MAS outlook on Cryptocurrency

What is Singapore's outlook on Decentralised Finance (DeFi)?

According to MAS (Speeches)
last revised on 9 Nov 2021

DeFi is already a growing reality, albeit nascent. Crypto tokens are bought and sold on decentralised exchanges, without the need for intermediaries to clear and record the trade.  Another example is borrowing and lending, where anyone can lend and borrow directly to others via a liquidity pool managed by a smart contract

DeFi has the potential to yield significant economic and social benefits. By replacing intermediaries and central counterparties, these open crypto networks can potentially reduce the cost of finance.  When firms of all sizes, and even individuals, can directly access financial infrastructure, it could mean more competition and inclusion.

But DeFi is not without risks and vulnerabilities. These open crypto networks are not at the stage where they can meet the high standards of governance, security, and resilience that are required of critical infrastructure by central banks and regulators.  There have been some unsavoury practices in this space: “flash loans” being used to manipulate prices in the market; bots being used to front-run retail trades.   With decentralised governance, who do you approach to recover lost accounts or reverse accidental transfers of money? 

Existing regulatory frameworks will need to be adapted if DeFi becomes a reality. Regulations crafted to manage risks in a world of intermediaries are ill-suited where intermediaries are replaced by smart contracts.  Enforcement is more challenging when control or governance is dispersed across the blockchain.

MAS will follow Web 3.0 and DeFi developments closely, deepen our understanding, and seek to harness the benefits while managing the risks.  We will work with both the financial industry and the broader ecosystem to find the right balance.  It will be a learning journey.

In 2022, MAS announced that Project Guardian; a collaborative initative that aims to “explore the economic potential and value-adding use cases of asset tokenisation”.

The first industry pilot under MAS’ Project Guardian that explores potential decentralised finance (DeFi) applications in wholesale funding markets has completed its first live trades.

According to MAS (Media Releases)
last revised 2 November 2022

Since the announcement of Project Guardian in May 2022, MAS has engaged the financial industry to identify key areas for collaboration. These include:
  • Carrying out industry pilots with financial institutions and FinTechs, in Singapore and other jurisdictions, to develop good asset tokenisation use cases for financial services. Such pilots allow the industry to identify opportunities to unlock economic value, and surface potential risk management issues. 
  • Studying regulatory and risk management implications of tokenised asset transactions, such as the regulatory treatment of tokenised liabilities and appropriate governance for institutional DeFi structures, to promote oversight and accountability. 
  • Developing technology standards to support interoperability across the digital asset ecosystems with the potential to facilitate cross currency transactions of tokenised assets globally. This involves first establishing a common identity and access framework supported by trust anchors [4] - regulated financial institutions that screen, verify and issue verifiable credentials to entities that wish to participate in the DeFi protocols. 
Arising from the industry engagements, MAS is launching two new industry pilots. 
  • Trade Finance: Standard Chartered Bank is leading an initiative to explore the issuance of tokens linked to trade finance assets. The project aims to digitise the trade distribution market, by transforming trade assets into transferable instruments that are more transparent and accessible to investors.
  • Wealth Management: HSBC and UOB are working with Marketnode [5] to enable native digital issuance of wealth management products, enhancing issuance efficiency and accessibility for investors.