Singapore’s monetary authority launches industry pilots to testbed asset tokenization and DeFi processes to explore economic potential, regulatory and national-development insights

This week, the Monetary Authority of Singapore (MAS) announced that the first industry pilot to explore potential decentralized finance (DeFi) applications in wholesale funding markets had completed its first ‘live’ trades. In addition, a simulated exercise was performed involving the buying and selling of tokenized government bonds.

More industry pilots have been launched to test the application of asset tokenization and DeFi across a broader range of use cases in the country’s financial sector.

Under the first industry pilot, DBS Bank, JP Morgan and SBI Digital Asset Holdings conducted foreign exchange and government bond transactions against liquidity pools comprising of tokenized Singapore Government Securities Bonds, Japanese Government Bonds, Japanese Yen and Singapore Dollar. 

Valuable tokenization lessons gleaned

DeFi enables financial transactions to be performed by entities directly with one another using smart contracts, without financial intermediaries. The ‘live’ transactions executed under the first pilot demonstrate that cross currency transactions of tokenized assets can be traded, cleared and settled instantaneously among direct participants. This frees up costs involved in executing trades through clearing and settlement intermediaries, and the management of bilateral counterparty trading relationships as required in today’s over-the-counter markets.

Some of the valuable takeaways gleaned from the trading involved the following benefits:

    • Continual use of industry pilots with financial institutions and fintechs in Singapore and other jurisdictions, to develop good asset tokenization use cases for financial services. Such pilots allow the industry to identify opportunities to unlock economic value, and surface potential risk management issues.
    • Promotion of oversight and accountability through studying regulatory and risk management implications of tokenized asset transactions such as the regulatory treatment of tokenized liabilities and appropriate governance for institutional DeFi structures.
    • Development of technology standards to support interoperability across the digital asset ecosystems, with the potential to facilitate cross-currency transactions of tokenized assets globally. This involves first establishing a common identity and access framework supported by trust anchors — regulated financial institutions that screen, verify and issue verifiable credentials to entities that wish to participate in the DeFi protocols.

Two upcoming industry pilots will involve tokenization in trade finance and wealth management. The projects aim to study digitalization in the trade distribution market, involving the transformation of trade assets into transferable instruments that are more transparent and accessible to investors. As well, ‘native digital issuance of wealth management products’ will be explored for its potential to  enhance issuance efficiency and accessibility. 

According the MAS’ Chief FinTech Officer, Sopnendu Mohanty: “The live pilots led by industry participants demonstrate that with the appropriate guardrails in place, digital assets and decentralized finance have the potential to transform capital markets. This is a big step towards enabling more efficient and integrated global financial networks,” noting the project’s benefits in shaping Singapore’s digital asset strategy, digital asset regulation and responsible innovation.