also encouraged interested parties to submit proposals to its fintech regulatory sandbox for live experimentation. MAS’s sandbox launched six years ago to encourage nascent fintech projects. A ‘Sandbox Express’ was then launched by MAS in 2019 as well as a ‘Sandbox Plus’ at the start of this year.

*** MAS has also announced that it has carried out a ‘joint crisis management exercise’ focused on cybersecurity threats alongside the Banque de France (BdF) and France’s Autorité de contrôle prudentiel et de résolution (ACPR). The joint exercise tested the effectiveness of cyber crisis coordination and response by the three financial authorities when managing scenarios such as ransomware, zero-day vulnerabilities and IT supply chain attacks, MAS said. The exercise follow a Memorandum of Understanding on Cooperation in Cybersecurity signed between MAS, BdF and ACPR in 2019.