Key takeaways
- Project Guardian explores tokenizing assets like bonds, stocks and real estate using blockchain, enabling faster, safer transactions while reducing costs.
- Project pilots test secured lending, tokenized securities and FX transactions, showcasing blockchain’s potential in finance.
- The project tackles regulatory hurdles, blockchain scalability and privacy concerns while aiming for regional standardization to foster global adoption.
- Project Guardian lays the groundwork for widespread asset tokenization, promising greater financial inclusion, efficiency and adaptability in investment strategies.
Project Guardian is an initiative of the Monetary Authority of Singapore (MAS) and the financial industry to explore and develop the potential of asset tokenization. It is a cooperative endeavor to revolutionize how conventional financial assets, such as stocks, bonds and real estate, may be digitalized or “tokenized” on the blockchain, facilitating quicker and safer transactions.
The pilot, spearheaded by JPMorgan, DBS Bank and Marketnode, was initiated as a digital asset joint venture formed by Temasek and the Singapore Exchange (SGX) in June 2022 to leverage decentralized finance (DeFi) and facilitate secured borrowing and lending using a public blockchain-based network. Deutsche Bank joined in May 2024 to explore asset tokenization applications. Moody’s announced participation in Project Guardian to explore asset tokenization in 2024.
Project Guardian is a long-term initiative involving global regulators, including the United Kingdom’s Financial Conduct Authority (FCA), Switzerland’s Swiss Financial Market Supervisory Authority (FINMA) and Japan’s Financial Services Agency (FSA), as well as representatives from the financial services industry. The World Bank is a member of the policymaker group of Project Guardian.
This article discusses various aspects of Project Guardian, such as its objectives, how it supports asset tokenization, the technological framework it provides and its global applications.
Objectives of Project Guardian
Project Guardian addresses key challenges in asset tokenization by standardizing processes, automating tasks and enabling crosschain interoperability. Its pilots showcase the potential to create comprehensive investment portfolios across traditional and alternative funds.
Participants in Project Guardian are creating uniform procedures and frameworks for compliance with international financial regulations, enabling law-abiding international transfers of global assets. Key objectives of Project Guardian include:
- Create frameworks for tokenizing various asset types
- Establish institutional-grade protocols to enable safe, easy cross-border transactions
- Ensure regulatory compliance internationally.
MAS believes DeFi’s autonomous and intermediary-free nature makes it an excellent platform for testing tokenization. By automating financial transactions like borrowing, lending and trading, DeFi can enhance efficiency, accessibility, affordability and liquidity in financial markets, ultimately promoting greater financial inclusion.
Currently, the tokenized investment ecosystem is rapidly growing but remains fragmented, posing challenges to access and liquidity. Project Guardian resolves these challenges effectively:
Did you know? Widespread tokenization could lead to annual savings of $20 billion in clearing and settlement costs. By 2030, it’s estimated that tokenization could unlock $16 trillion in illiquid assets.
Understanding asset tokenization
Asset tokenization refers to converting real-world asset ownership rights into digital tokens on a blockchain. Tokenized assets are easily tradeable or transferable online, unlike traditional assets, which are often constrained by legal and jurisdictional restrictions. Tokenization democratizes investing and modernizes ownership, creating a more inclusive financial ecosystem.
A vast array of assets can be tokenized — from financial instruments like stocks and bonds to tangible assets like real estate and precious metals, as well as valuable goods like artwork and antiques. You can even tokenize intellectual property, giving investors a new way to invest in IP assets.
Here are a few advantages of asset tokenization:
- Liquidity: The ability to break your assets into smaller, tradable units makes it simpler for users to buy and sell them on digital platforms.
- Transparency: Investors can confidently trace the ownership and history of an asset since blockchain records all transactions irrevocably.
- Cost-efficiency: By eliminating intermediaries and the paperwork associated with traditional finance, tokenization reduces transaction costs.
- Accessibility: Tokenization enables a wider range of investors to access previously unattainable markets.
How Project Guardian supports asset tokenization
Project Guardian is advancing asset tokenization through several test cases and pilot initiatives to integrate tokenized assets into mainstream financial systems. These pilots evaluate how tokenized assets, including securities, bonds and foreign currencies, can be efficiently traded and managed on a blockchain while maintaining regulatory compliance.
Building a framework for tokenized securities
A primary objective of Project Guardian’s pilots is building a framework for the cross-border distribution of tokenized securities, which is typically complex because of variations in banking systems and regulatory constraints. Executed over a blockchain network, tokenized assets make transactions easier, faster and safer.
In such pilots, the participants in Project Guardian may collaborate with various banks globally to explore the use of tokenized bonds and securities. These pilots effectively illustrate how digital tokens could simplify asset trading across nations by eliminating the need for intermediaries and lowering transaction costs.
SBI Digital Markets, a subsidiary of SBI Digital Asset Holdings, has launched tokenized securities in Singapore as part of Project Guardian. The company has also partnered with UBS to explore tokenized money market funds.
Did you know? Tokenizing bankable assets such as stocks and bonds is a promising use case for blockchain technology. The Financial Times estimates that DLT-based market infrastructures could save asset managers up to $2.7 billion annually in buying and selling costs.
Tokenization of foreign currency (FX) transactions
The tokenization of foreign currency (FX) transactions is another important test case. On the platform set up by Project Guardian, financial institutions can trade tokenized versions of currencies such as the Singapore dollar and the United States dollar. These blockchain-based transactions demonstrate how tokenization might increase the efficacy and openness of FX markets.
Citi and Fidelity International are collaborating on a project under the MAS’ Project Guardian, a global initiative to improve financial market liquidity and efficiency through asset tokenization. FX markets could provide investors with quick and efficient global access to digital assets, ensuring timely liquidity.
Integrating blockchain technology seamlessly with traditional finance
Project Guardian demonstrates the feasibility of tokenized assets in practical applications by bridging the gap between blockchain technology and conventional financial assets.
It is laying the groundwork for asset tokenization to be widely adopted, particularly in cross-border payments, which will ultimately contribute to developing a more interconnected, effective and easily accessible global financial system.
Did you know? By 2030, the market value of tokenized assets is projected to reach $26 trillion. In 2023, the global market for tokenized currencies was valued at $17.725 billion.
Technological framework to enable asset tokenization
Project Guardian involves setting up a permissioned liquidity pool of tokenized bonds and deposits, where transactions are executed using smart contracts. Project Guardian provides a robust technological framework for various aspects to enable asset tokenization:
Transparency
Tokenization of assets makes transactions transparent, thanks to the unchangeable record of ownership in blockchains and transaction history on a decentralized ledger. This promotes trust among participants who can independently confirm asset facts.
Automation
Self-executing smart contracts with conditions directly incorporated into the code power asset tokenization. Smart contracts enable the enforcement of agreements and the automation of transactions. As a result, trading tokenized assets becomes quicker, more effective and less prone to human error.
Privacy
Using encryption technologies like zero-knowledge proofs and other privacy-preserving techniques, Project Guardian enables asset detail verification without disclosing private information. The framework assists in striking a balance between user confidentiality and verification of facts.
Interoperability
Project Guardian facilitates the interoperability of tokenized assets across different blockchain networks and financial systems. Interoperability standards are crucial for cross-border operations, where you must transfer or trade assets across platforms with varied regulatory constraints.
Did you know? Tokenized assets will account for 10% of global gross domestic product (GDP) by 2030. Non-fungible tokens (NFTs) are a major force driving the growth of tokenization.
Modular approach to asset tokenization
Project Guardian proposes a four-layer model to visualize the components of a digital asset network. MAS has jointly developed system architecture with the International Monetary Fund (IMF). Each layer, potentially governed by different entities, interacts to facilitate digital asset transactions:
- Access layer: This layer enables users (borrowers, investors and issuers) to interact with the network through various interfaces, both custodial and non-custodial.
- Services layer: It comprises smart contract-powered services such as payments, lending, borrowing, foreign exchange and exchange functionalities, which can operate with different digital assets.
- Asset layer: The asset layer records asset ownership. It includes native assets issued and represented on the platform and tokenized assets, which are digital representations of real-world or traditional financial assets.
- Platform layer: It forms the infrastructure for recording asset ownership and executing transactions. Designed to be flexible and programmable, it supports various digital assets, including tokenized securities and central bank digital currencies (CBDCs).
Impact of Project Guardian on financial markets
Demonstrating the real-world viability of asset tokenization, Project Guardian has proven that blockchain-based asset tokenization is more than just a theoretical concept. Technology has the potential to revolutionize traditional finance by bringing new accessibility, transparency and efficiency. It has encouraged various nations and financial institutions to explore the tokenizing of assets.
Harbinger of drastic change in investment techniques
Thanks to asset tokenization, investment techniques in traditional finance may change drastically. Tokenization of assets encourages broader market involvement, allowing investors to possess fractional shares of conventionally high-value assets such as bonds or real estate. As a result of this fractionalization, investment models and portfolio diversification techniques are likely to become more inclusive and adaptable.
Changes in cross-border trade
As tokenized assets streamline transactions and cut down on the time and expenses involved in international trade, cross-border trade where the real-world assets underlying the tokens may also transform.
Active backing of asset tokenization by regulatory agencies
Regulatory agencies have a role to play in the future of tokenization projects. Encouraged by the initiatives taken by the Project Guardian, some other agencies may undertake similar projects, while others may prefer to take a more cautious approach because of concerns regarding market stability, data security and compliance.
Project Guardian’s cooperative strategy with other regulatory organizations is likely to establish standards for secure and lawful tokenization, which will eventually lead to the financial industry’s seamless transition into the age of digitized tokens.
Challenges and future outlook
Regulatory differences between various countries regarding blockchain and tokenized assets make cross-border integration challenging. Technological limitations, such as blockchain scalability and platform interoperability, also pose obstacles. Moreover, gaining trust from financial institutions and end-users requires strong evidence in favor of asset tokenization.
Privacy concerns are crucial, particularly with sensitive financial data involved. Scalability is another challenge, as networks need the capacity to handle high transaction volumes for global reach. Standardization across regions is necessary, as a lack of unified guidelines could slow adoption and hinder interoperability.
These challenges notwithstanding, the future of Project Guardian appears promising. Its success in Singapore could serve as a model for expanding into other regions, especially those seeking to modernize their financial systems. The project has the potential to diversify into more asset types, including commodities, real estate and intellectual property. If these hurdles are overcome, Project Guardian could redefine global finance, offering unprecedented efficiency and inclusivity.