JP Morgan, DBS, SBI Digital Asset test DeFi tokenization on public blockchain – Ledger Insights | Rare Techy
Today the Monetary Authority of Singapore (MAS) announced the successful launch of Project Guardian, which explores the potential of DeFi for financial institutions. JP Morgan Onyx, DBS and SBI Digital Asset conducted the first pilot for foreign exchange transactions and government bond trading using the public debt exchange protocol Aave and the decentralized exchange (DEX) Uniswap on the Polygon chain.
One test was for foreign exchange, and the other was for trading government bonds. Aave earlier this year supported a decentralized DeFi lending pool, Aave Arc.
The challenge of using institutional DeFi is how to avoid creating walled gardens while adding a layer of protection for compliance. One solution is to introduce credential anchors, with some financial institutions issuing certified credentials to merchants so that the parties are known.
In addition, the use of standards facilitates compatibility. Here the widely used Ethereum ERC-20 token standard was used as well as the W3C standards for verifiable credentials. Future tests may use ERC-1155, the multi-token standard.
“The law of programming smart contracts will reshape how execution can be achieved in a very reliable way, especially if it takes place in a permissioned market where all anonymous wallets are verified by anchors of trust that process ‘know your client’ ‘ and businesses are allowed to be included in that pool,” said Han Kwee Juan, Head of Strategy and Planning Group, DBS. “This provides a way for the industry to further develop 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 borrowing and lending protocol as well as DEX for forex transactions. A second lawsuit involved DBS and SBI Digital Assets, where they traded government bonds with DBS tokenizing the SGD currency and Singapore bonds. SBI did the same for Japanese bonds and the JPY currency.
Institutional DeFi path to adoption
“A highly liquid market attracts more investors and achieves efficiency gains by cutting out intermediaries,” observed Han Kwee Juan of DBS.
Despite the positive experience, the participants pointed out many problems that need to be solved for institutional approval. The biggest one is legal transparency, and that basket of problems is not the only one. Some problems were solved by bilateral agreements and the method can be used with a large number of participants.
The group recognizes the benefits of automation through smart contracts and efficiency gains. But in these tests, “integration” with legacy systems involved manual transmissions. Therefore, there is a need to integrate with or adapt legacy systems to realize efficiencies. For example, one of the benefits of blockchain is that it uses a shared ledger to remove the need for reconciliation, so legacy systems don’t have to refer to that ledger.
Other issues to be addressed include adoption incentives, safeguards such as auditing and smart contract standards, and business models.
In addition, today MAS announced the addition of two new pilots.
“This is a big step towards enabling more efficient and integrated global financial networks,” said Mr. Sopnendu Mohanty, Chief FinTech Officer, 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.”