American investment bank JPMorgan Chase & Co is piloting the tokenization of DeFi on the blockchain, part of a project to explore the economic potential and value-adding use cases of cryptocurrency by the central bank of Singapore.
Dubbed ‘Project Guardian’, the initiative also includes Singaporean multinational DBS Bank Ltd and digital markets infrastructure operator Marketnode, regulated financial institutions that, together with JPMorgan, will act as ‘trust anchors.’
According to the Monetary Authority of Singapore (MAS), the city-state’s central bank, the project will research the feasibility of asset tokenization and decentralized finance (DeFi) using open, interoperable networks.
This is expected to enable crypto assets to be traded across platforms, including existing financial infrastructure, it stated. A range of issues will be explored across the blockchain industry, including institutional-grade DeFi protocols to tackle market manipulation and risks.
MAS said the first industry trial under ‘Project Guardian’ involves the use of tokenized bonds and deposits in a permissioned liquidity pool for DeFi applications to carry out borrowing and lending on a public blockchain-based network.
“It [tokenization] could potentially enhance the efficiency, accessibility, and affordability of financial services, increase liquidity in financial markets and enhance economic inclusion,” said MAS chief fintech officer Sopnendu Mohanty, in a statement.
Bringing DeFi to the mainstream
Tokenization allows a crypto token to represent a conventional asset like shares. Targeting the wholesale funding market, the MAS pilot appears as though it might work in the same way as does DeFi protocol Aave, which has permissioned liquidity pools.
Typically, a bank holding a certain amount of money in tokenized bonds will post that as collateral, which is locked in a smart contract, according to observers. The entity can then borrow up to 75% against the deposit while paying interest.
Meanwhile, other depositors looking to earn interest on their tokenized cash can do so by providing liquidity to a pool that pays them a portion of the interest generated from the borrowed 75%, as well as from any other banks who may have borrowed against bonds.
The interest rate on borrowing is calculated algorithmically, based on supply and demand, say analysts. The higher the demand from borrowers the higher the interest rate and vice versa. Tokenization in this manner could help transform the role of commercial lenders in mainstreaming cryptocurrency and the blockchain.
“JP Morgan…sees deposits accessible on the public blockchain as the next step in the evolution of digitized commercial bank money…” said Umar Farooq, CEO of Onyx, the bank’s digital assets subsidiary for fixed income trading. The unit has reportedly done about $300 billion worth of transactions since its launch in 2020.
DBS Bank, JPMorgan, and Temasek, co-owner of Marketnode, are already involved in a separate trial of a Singaporean blockchain-based interbank payment system called Partior. The enterprise platform is targeting to improve the speed and reduce the costs of cross-border payments, which are seen rising to $156 trillion by the end of 2022.