At last year’s Singapore FinTech Festival, Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), spoke about the significant economic possibilities arising from a crypto or tokenised economy.
Cross-border payments are made a lot simpler using the blockchain. If countries were to embrace tokenised currencies, transferring money from Singapore to the US would take no more effort than a PayNow transaction.
Tokenisation can apply to real-world assets as well. A real estate property can be represented on the blockchain by any number of tokens. Investors are then free to buy fractions of a property, and the entire asset class becomes a lot more liquid.
In May this year, MAS announced the launch of Project Guardian, an initiative in partnership with the financial industry to explore such benefits of asset tokenisation.
“The learnings from Project Guardian will serve to inform policy markets on the regulatory guardrails that are needed to harness the benefits of DeFi, while mitigating its risks,” said MAS CFO Sopnendu Mohanty.
DeFi takes on the real world
As part of Project Guardian, a pilot project — led by DBS, JP Morgan, and Marketnode — seeks to explore the tokenisation of bonds and deposits. The aim is to carry out secured borrowing and lending on a blockchain, through the use of smart contracts.
Looking at past financial crises, or even the recent crypto crash, only strengthens the case for DeFi. Up till now, financial markets have been susceptible to human risks. However, DeFi protocols are wholly objective. They don’t allow for unsustainable models or the misuse of leverage.
DeFi is already proving more reliable than traditional lenders because smart contracts are not susceptible to influence and poor risk management — they simply execute commands based on inputs. This can be disruptive to some aspects of traditional finance, because it disintermediates and vastly improves some processes, particularly borrowing and lending.– Igneus Terrenus, Policy Advocate, Bybit
The growth of DeFi has the potential to revamp financial systems. Zhuling Chen, CEO of Singapore-based crypto finance company RockX, explains that traditional finance has already begun to take note of this development.
“We have heard many instances from banks about their clients requesting access to crypto assets,” he says. “We have also seen an outflow of banking talents into the crypto world, indicating that more people are seeing a new opportunity to challenge the traditional banking sector. Crypto has caused more money to flow into Singapore.”
Traditional finance faces disruption
By highlighting the inefficiencies of TradFi systems, DeFi is forcing the industry to adapt and evolve.
“Traditional finance is now reflecting on how it can make legacy processes and business models more efficient,” says Chen. “For example, using technology to reduce counterparty risk or designing products that can attract a younger generation of users.”
It remains to be seen whether this will result in the convergence of DeFi and TradFi, or one of them reigning supreme. “Either way, the end result should still be better service to users in the 21st century.”
Matrixport’s Ross Gan advocates for the former eventuality, stating that DeFi can only be seen as a complement to traditional finance. “DeFi is both fluid and far-reaching in evolution. It is a new paradigm that exponentially expands the reach of existing financial services into the future.”
“DeFi can access areas previously untouched by traditional finance systems,” Gan adds. “It can help tokenise and financialise assets that were difficult to value in the past.”
Apart from tokenisation, DeFi is also providing attractive crowdfunding solutions for companies.
Initial Coin Offerings (ICOs) and Initial Exchange Offerings (IEOs) allow companies to easily raise funds from retail as well as institutional investors. In traditional markets, this process of fundraising is a far more time-consuming and expensive process.
“IEOs have helped bring in retail participation, leading to new and powerful forms of fundraising for promising projects,” says Daiki Moriyama, Director of Oasys, an eco-friendly blockchain built for the gaming community.
“We believe that investing in tokens can increase investors’ sense of participation in the project more than investing in shares,” Moriyama adds. Such methods of fundraising have been especially popular among blockchain gaming startups.
Web3 gaming is on the rise
Based in Japan and Singapore, Oasys is backed by some of the biggest brands in the Web2 gaming industry such as Bandai Namco, Ubisoft, and Sega.
This is a positive signal towards the growth of the blockchain gaming space. According to a report by DappRadar, the space has grown by 2,000 percent year-on-year.
Investments from VCs and other investors into blockchain and metaverse gaming projects have surpassed US$2.5 billion in the first quarter of 2022 alone. At this pace, play-to-earn and metaverse-related projects will add US$10 billion this year, building the future of this industry.– Daiki Moriyama, Director of Oasys
For Singapore, supporting the growth of this space is helping attract foreign investment. Although Japan is one of the leading game development markets in the world, its lack of clarity around crypto regulations make it tough for blockchain gaming companies to operate.
“Until these are resolved, Singapore’s liberal attitude towards crypto regulation, international connectivity and favourable time zones — compared to Dubai, create a good environment for a blockchain gaming business hub in APAC,” says Moriyama.