Today, the Monetary Authority of Singapore (MAS) announced the successful start of the Guardian Project, which explores the potential of DeFi for financial institutions. JP Morgan Onyx, DBS and SBI Digital Asset ran the first pilot for foreign exchange and government bond trading using the Aave modified public lending protocol and Uniswap decentralized exchange (DEX) on the Polygon blockchain.

One test was for foreign exchange and the other was for government bond trading. Aave launched support for licensed DeFi lending pools, Aave Arc, earlier this year.

The challenge for institutional use of DeFi is how to avoid creating walled gardens and yet add a layer of safeguards for compliance. One solution is the introduction of trust anchors, with certain financial institutions issuing verifiable credentials to traders so that counterparties are known.

In addition, the use of standards allows interoperability. The widely used Ethereum ERC-20 token standard was used here, as well as the W3C standards for verifiable credentials. Future trials could use ERC-1155, the multi-token standard.

“The ability to program smart contracts will change the way execution can be achieved in a highly reliable manner, especially if it is carried out in a sanctioned market where all anonymous wallets are verified by trust anchors that perform ‘Know Me’ processes. to your customer’ and trading is allowed. they take place within that group,” said Han Kwee Juan, head of group strategy and planning, DBS. “This provides a springboard for the industry to have more opportunities in the commercial world.”

In one of the tests, JP Morgan Onyx tokenized SGD deposits and SBI Digital Assets tokenized JPY assets. These tokenized assets used the lending and borrowing protocol as well as the DEX for currency transactions. A second test involved DBS and SBI Digital Assets, where they swapped government bonds with DBS by tokenizing the SGD coin and Singapore bonds. SBI did the same for Japanese bonds and the JPY currency.

DeFi’s Institutional Path to Adoption

Han Kwee Juan of DBS observed: “A highly liquid market attracts more investors and achieves efficiency gains by bypassing middlemen.”

Despite the positive experience, participants identified a number of issues that would need to be addressed for institutional adoption. The biggest one is legal clarity, and that’s a basket of problems instead of just one. Some of the challenges were addressed through bilateral agreements and a rule book could be used with a larger number of participants.

The group recognizes the benefits of automation with smart contracts and efficiency gains. But in these tests, “integration” with legacy systems involved manual postings. So, to achieve efficiency, interoperability with or retrofitting legacy systems is necessary. For example, one of the benefits of blockchain is using a shared ledger to eliminate the need for reconciliation, so legacy systems would have to reference that ledger.

Other topics to be addressed include incentives for adoption, guardrails such as smart contract audits and standards, and business models.

In addition, today MAS announced the incorporation of two new pilots.

“This is a big step in enabling more efficient and integrated global financial networks,” said Mr. Sopnendu Mohanty, Director of FinTech, MAS. “We look forward to working with more institutions to promote global learning on policies, standards and best practices for digital asset regulation and responsible innovation.”