Trailblazing the Unknown: Singapore's MAS Explores the Uncharted Path of Digital Asset Networks

In a display of its unwavering commitment to innovation, Singapore's central bank presents a ground-breaking proposition — an invitation to revolutionise the very fabric of digital finance.

The Monetary Authority of Singapore (MAS), in collaboration with esteemed institutions including the Bank for International Settlements (BIS) and other financial powerhouses, unveils a visionary framework aimed at designing open and interoperable networks for tokenised digital assets. In MAS’ media release it was noted that the report, titled ‘Project Guardian: Enabling Open & Interoperable Networks', includes contributions from DBS Bank, JP Morgan, HSBC, SBI Digital Asset Holdings, Standard Chartered, and UOB.

Aptly named Project Guardian, this ambitious endeavour has rallied the collective expertise of 11 prominent institutions. Together, they will embark on a series of pilot studies, exploring the realms of asset tokenisation across various financial asset classes. The project's scope encompasses wealth management, fixed income, and foreign exchange, enticing industry titans such as HSBC, Standard Chartered, DBS, and Citi to embark on this transformative journey.

What is Project Guardian?
Project Guardian aims to assess the feasibility of asset tokenisation and the transformative potential of Decentralised Finance (DeFi). Its ultimate goal? To establish international standards that not only promote the safety and security of emerging digital asset networks but also foster efficiency within the financial market infrastructure.

Interestingly, Project Guardian is not an entirely new initiative, but rather was conceptualised and launched last May. It has a resolute mission — to delve into uncharted realms and unravel the transformative potential of public blockchains. Spearheaded by MAS, this bold endeavour has given birth to the Project Guardian Industry Group, a dedicated body entrusted with leading the charge in the ground-breaking pilot studies mentioned earlier.

Different Assets, One Initiative
One such visionary pilot is UBS Asset Management, a trailblazer in its own right embarking on a quest to explore the native issuance of a variable capital company (VCC) fund on digital asset networks. By leveraging the power of these networks, UBS aims to revolutionise fund distribution and enhance the secondary market trading of VCC fund shares.

Another pilot is Schroder Investment Management, which has joined forces with global funds network Calastone to explore the immense capabilities of tokenised investment vehicles for VCCs. This novel collaboration seeks to empower clients by enabling them to personalise their investment solutions, while simultaneously leveraging blockchain technology to streamline daily operational processes.

Schroders Singapore’s Chief Executive Lily Choh expressed that, “Blockchain technology has the potential to improve speed and transparency, achieve efficiencies, and allow personalisation of investment options in new and exciting ways.”

DBS Bank, SBI Digital Asset Holdings, and UBS are at the forefront of a pilot repurchasing agreement that explores the potential of natively issued digital bonds. By harnessing the power of blockchain technology and digital assets, these esteemed institutions seek to revolutionise the repurchasing process, unlocking new levels of efficiency, transparency, and liquidity.

Meanwhile, Standard Chartered and Linklogis are spearheading an initiative that could reshape the landscape of asset-backed securities. Through their joint efforts, they have developed an innovative initial token offering platform, facilitating the issuance of asset-backed security tokens listed on the Singapore Exchange (SGX).

Kai Fehr, global head of trade and working capital at Standard Chartered, shared his insight, “The initial pilot trade conducted in collaboration with Singapore Exchange and Linklogis proves the viability of assets-backed tokenisation as an innovative originate-to-distribute structure, and the potential opportunities it presents to investors to participate in financing real-world economic activity.”

HSBC, Marketnode, and UOB have achieved a remarkable milestone by successfully completing a technical pilot centered around the issuance and distribution of a digitally native structured product. The potential benefits of lower costs, reduced settlement times, enhanced customisation, and wider distribution within the structured product chain, were showcased in this pilot.

In addition, Citi’s pilot project that aims to redefine the pricing and execution of trades on a distributed ledger. By harnessing the transformative capabilities of this cutting-edge technology, Citi sets out to unlock a new era of post-trade reporting and analytics, sparking curiosity and reimagining the future of trade execution.

Beyond The Shores
The initiative also includes the Japan Financial Services Agency (JFSA) participating as the first overseas financial regulator to join forces with MAS in Project Guardian. JFSA Deputy Director-General of the Strategy Development and Management Bureau Mamoru Yanase elaborated on this emerging landscape, “The decentralised financial ecosystem continues to develop in complexity, and it is important to address emerging risks. On the other hand, blockchain technology including web3 could be a strong driver of innovation in the medium to long term. We look forward to working with MAS, traditional financial institutions and FinTechs to further enhance our knowledge in this area.”

This collaboration marks a pivotal moment in the journey towards unlocking the full potential of digital assets, as knowledge exchange and the sharing of best practices become the cornerstones of this transformative partnership.

Greater Efficacy or Greater Risk?
The report mentions that a notable feature of the digital asset networks is the shorter settlement cycles, “Faster or instant settlement could reduce or eliminate replacement cost risk (a form of credit risk) and therefore reduce or eliminate the amount of margin required. However, this would likely involve pre-positioning cash and digital assets pre-trade, which would increase liquidity costs.”

While the efficacy of private digital networks takes centre stage, the MAS report does not shy away from examining the potential pitfalls that loom within their public counterparts.

It highlights the inherent risks embedded within public networks, emphasising the lack of stringent controls that renders them potentially exposed to unscrupulous activities. These open domains, susceptible to external forces, raise concerns regarding security and integrity.

On the other hand, private networks emerge as beacons of trust and exclusivity. By strictly restricting access to pre-approved entities, they create a fortified environment where all participants are verified and trusted parties. This emphasis on exclusivity fosters a safer ecosystem, mitigating the chances of fraudulent or damaging incidents.

The report candidly acknowledges the difficulties that arise from the absence of well-defined legal and regulatory guidelines for tokenised fiscal assets and DeFi.

One pivotal aspect highlighted in the report is the recognition of digital fiscal assets as legitimate property. How can we establish a robust framework that ensures the rights and protections associated with traditional fiscal assets are extended to their digital counterparts?

The quest for settlement finality poses another compelling question, urging us to explore the mechanisms that underpin trust and enforce contractual obligations within the realm of DeFi. Furthermore, the governance of DeFi protocols emerges as a critical consideration. How can we strike a balance between fostering innovation and preserving the integrity of the financial ecosystem, ensuring that decentralised systems remain accountable and resilient?

Making Sense of Regulation
The complexity deepens as we encounter the diverse regulatory landscapes across jurisdictions. Varying regulatory frameworks pose potential hurdles and inconsistencies, raising concerns about cross-border transactions and the global interoperability of DeFi protocols. As we confront these challenges head-on, the report emphasises the urgent need for a unified international strategy.

While not traditionally aligned with cryptocurrencies, MAS stands firm in its commitment to harnessing the transformative potential of emerging technologies to enhance the existing traditional financial systems. By recognising the value of crypto technologies while exercising caution, MAS showcases its dedication to exploring uncharted territories without compromising the stability and integrity of the financial sector. This measured approach lays the foundation for open collaboration, where traditional and crypto communities can come together to find common ground and drive meaningful change.

In a statement, MAS' Deputy Managing Director of Markets and Development Leong Sing Chiong, points out that “While MAS strongly discourages and seeks to restrict speculation in cryptocurrencies, we see much potential for value creation and efficiency gains in the digital asset ecosystem… This is why we are actively collaborating with the industry to foster a responsible and innovative digital asset ecosystem…As we enter this new phase of Project Guardian, we look forward to collaborating with fellow policymakers and industry practitioners to jointly develop effective frameworks to guide the sound development of future financial networks.”

Could MAS's measured approach allow for ground-breaking applications, novel business models, and increased efficiency? Through these pilot studies, the banking giants participating in Project Guardian will provide invaluable insights, pushing the boundaries of what is possible and catalysing the exploration of uncharted territories.