The Monetary Authority of Singapore’s (MAS) decentralized finance pilot program just executed “the first real-world use case for institutional-grade DeFi protocols,” Aave founder Stani Kulechov told Decrypt

J.P. Morgan, DBS Bank and SBI Digital Asset Holdings yesterday used the Aave protocol on Polygon—a layer-2 scaling solution—to complete foreign exchange and government bond transactions on the Ethereum network. The banks exchanged tokenized versions of Singapore government securities bonds for Japanese government bonds, and Japanese Yen for Singapore Dollars as a test. 

“We look forward to welcoming more innovation that leverages composable DeFi protocols to provide access to many underserved markets and enable a more inclusive system,” Kulechov told Decrypt over Telegram.

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Polygon co-founder Sandeep Nailwal echoed his optimism.

“Hardcore financial institutions are being increasingly comfortable in experimenting with public blockchains,” he wrote on Twitter yesterday. “Eventually some of them are going to crack the use cases [that add] value to their core business models and that will potentially open the floodgates for mass adoption.”

MAS has said one of the big driving factors behind the pilot program, which was announced in May, has been making markets more efficient.

Banks being able to transact directly with another another “frees up costs involved in executing trades through clearing and settlement intermediaries, and the management of bilateral counterparty trading relationships as required in today’s over-the-counter markets,” MAS said in its announcement.

The government transactions were not the only news to come of the Singapore Fintech Festival this week. Early Wednesday morning, stablecoin issuers Paxos (Pax Dollar and Binance USD) and Circle (USD Coin and Euro Coin) announced they were approved to operate in Singapore. 

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Paxos has permission to offer digital payment token services, and Circle received in-principle approval to operate as a major payments institution in the country, which means it can issue cryptocurrencies and facilitate domestic and cross-border payments.

The approvals come after MAS released two different regulatory framework proposals for how regulators might oversee stablecoins.

“That’s a huge signal, a super huge signal from a central bank making a call on [crypto] assets,” Sopnendu Mohanty, MAS Chief Fintech Officer, told Nasdaq’s TradeTalks at the event.

But there’s still work to be done. The banks said in a white paper published by think tank Oliver Wyman Forum that the pilot program will need to obtain some legal clarity, incentivize adoption, and run more tests before institutional DeFi can be scaled.

For example, the pilot used a modified version of Aave Arc to run its test. 

“DeFi protocols are designed to ensure that key market metrics, such as interest rates, collateral haircuts, and the like, follow supply and demand dynamics of the assets trading within them,” the forum wrote in its paper. “For Pilot One, some of these codified rules had to be tailored to force-fit the business objective, such as altering interest rates of the lending protocol to zero, to avoid unintended behavior during transactions.”

Monica Summerville, head of capital markets at Celent, told Decrypt in an email that the pilot is significant, especially given how much interest there is from institutional investors. 

The advisory firm recently conducted a survey of institutional clients for BNY Mellon, who share some of the concerns raised in the white paper.

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“DeFi ranked as the top feature after custody and execution when considering which digital asset custodian to work with,” Summerville said. “However, echoing some of the findings of this pilot, our study also found that interoperability ranked as a top three concern around digital representations of cash on the blockchain.”

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