In the future, this would allow traditional financial institutions to completely rethink processes that have become standard practice, and bring about a restructuring of capital markets. Exhibit 15: The Implications for Key Industry Sectors. Coordination is essential for widespread adoption of Institutional DeFi. and the use of tokenized deposits issued by deposit-taking institutions on For example, on the Onyx Digital Assets platform, securities accounts holding US Treasuries maintained by J.P. Morgan for the benefit of its clients are tokenized to enable intraday repo transactions. Recently, MAS published We've been impressed with Theta's achievements since our seed investment in 2016 and look forward to supporting the project in the years ahead. Exhibit 2: History of Asset and Money Representation. Participants need to actively identify areas that need clarity within the prevailing legal and regulatory framework and engage with regulators and legislatures to drive regulatory and legislative solutions that account for this new financial environment enabled by the new technology. Based on these scenarios, firms could form a house view of the future and assess its implications for their business portfolios, profitability, funding costs, and the like. The past few years have witnessed an increased focus on blockchain technology as a potential panacea for resolving these inefficiencies. These teams play a role in driving proofs of concept and also act as a catalyst for reshaping the culture and right-skilling teams. New technology innovations is not lost on large corporations and banks as they slowly begin to adopt blockchain technology where it benefits them. In May 2022, the Monetary Authority of Singapore launched Project Guardian to test the feasibility of applications in asset tokenization and DeFi while managing risks to financial stability and integrity. This is especially important for solutions on the public blockchain as data is permanently and immutability recorded on a publicly available ledger, introducing a higher risk of loss of privacy. Of institutional investors are interested in investing in tokenized assets, The panellists also noted that while the trading of foreign exchange and government securities has been a success, the infrastructure that they have developed is far from complete, and that there are still problems that need to be dealt with before Project Guardian can become part of public market infrastructure. The project will include regulated financial. On-chain settlement is when settlement finality is recognized on-chain, whereby the on-chain ledger is recognized as the single source of truth for transfer and ownership. As environmental, social and economic regulation is brought into place, it is crucial that blockchain companies provide proper reporting on their impacts, and a new World Economic Forum report highlights the . One component is JPMorgan's blockchain-based collateral settlement system that was extended last . Pilot One was led by co-authors DBS, Onyx by J.P. Morgan, and SBI Digital Asset Holdings. a CBDC in October 2023. For instance, Vanguard partnered with vendor Symbiont and its blockchain platform Assembly; BNY Mellon, Morgan Stanley, and UBS joined a consortium led by iCapital to leverage blockchain-based solutions; J.P. Morgan delivered its blockchain solutions through internal efforts spearheaded by its Onyx by J.P. Morgan unit and predecessor teams; DBS leverages a mixture of options such as tapping internal capabilities for the solutioning in this pilot while also engaging external vendors for some of the other initiatives. to detect code vulnerabilities. These should include: After firms have established their objectives, they need to make choices in three key areas: Blockchain, Participation and Token Design. financial institutions that screen, verify, and issue Verifiable Credentials "WORLD! Our co-authors are taking different approaches to participate where they see opportunities to better support end clients: Each finance industry institution needs to tailor their participation strategy for specific markets, business, and clients. Yet the logic embedded in DeFi protocols, which are programmable, self-executing business processes, can be applied to interact with any tokenized asset. (It is important to note that in this joint paper we do not refer to Institutional DeFi as institutional players participating in crypto DeFi.) Off-chain settlement is when a token transfer is not recognized as a transfer of the underlying asset. The promised value of blockchain comes from combining ledgers and networks in a way that allows multiple parties to see the same information, hence greatly reducing the need for reconciliation after a trade or transaction. This is a question firms will need to work through in defining their strategy. Examine the representation of securities in the form of digital bearer assets This section details the pilots business objectives, design choices, and the lessons learned to date. In Sections 2 and 3, we showed how an Institutional DeFi solution can be designed to fit business objectives while navigating industry constraints. Ambassador Hirut Zemene held a fruitful discussion about an arts conservation project with Antwerpen University of Belgium and BahirDarUniversity of Ethiopia that has come to . bonds reached $35 billion in the first weeks after launch; DBS has successfully issued the DBS Building out these bespoke solutions requires a mix of talent, not just technologists. . We define Institutional DeFi as the application of DeFi protocols to tokenized real-world assets, combined with appropriate safeguards to ensure financial integrity, regulatory compliance, and customer protection. For example, some DeFi protocols today make use of code audits. The first pilot sees DBS, JP Morgan, and Marketnode explore lending on a public blockchain. The transaction volume of Chinas digital yuan, or e-CNY, Study the introduction of regulatory safeguards and controls into DeFi Broader efforts are needed, however, to unlock the full potential of Institutional DeFi and make it scalable. #2 Where and how will we participate? This lowers barriers for application development and encourages competition, but it also entails risk as there are fewer checks and balances before protocols are deployed. Digital Asset Marketplace (DAM) The next project idea is Digital Asset Marketplace. The use of blockchain as the book of records allows for potential minimization of post-trade reconciliations between participants, thereby reducing operational overhead. To get to that view, firms could consider three broad questions: Once they form their view of the future, firms could perform an impact analysis to assess the specific implications on their current business and financials while agreeing on the key watch points to monitor to potentially accelerate or pivot their responses. In the finance industry, client information in respective transactions is masked and protected through brokers, without being revealed to the market. It is worth noting that asset tokenization is rapidly evolving, and there may be more ways to issue tokens in the future. Subscribe to our premium content for just S$99.90 a year. Such mechanisms are lacking in public DeFi solutions, giving rise to uncertainty in arbitration procedures. On the other end of the spectrum, in an assurance-based model, control and review/approval mechanisms are put in place to ensure adherence to specific standards before deployment. They also can work with relevant middle- and back-office teams to understand requirements and assess new solutions, such as digital identity solutions. J.P. Morgan made its first LIVE transaction on the public blockchain using DeFi, Tokenized Deposits, and Verifiable Credentials as part of MAS' Project Guardian. The issues that traditional finance has been unable to solve, however, can be solved through the use of DeFi tools on the blockchain and this is what Project Guardian has set out to test. Based on this, firms can then determine if, where, and how to participate, which we discuss next. Data transparency is itself a multifaceted concept and the choices vary along a spectrum. Scenario analyses should aid senior management to align on a view of the future and implications for the business. On the other hand, real world assets can be issued directly on a blockchain as native tokens, such as through security token offerings (STO). Firms also need to consider a number of broader objectives when designing Institutional DeFi solutions. There will be more developments as the Project Guardian continues to research asset tokenisation and DeFi tools. Bridges connecting different networks are particularly vulnerable, as hackers demonstrated in July 2021 by attacking the cross-chain DeFi platform Poly Network, and causing roughly $600 million in losses in Ethereum and other tokens. This process is still in its early days and more work is needed by both individual firms and the broader industry to scale these efforts. In the first pilot, our co-authors gained first-hand experience in implementing DeFi solutions in the financial markets, including foreign exchange and government bond markets. The project will offer users from around the world the opportunity to participate in a virtual metaverse world where they can create and interact with other users in a way that emulates real life. The Project Guardian pilot carried out transactions involving foreign exchange with tokenized deposits and separate transactions with government bonds, in each case, on a public blockchain network, using digital identity solutions and logic adapted from existing DeFi protocols. Exhibit 11: Key Areas of Instituitional DeFi Adoption Efforts, Exhibit 12: Key Areas of Institutional DeFi Adoption Efforts Details. One approach is to allow only selected developers or firms to develop new processes. At a broad level, programmable smart contracts could enable a high degree of automation, transparency, and efficiency in financial transactions. for the cryptoasset industry, including stablecoins. JPMorgan, DBS Bank and SBI Digital Asset Holdings successfully conducted transactions in tokenized foreign exchange and government bonds in Project Guardian, one of various blockchain. In 2021, financial institutions were fined $2.7 billion for their deficiencies and failures in AML compliance policies, procedures, and processes. A closed beta version is already being tested by key community members, and open beta is expected to launch in . Banks invest over $270 billion a year and dedicate an average of 10% to 15% of their staff to comply with regulatory obligations. Transactions under both workstreams were conducted on public blockchain main net, focused on technical and operational feasibility, and participants established bilateral terms and other controls to avoid actual financial impacts, such as planned trade unwinding for workstream one. The analysis here will determine whether transactions need to rely on legacy ledgers and processes, or whether legacy systems can be entirely replaced. In August 2022, the U.S. Department of the Treasurys Office of Foreign Assets Control (OFAC) imposed sanctions on Tornado Cash, a cryptocurrency mixer that facilitates anonymous transactions by obfuscating their origin, destination, and counterparties, alleging that it had facilitated the laundering of more than $7 billion worth of cryptocurrency. Drawing on lessons learned from industry pilots, we see three areas where industry could work together (see exhibit 11). Participants also used Verifiable Credentials to establish a strong framework for instituting trusted identities and the accompanying qualifications to permission the participation in the DeFi liquidity pools. That kind of application on the Onyx Digital Assets blockchain, which is settled in the bank's in-house digital token JPM Coin, . For non-native tokens, there are considerations such as on-chain settlement finality, which we discuss in the next sub-section. incorporate trust anchor credentials, and enable asset-backed tokens to be 379. Stay updated with Vulcan Post weekly curated news and updates. Existing DeFi protocols are based on different governance and conduct assurance mechanisms, most often done through governance tokens that bestow holders with voting rights. 1.2 DeFi protocols enable new ways to deliver financial services, 1.3 Safeguards are the key to Institutional DeFi, Now is the time to actively explore Institutional DeFi, 2.1 Start by defining objectives of Institutional DeFi solutions, 2.2 Make design choices that fit the objectives, There is no one-size-fits-all Institutional DeFi solution, Institutional DeFi is feasible, but work is needed to drive adoption at scale, 4.1 How the finance industry can foster Institutional DeFi, Four effective moves for seizing Institutional DeFi opportunities, Partner, Corporate and Institutional Banking, Oliver Wyman, Netherlands, Senior Fellow, Future of Money Initiative, Oliver Wyman Forum, New York, Partner, Corporate and Institutional Banking, Oliver Wyman, Hong Kong, Engagement Manager, Financial Services, Oliver Wyman, Hong Kong, Group Head, Liquidity Funding Management, Treasury & Markets, DBS, Singapore, Head, Financial Market Infrastructure Ecosystems, Group Strategy and Planning, DBS, Singapore, Group Head of Institutional Banking Group & Future Ready Technology, DBS, Singapore, Financial Market Infrastructure Ecosystems, Group Strategy and Planning, DBS, Singapore, Global Head of Coin Systems, Onyx by J.P. Morgan, Singapore, Senior Product Manager, Blockchain Launch and Onyx Digital Assets, Head of Blockchain Launch and Onyx Digital Assets, Onyx by J.P. Morgan, London, Lead Product Designer, Coin Systems, Onyx by J.P. Morgan, New York, Head of Product, SBI Digital Asset Holdings, Japan, Chief Scientist, SBI Security Solutions, Japan, Art Director, Oliver Wyman Design, New York, Marketing Manager, Oliver Wyman Marketing, London. For example, J.P. Morgans intra-day repo application on Onyx Digital Assets has processed This story. Digital Bond in May 2021 via security token offering (STO); Mata Capital, a French asset manager, It could generate substantial cost savings, as code dramatically reduces middle- and back-office operations across firms and intermediaries. The. For example, lending business logic can be codified transparently in smart contracts, thereby enforcing adherence to rules and automating settlement. Project Guardian was established to explore potential decentralized finance applications in wholesale funding markets and has completed its first live trades. #2 Where and how will we participate? Tokenization efforts in the industry are well under way covering both payment instruments and assets, which creates the potential for end-to-end asset exchange on blockchain. The co-authors note that to attract the right talent, firms need to complement talent strategies with branding efforts to ensure they have a compelling digital brand aligned with their ambitions. Source Code: Blockchain Wallet. The Monetary Authority of Singapore (MAS) launched this collaborative initiative with the financial services industry to explore the economic potential and value-adding use cases of asset tokenization and DeFi. The value of this approach was demonstrated by Pilot Ones rapid solution development by leveraging an Ethereum-compatible public blockchain, ERC token standards with W3C Verifiable Credentials standards, and open-source DeFi protocols. For example, as transaction data is recorded on a mutualized public ledger, workflows can be adapted to refer to the ledger instead of legacy systems for faster reconciliation. Another approach is to ensure specific checks are made to protocols, allowing only verified protocols to be deployed. Todays finance industry rests on an array of safeguards that protect investors from fraud and abusive practices, combat financial crime and cyber malfeasance, maintain investor privacy, ensure that industry participants meet certain minimum standards, and provide a mechanism for recourse in case things go wrong. Financial institutions are highly regulated with mature quality assurance processes. liquidity pools. More recently, the Banque de France announced a new project to look at using DeFi for Open, interoperable networks can mitigate against the However, a specific design choice may help achieve one business objective while imposing limitations on another. It sought to determine whether tokenized real-world assets and deposits could be transacted on a public blockchain leveraging DeFi protocols, in a compliant manner that preserves financial stability and integrity. At the same time, innovations such as trust anchors mean that even spaces like DeFi can be regulated properly. However, as noted above in respect of CSD registration requirements, this issue may arise due to regulation in respect of native tokens as well. New business opportunities are also likely to emerge as financial institutions take advantage of the composability of DeFi protocols, packaging multiple DeFi protocols together to offer new solutions. Exhibit 5: The Three Key Design Choices - Blockchain. For example, dematerialization replaced paper certificates with digital ones in the form of electronic book-entries, fostering the rise of electronic payments and trading. This is not meant to suggest every institution needs to be a leader, but it does require institutions to form a house view on the future of DeFi and the implications for the business, and then define the relevant participation and operating models to fulfill their ambitions. The application of smart contracts in asset tokenization also has delivered a number of benefits, including enhanced and new offerings. The first stage of "Project Guardian" will see the MAS explore DeFi applications in wholesale funding markets through the creation of liquidity pool of tokenized bonds and deposits to carry out . We have implemented the concept of a "Project" to the Guardian which groups together the following entities: Root Authority, Policy, Users & Custom Roles, and Sensors with their associated MRV data. Scaling the solution to benefit global financial markets will require more work. Source: Oliver Wyman Forum, DBS, Onyx by J.P. Morgan, SBI Digital Asset Holdings. This includes interoperability with existing financial These can be industry standards widely accepted by institutional investors and clients or standards instituted through regulatory requirements. Distributed ledger technology (DLT), such as blockchain, has the potential to resolve some of those inefficiencies by presenting transactional and ownership information on a single shared ledger. The foundation for Institutional DeFi is being established by the growth of real-world asset tokenization and the innovations observed in DeFi. Blockchain April 2023 Akshata Murty to get almost 6.7m in Infosys dividends Income of Rishi Sunak's wife from Indian tech firm to reach 13m for financial year 13 Apr 2023 February 2023 The. We note that this leaves space for innovation in regulation as well as the creation of blockchain-native CSDs and similar actors. So many people hold digital collectibles (digital assets) and they need a place to buy and sell them. Experimentation is crucial to understanding different approaches to Institutional DeFi. There are a number of factors to consider when determining the delivery approach, such as ensuring that proofs of concept are done with scaling in mind; working with like-minded partners to build, test, and evolve the proposition based on lessons learned; and taking a co-creative approach with clients and regulators, being clear on what is needed from regulators to make pilots a scalable reality. @MAS_sg. Firms need to develop safeguards to address these challenges before DeFi protocols can be adopted at scale in mainstream finance. 2021 GRVTY Media Pte. Blockchain technology has not been abandoned by MAS, and as Project Guardian shows, Singapore is prepared to change with the times, but it will change on its own terms. In an effort to advance industry thinking on these issues, the Monetary Authority of Singapore launched Project Guardian in May 2022. Function-level access management can provide different levels of access to users, while encrypting data and providing a viewing key to selected participants can enable authorized viewership. What does this mean for our portfolio and financials? SBI is actively involved in the space, launching efforts across numerous digital asset classes, including NFTs, Web3 tokens, and tokenized traditional securities, and providing infrastructure and tools, such as AsiaNext, their regulated digital asset exchange joint venture with Swiss Digital Exchange (SDX). user interfaces for a digital euro; it expects to complete its investigation on whether to launch It should be iterative given the dynamic nature of blockchain and DeFi protocols. We illustrate the design choices made under the four focus areas: Among multiple design aspects, our coauthors believe at least two were critical: Exhibit 10: Summary of Project Guardian Design Choices. This means that financial intermediaries have to record transactions on siloed ledgers and then message each other to reconcile their books and finalize settlement. Blockchain MAS Launches Project Guardian to Pilot Use Cases in Digital Assets by Fintech News Singapore June 1, 2022 The Monetary Authority of Singapore (MAS) announced the launch of Project Guardian, a collaborative initiative that seeks to explore the economic potential and value-adding use cases of asset tokenisation. There are a number of make it happen areas firms could consider as they work to fulfill their ambitions. public blockchains. Building full-scale financial services that leverage tokenization and programmability could have far-reaching implications for the finance industry. They are better equipped to facilitate interoperability with existing digital assets and DeFi protocols, which are on public permissionless networks. MAS' pilot also simulated the buying and selling of tokenised government bonds. Both non-native tokens and native tokens can interact with DeFi protocols, allowing for automatic execution of asset servicing and transactions without the need to rely on legacy systems. The level of organizational support and engagement determines the feasibility of achieving such transformative opportunities. The project aims to build upon existing token standards, SBI Holdings created a separate centralized entity, SBI Digital Asset Holdings; JP Morgan established Onyx by J.P. Morgan within the firm to engage on blockchain matters across the entirety of the firms businesses; DBS leverages an ecosystem approach to engage in blockchain initiatives across the organization and externally with industry partners. These non-native tokens are bound to existing off-chain processes and control mechanisms, such as custody and reconciliation. Design choices for Institutional DeFi solutions need to be tailored for specific, prioritized business objectives. Modifying DeFi protocols to force-fit them for institutional use is a test-and-learn process. The growing acceptance of tokenization, which creates digital representations of assets such as a stocks and bonds on a blockchain, can extend the benefits of DLT to enable exchange and settlement of a wide range of asset classes. Institutions can generate further efficiency by adopting DeFi protocols, which use software code to automatically execute a range of financial transactions pursuant to preset rules and conditions. This report draws on the hands-on experience of the co-authors in running a joint pilot under Singapores Project Guardian. From the carrier pigeon to the telegraph, the transistor to the mainframe, technology has shaped the finance industry for generations. The Monetary Authority of Singapore (MAS) has commenced Project Guardian in collaboration with the financial industry with the goal of exploring the economic potential and value-adding use cases of tokenisation. Project Guardian is a collaborative initiative with the financial industry that seeks to test the feasibility of applications in asset tokenisation and DeFi while managing risks to financial stability and integrity. Imagine the potential if the technology were to be applied to streamline transactions in foreign exchange, equities, bonds, and other real-world assets. Project Guardian was first officially launched in May 2022, which came about a month after a partnership was made between JPMorgan and DBS to build a new blockchain interbank platform to. To create viable Institutional DeFi solutions that fit their purpose and ambitions, we believe financial institutions need to make several key design choices to implement appropriate safeguards and drive innovation. Other potential benefits include greater transaction transparency, lower settlement risk, as well as enhanced efficiency and trading velocity due to atomic settlement. What will we not do? Nonetheless, more can be done to facilitate industry adoption, such as establishing an industry-recognized smart contract standard for interoperability. For example, there are more than nine different federal financial regulators in the United States on top of multiple regulators in each of the 50 states. The Monetary Authority of Singapore (MAS) has launched Project Guardian, a blockchain-based digital assets trial that will use tokenization. "WORLD! In this case, settlement finality is recognized off-chain, in which an off-chain ledger is updated to reflect ownership change. protocols to mitigate against market manipulation and operational risk. Further iteration is required as the Institutional DeFi space is at a very early stage of development. Furthermore, in May 2021, Germanys Parliament passed a law allowing securities to be issued in The projects first pilot was being led by our co-authors DBS, Onyx by J.P. Morgan, and SBI Digital Asset Holdings. Like gambling, cryptocurrency trading and investing can be addictive, MPs concluded. To fully assess the efforts needed for the implementation of Institutional DeFi, the pilot went through the complete lifecycle from trade order placement to trade execution, token settlement and clearing. For Pilot One, some of these codified rules had to be tailored to force-fit the business objective, such as altering interest rates of the lending protocol to zero, to avoid unintended behavior during transactions. While Project Guardian has already yielded results, the panelists have also promised that this is not the end. Vulcan Post aims to be the knowledge hub of Singapore and Malaysia. Future phases of Guardian will explore other blockchains too given the MAS goal for open/interoperable networks. Project Guardian will test the feasibility of applications in asset tokenization and DeFi, while managing risks to financial stability and integrity. DBS established DBS Finnovation, a holding company which houses DBS Digital Exchange and Partior (a joint venture among DBS, Onyx by J.P. Morgan, and Temasek). As Institutional DeFi models are still being explored, it is possible a public permissionless blockchain could be modified to ensure it is usable at scale by institutional participants. These services include payments, lending, trading, investments, insurance, and asset management. But such standards are not mandated nor instituted for deployment. . With all this uncertainty, it is important that industry participants take a scenario-based approach that enables them to examine multiple different potential futures while maintaining analytical discipline by requiring each scenario to use coherent and integrated assumptions. Nonetheless, the use of DeFi could lead to alteration of existing business operations, requiring participants to refine business and operational models to capture the incremental business value. The prize for innovators who hone this model for use in the worlds trillion-dollar finance industry could be substantial. Exhibit 6: The Three Key Design Choices - Participation. Participants need to explore Institutional DeFi in a comprehensive manner, involving all relevant business lines and evaluating and updating existing processes to capture/realize the potential benefits. The project will also examine the use of smart contract auditing capabilities Eighty-eight percent said they are still planning to move forward with current plans around digital assets despite market downturn. Exhibit 14: Potential Future Paradigms of Financial Services. Each of our co-authors has opted for different operational set ups, with varying extents of centralization, such as focusing on one business unit only, or stretching across the entire business. Earlier this month, MAS unveiled Project Guardian, which aims to explore securities tokenization and the use of DeFi technologies such as lending without intermediaries and automated market making (AMM) for trading. However, transactions with non-native tokens may ultimately require interactions with off-chain processes as noted above. Project Guardian is designed to help MAS build a digital asset ecosystem framework, develop and enhance relevant policies, and provide direction on technology standards. Firms that wish to apply DeFi in their client offerings must incorporate the same, if not higher, levels of safeguards and security standards that have been developed over decades in the finance industry. The degree of effort in each requires clear alignment with a firms ambition. Different public standards might be appropriate depending on the type of token to be issued. Once a trader executes a trade, securities and cash need to go through about three or four different steps before they reach their final destination. The rapid evolution of blockchain technology and the potential disruption it can bring requires institutions to get ahead of the curve to avoid being left behind. Orchestration between legacy systems and blockchain-based assets and business logic is required to enable process and data interoperability. These tokenization benefits are also welcomed by asset managers, as 70% of institutional investors expressed willingness to pay extra for increased liquidity and faster asset turnover, according to a recent survey conducted by Celent. We already observe how both ends of the spectrum are driving change, with financial institutions starting to evolve and develop Institutional DeFi solutions while native DeFi players are looking to disrupt financial services with their decentralized solutions. Since there are many parties involved within a single trade, it also opens traders up to greater risk and complexity different service providers will provide different prices, which can lead to significant price deviations within the same day, and traders are exposed to greater risk since their securities and cash pass between multiple hands. Develop the right talent strategy to build propositions Recourse and dispute management should be properly established up front. When a hacker stole $130 million in crypto assets from users of DeFi platform BadgerDAO, they were unable to afford full restitution immediately with a mere $53 million in their treasury and no insurance coverage. According to a 2022 Celent survey of global institutional investors, 72% showed a preference for working with an integrated provider for all digital asset needs, indicating the need for significant upgrades to current investment management systems. JPM +0.97% | Multinational banking behemoth JPMorgan Chase & Co (NYSE: JPM) has completed the first-ever cross-border transaction using decentralized finance (DeFi) on an open blockchain. Exhibit 16: Our Ambition For Institutional DeFi. Central banks are broadening the scope of their CBDC experiments. What are the implications for our clients and competitors? This joint report would not have been possible without ideas and contributions from numerous members across Oliver Wyman, DBS, Onyx by J.P. Morgan and SBI Digital Asset Holdings, and inputs from the Monetary Authority of Singapore across interviews and workshops. Institutional DeFi will need to incorporate the same, if not higher, level of standards to meet regulatory requirements, create trust, and drive adoption by issuers, investors, and financial institutions. For example, there are methods for ensuring compliance with AML/KYC without necessarily revealing ones personal information, such as using zero-knowledge proofs combined with pseudonymous identity mechanisms. No party to a transaction is then left waiting for delivery. DeFi protocols are the code and procedures that govern these applications. Institutional DeFi efforts are already happening and starting to bring change to the finance industry. We believe these areas need joint actions from multiple parties across regulators, financial intermediaries, clients, and other third parties, including DeFi communities. Project Guardian will test the feasibility of managing financial stability and integrity risks in using public blockchains for asset tokenization and decentralized finance (DeFi). Media Listing DBS introduces Singapore's first programmable money live pilot for government vouchers Businesses to benefit from instant settlement, easing cashflow and reducing resources needed for administrative tasks Forms part of Project Orchid efforts to develop infrastructure to enable the issuance of a digital Singapore dollar Novel tokenomics arrangements in the crypto-asset industry, which enable liquidity providers and developers to earn tokens as participation rewards, might not apply readily in mainstream finance. It also validated the crucial role of two key factors in this process: 1) the use of regulated institutions to act as trust anchors, issuing and verifying the credentials of participating entities to establish the identities of transacting parties and connect with existing legal frameworks, and 2) the need for an agreed set of technical standards around business logic and token standards for interoperability. We see a spectrum of potential paradigms for the future of financial services, ranging from a modest evolution of existing market structures to a complete revolution that leaves DeFi triumphant. The pilot demonstrated the feasibility and transformative potential of using DeFi protocols in financial markets with appropriate guardrails. The transactions, conducted on Project Guardian's public blockchain, used smart contracts to cut out financial . Using a controlled, sandbox environment, it aims to test the feasibility of applying asset tokenization and DeFi protocols, while managing financial stability and integrity. The project aims to test the feasibility of applications in asset tokenization and DeFi while managing risks to financial stability and integrity. wholesale CBDC liquidity management. There are common trust layer of independent trust anchors. Also, many DeFi protocols have a very high concentration of voting control: Research by Chainalysis into 10 major governance tokens found that fewer than 1% of token holders held 90% of the voting rights. Project Guardian will help MAS build the digital asset ecosystem framework, enhance and develop relevant policies, and provide direction on the technology standards. #1 What is our ambition for Institutional DeFi? This is a notable issue for consideration in respect of non-native tokens, where additional steps may be required to be taken with respect to the off-chain asset being represented. Standardized, well-adopted frameworks lay a strong interoperability foundation on which DeFi applications could be built and interact. Designing appropriate risk controls however is not easy. more than $430 billion of repo transactions since its launch in November 2020; the daily Targeted incentives will be needed to encourage adoption and such incentives are likely to differ across various stakeholders and participants. These included Tyrone Lobban, Head of Blockchain and Onyx Digital Assets at Onyx by J.P.Morgan, Jason Beale, Head of Product at SBI Digital Asset Holdings, and Keith Desouza, Managing Director for Treasury and Markets and Treasury Liquidity Management at DBS. While a permissionless participation model could help maximize the potential userbase and foster growth, a permissioned participation model helps comply with regulatory requirements (such as KYC, qualified access) by ensuring only the right participants can use the appropriate functions. We believe that Web3 and blockchain technologies will bring unprecedented opportunities to our family of storytellers, trendsetters and icons in the entertainment industry. Objectives could range from creating new products and reducing data reconciliation tasks, to cutting costs and speeding up settlement times. For example, many securities transactions, particularly cross-border ones, can take anywhere from one to four days to settle. To think through this, firms may want to consider several questions that can help them agree on a bespoke participation strategy. To help drive change, we also observe peers building specialist task forces. This is not a one-off exercise. Transactions were executed using modified public DeFi protocols and leveraged Verifiable Credentials issued by trust anchors to ensure transactions were executed in a safe and compliant manner. This is similar to most common equity structures but without the same level of corporate governance. The central bank aims to develop and pilot use cases in four main areas: Explore the use of public blockchains to build open, interoperable #1 What is our ambition for Institutional DeFi? The road ahead remains unclear, and the degree of change is likely to vary by business and market segment. Decentralized finance (DeFi), which uses blockchain-based smart contracts to execute a variety of financial services activities, has seized the attention of technology developers, investors, and financial institutions. Our co-authors have built teams with professionals from a variety of backgrounds while at the same time working to right-skill their existing teams. interoperable with other digital assets used in DeFi protocols on open networks. Relevant business and operational teams from front office to back office were involved to assess potential gaps ahead of the potentially scaled implementation of Institutional DeFi, reducing adoption friction and encouraging internal buy-in. To ensure transactions happen in a safe and trusted manner, preserve transaction privacy, and provide security assurance against potential hacks, more tools are needed to streamline DeFi protocol development and improve the integration experience to drive usage. As strategy is all about trade-offs, being clear on the right trade-offs is critical to aligning an institution and putting in place guardrails to ensure that where and how it participates is in line with its risk appetite and other internal considerations. This helps kickstart and facilitate continued innovation, using software components and applications that are leverageable and composable. Moreover, different techniques, such as zero-knowledge proofs (ZKP) and ensuring DeFi protocol uses only private messages, can be implemented for data privacy on public blockchains. Institutions interested in exploring Institutional DeFi solutions should start by asking themselves, why DeFi? The answer will depend on the commercial viability, adoption feasibility, and competitive advantage of such a solution. That, in turn, made securitization possible, which added value to previously illiquid assets such as mortgages. The first industry pilot under Project Guardian will explore potential DeFi applications in wholesale funding markets, and is led by the aforementioned partners. bonds, real estate, commodities and others. Although the underlying blockchain technology makes it difficult to alter data, firms seeking to develop Institutional DeFi solutions must address cybersecurity vulnerabilities in cross-chain bridges, private digital keys, and on-chain price oracles, as well as guarding against market manipulation. The cost savings and new business opportunities of creating a tokenized version of real-world assets for transacting through DeFi protocols could be significant for issuers and investors, as well as for financial institutions that can adapt their technology and business models. Objectives Industry Pilots with traditional financial institutions and FinTechs to understand opportunities and risk areas. Incidents such as theft or loss due to operational errors can occur in any financial system. From experience with Pilot One to date, our co-authors have jointly identified seven areas that would need broader industry efforts to build the scalable foundation for Institutional DeFi offerings. 2. Public permissionless networks, such as Ethereum and Polygon, impose no restriction on access, and therefore have the potential to encourage wider participation. This enables easier implementation of checks and balances, along with traceability for investigation purposes. We will share perspectives of a general industry framework for roles and responsibilities but be mindful that each business and jurisdiction may require refinement based on its localized specificities. Also Read The determination as to whether settlement can be recognized on-chain mainly depends on whether regulators and transaction participants can legally recognize the blockchain records as the final books and records of transactions, allowing the blockchain to function also as a de facto ownership ledger. Ltd., DBS Bank Ltd., JPMorgan Chase Bank, N.A, and SBI Digital Asset Holdings, Inc. All Rights Reserved. 42. participants interact only with verified counterparties, issuers, We believe Institutional DeFi has the potential to be the next great transformative force. May 31, 2022 by Ledger Insights Today the Monetary Authority of Singapore (MAS) announced Project Guardian, a digital assets pilot using tokenization on public blockchains. #7 Refined business models DBS Digital Exchange allows for listing and trading of both digital payment tokens, including crypto and security tokens such as DBS Digital Bond originated by DBS Capital Markets; DBS Digital Asset Custody provides an institutional-grade solution to safekeep digital assets; Partior (a joint venture with Onyx by J.P. Morgan and Temasek) enables atomic settlement of payment transactions. The way forward, therefore, is to continue taking existing concepts from DeFi that are suited to the institutional space, and combine them with the requirements that are already in place for traditional finance. the digital asset ecosystem. Our co-authors continuously assess end-to-end business flow to identify where DeFi logic could potentially fit in, whether that is in their non-core functions or core functions. DeFi has rapidly emerged in the past three years and grew more than tenfold to $160 billion in 2021 in terms of total value locked before retreating to stand at a little over $50 billion as of October 2022. Project Guardian 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 the open networks." Institutional Grade DeFi Protocols Pilot One participants engaged with third-party auditing services to conduct complete smart contract audits prior to deployment. a consultation paper to support the development of stablecoins as a credible medium of exchange in For instance, the London Court of International Arbitration, one of the worlds leading arbitral institutions, managed 86 international dispute cases from the banking and finance industry in 2021. . DeFi, as it is popularly known, refers to decentralized applications (DApps), which provide financial services via sophisticated and automated computer code on a blockchain as the settlement layer. There is also limited, if any, recourse for investors should something go wrong. As each intermediary has a different piece of the puzzle, the system requires much post-transaction coordination to reconcile the various ledgers and settle transactions. Siloed efforts create the risk of inconsistencies across the industry, potentially stymieing progress and porting existing challenges to this new technology; joint efforts maximize network effects via interoperability and are likely to accelerate adoption. As such, the task for any firm considering an Institutional DeFi solution is to choose a complementary set of options within each design choice to address its business objectives, taking into account asset classes, jurisdictions, and the target value proposition. As of October 2022, the BIS was running seven CBDC projects with various member central banks. On one end of the spectrum, all transaction data is transparent and available for all participants to view, as is common with many public blockchains today. In the exhibit below we list some notable benefits of DeFi solutions. This ensures that According to Keith, the execution of a trade within traditional financial markets is slow and cumbersome. Each step in this evolution brings new business opportunities. These issues result in significant friction within the markets, and thus far, the banking sector has failed to address them adequately without blockchain technology. Depending on the nature of the native tokens asset class, there can be a lack of legal clarity on whether such native tokens can exist by themselves and rely on the blockchain alone for record of its existence. 101. Project Guardian will help MAS build a framework for a digital asset ecosystem, develop and enhance relevant policies, and provide direction on required technology standards. The choices lie in three critical areas: 1) blockchain which underlying network to build on and what information is visible to whom; 2) participation the mechanisms that determine who can develop and access solutions, and 3) token design how tokens are issued, transacted, settled, and standardized. is that verifying customer information in Project Guardian is being done by large financial . Indeed, participants could consider whether to and how to cover DeFi protocols under a corporation construct such as trusts, special purpose vehicles, or other limited purpose corporations to allow for structured governance and liability recourse. The European Investment #1 Legal clarity on frameworks There is currently legal uncertainty involved for both native and non-native tokens. For example, the ERC-721 standard is designed for non-fungible tokens (NFTs) while ERC1155 is suitable for both fungible and non-fungible tokens and can be explored for tokenized assets. Formulating a firms participation strategy requires an understanding of their clients starting point, including their DeFi IQ and willingness to use new technologies. Such controls are needed to enhance client trust and protect the safe ownership of digital assets. Reliable DeFi protocol governance and stakeholder conduct standards are needed to ensure that the quality of Institutional DeFi solutions offered are in alignment with financial services professional standards. There were two workstreams in this pilot to ensure comprehensiveness. Losses due to compromised private keys have totaled $274 million in the first eight months of 2022 alone. Firms can consider taking gradual approaches to focus on products that are not overly complex and/or markets requiring efficiency improvement on day one, such as illiquid asset classes. 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But such standards are not mandated nor instituted for deployment to enhance client trust and the. Whether legacy systems and blockchain-based assets and DeFi while managing risks to financial stability and integrity mainstream finance firms... Intermediaries have to record transactions on siloed ledgers and processes exhibit 5: the Three Design... Challenges before DeFi protocols, which added value to previously illiquid assets such as digital solutions. The mainframe, technology has shaped the finance industry to existing off-chain processes as noted.! Bis was running seven CBDC projects with project guardian blockchain member central banks are broadening the scope of clients... Fulfill their ambitions also observe peers building specialist task forces growth of real-world asset tokenization and tools! Investors and clients or standards instituted through regulatory requirements hands-on experience of co-authors... 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