Singapore bank DBS uses DeFi to trade FX and state securities

Major Asian financial institution DBS Bank has applied DeFi technology for a project backed by the Monetary Authority of Singapore.

DBS Bank, a major financial services group in Asia, is applying decentralized finance (DeFi) for a project backed by Singapore’s central bank.

DBS has started a trading test of foreign exchange (FX) and government securities using permissioned, or private, DeFi liquidity pools, the firm announced on Nov. 2.

The development is part of Project Guardian, a collaborative cross-industry effort pioneered by the Monetary Authority of Singapore (MAS). Conducted on a public blockchain, the trade included the purchase and sale of tokenized Singapore government securities (SGS), the Singapore dollar (SGD), Japanese government bonds and the Japanese yen (JPY).

A spokesperson for DBS told Cointelegraph that Project Guardian was performed on the Polygon mainnet using a fork of Uniswap v2 protocol. The representative also pointed the two key implementations that need to occur to move a step closer to an institutional-grade DeFi protocol, including verifiable credentials and price oracles.

The project has shown that trading on a private DeFi protocol enables simultaneous operations of instant trading, settlement, clearing and custody. The initiative could potentially transform the existing trading processes by providing better liquidity across multiple financial assets and markets, DBS said.

According to DBS’ head of strategy Han Kwee Juan, the latest Project Guardian developments lay the foundations for building global institutional liquidity pools enabling faster trading, greater transparency, lower settlement risks and other benefits. Han noted that smart contracts show a lot of promise for trading execution and verification, stating:

“Smart contracts will reshape how execution can be achieved in a highly trusted manner, especially if it takes place in a permissioned market where all anonymous wallets are verified by trust anchors such as Know Your Customer processes.”

Han also pointed out that a highly liquid market attracts more investors and adds efficiency by bypassing intermediaries. “Currently, FX and government securities are primarily transacted in the over-the-counter markets involving multiple intermediaries resulting in friction in the settlement process,” he added.

Related: Singapore's MAS proposes banning cryptocurrency credits

DBS Bank made a massive move into the crypto industry in recent years, launching an institutional cryptocurrency exchange in December 2020. The company has also been working to expand its crypto trading platform to retail investors.

The latest milestone in Project Guardian is yet another example of the growing trend involving a combination of DeFi technology with centralized finance tools. According to Swiss central bank official Thomas Moser, DeFi can work well with central bank digital currencies, complementing each other in terms of stability and liquidity.