The move to get banks and brokers to use digital assets has been met with skepticism and hope by investors and founders

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Singapore is working to enable tokenized assets to be used for deposits that sidestep the banking system in the region, according to a leading regulatory official.

Last week, the Monetary Authority of Singapore said the first live trades between financial institutions had been made using digitized assets such as government bonds and the Japanese yen and Singapore dollar. The participants were DBS Bank, JPMorgan and SBI Digital Asset Holdings in its Project Guardian pilot program “that explores potential decentralized finance (DeFi) applications in wholesale funding markets,” MAS said in a Nov. 2 statement.

A week after the tokenized trades on the Polygon blockchain, Ravi Menon, a managing director at MAS said that digital assets would be one of the key areas that Singapore explores to drive adoption across the region. The development has been received with a mix of skepticism and hope by investors and founders in the blockchain space.

“Tokenized bank deposits are digital representations of commercial banks' deposits that can be used as digital cash to make payments or buy and sell digital assets without going through the banking system,” Menon said at the Singapore Fintech Festival on Nov. 3.

Jeffrey Paine, managing partner and co-founder at Golden Gate Ventures, a venture capital firm, was optimistic about the tests on Polygon but said that the market would make its own decisions on what was viable.

“MAS efforts to look into [DeFi innovation] is great,” Paine said. “Using Polygon is a good move as well, but they need to consider all options and before making this decision they also need a Plan B.”

Founders should be trying to find unique ways to tap into the potential in the space, according to Michael Shing, Director of Risk Management at XREX, a fintech startup based in Taiwan that focuses on cryptocurrency and cybersecurity.

Jeffrey Paine

“Traditional banking and financial institutions that are not at the forefront of experimenting on the blockchain will become laggards if this technology indeed delivers on its potential of amplifying liquidity, reducing settlement inefficiencies, and many more features made possible by smart contracts,” said Shing, a former senior risk specialist at the Federal Reserve Bank of San Francisco.

Shing said that Project Guardian, which drove the JPMorgan trial, is a tantalizing beacon for the cryptocurrency industry, but that regulators really need to stay focused on executing a viable plan.

“The conclusion of the pilot will determine whether ‘Institutional DeFi,’ as coined by the industry group, has the capability to improve or replace traditional financial infrastructure and intermediaries,” he said.

Complex regulatory borders, differences in domestic banking policy, and unaligned payment systems have made traditional forms of money something of a problem for groups like migrant workers and those sending remittances.

A significant portion of SE Asia – The World Economic Forum says it’s over 70 percent – lack bank accounts, making dealing with the banking system of any country within the region a non-starter.

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Cryptocurrency startups are attempting to usher in change by tapping into Asia’s mobile-first technology culture and helping early adopters interact with blockchain solutions, but startups face hurdles from the regulatory and the traditional finance ends of the infrastructure spectrum.

“Builders in crypto are facing tremendous challenges related to regulatory uncertainty and now possibly a tougher competitive landscape, as large and well-capitalized financial institutions, such as banks, enter the fray,” Shing said. “Project Guardian will produce great learnings from a regulatory perspective and help to reduce regulatory uncertainty, first in Singapore and then in regions beyond.”

Singapore has been a leading project enabler for new blockchain interactions with legacy finance infrastructure, more so than any other market in the region, even more than the semi-autonomous Hong Kong, where regulators mostly focus on integration with China and its payment systems.

For example, MAS used another project, Project Nexus, to link Singapore’s payment system to Thailand’s mobile payments system last year. And Menon said that they are working on integrating with a payment system in India and in Malaysia for trials to start possibly next year.

He said this kind of change would take time, since it deals with policy changes and domestic shifts in how governments work with regulators and commercial and retail users of money systems.

Still, the drive for blockchain and crypto innovations is slowly becoming the topic of policymakers regionally, especially in Singapore’s financial markets rival, Hong Kong.  Last month, Hong Kong regulators announced they would be reviewing current regulations that prohibit retail traders from trading blockchain assets and cryptocurrency through licensed brokers.

The industry globally will likely have to focus harder to increase its chances at going head-to-head with regulator bureaucracy and traditional finance legacy leaders. 

A quantitative analyst who looks at DeFi trends for Friktion Labs in the U.S. pointed out that the industry in general has money dumped into it that simply isn’t being used effectively.

Dune Analytics graph showing stablecoin allocation on Ethereum, from Alex D. Twitter thread

“There is over $70B+ of stablecoins sitting on ETH looking for productive use cases,” Alex D., a researcher and former high frequency trader working at Friktion Labs in Austin, Texas, wrote in a tweet this week.

“There are not enough productive use cases for this capital, especially in an environment where risk free rates are over 4%,” he said.