Project Guardian: blockchain payments meets global ambition

Plus, the global spread of BTC spot ETFs

“What you get by achieving your goals is not as important as what you become by achieving your goals.” – Zig Ziglar ||

Hello everyone! I hope things are good where you are. Some personal news: I was away from my desk yesterday as I had to go to the hospital to get the results of the recent biopsy… which came back NEGATIVE!!!! So relieved!!! Beyond words, beyond grateful… I don’t think my oncologist has ever received so many hugs while at work. I guess this means I am now officially clear. I have to let this sink in for a bit. ❤

No recording today, sorry, I had a schedule squeeze this morning and I’ve written more words than usual - recording would delay publishing by a lot. Looking forward to the time zones getting back into the usual alignment.

Programming note: Easter is upon us (ouch those chocolate prices!), so this newsletter will be taking a break on Friday and next Monday. I do plan to publish the free weekly on Saturday, though.

IN THIS NEWSLETTER:

• Project Guardian: blockchain payments meets global ambition

• The spread of spot crypto ETFs

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WHAT I’M WATCHING:

Project Guardian: blockchain settlement meets global ambition

Known mainly for its humid weather, floral colour and clean sidewalks, Singapore is also home to a cross-border exploration of digital money that could end up continuing the global shift to a more fluid payments system while cementing the city-state’s role as a nexus of international trade. Located in between the European and US west coast time zones, the bustling port spiked with financial skyscrapers has long been one of the world’s most significant foreign exchange centres. This is a key role on the global stage that it aims to expand by straddling current and future transfer rails while creating one of finance’s largest experimentation networks: a blockchain-based set of trials with the deliberately reassuring name of Project Guardian. Only, this is about more than whether or not asset transfers on blockchains are more efficient. This is about geopolitical strategy.

Project Guardian is at its essence a group of global banks and asset managers testing blockchain applications together, with input from the financial regulators of Singapore, Japan, Switzerland, the UK and the IMF. The unifying theme is the use of distributed ledger functionality to improve financial markets and services, with an emphasis on cross-chain and cross-border solutions.

Unlike other bank consortium trials, Project Guardian encourages testing on permissioned as well as on public blockchains, although obviously KYC is a common requirement.

At the latest count, if my information is up to date, there are 17 financial sector participants, including JP Morgan, UBS, Citi, BNY Mellon, HSBC, Standard Chartered, Apollo, SBI, Ant International and others. This makes Project Guardian the largest and most diverse consortium currently active, with a long roster of complex trials either under way or recently completed.

Just a few of the recent announcements:

• Last November, the Monetary Authority of Singapore (MAS) announced it was spearheading the design of a global tokenization platform. It is also working on a framework to facilitate the exchange of assets across different networks.

• Also in November, Switzerland’s UBS, Japan’s SBI Group and Singapore’s DBS Bank executed the world’s first live repo transaction of a digitally native bond issued on a public blockchain. As far as I know, they haven’t yet specified which one – it could be a permissioned version of a public blockchain, often the terminology gets mixed up.

• In the same month, JPMorgan and Apollo Global partnered on a proof-of-concept to streamline the management of discretionary funds. The test covered the issuance of assets (other funds) on various chains, the combination of these funds into a discretionary basket, as well as automatic rebalancing and distribution.

• Citi worked with T.Rowe Price and Fidelity International on an FX transaction using a permissioned version of Avalanche.

• In October, UBS Asset Management issued a pilot tokenized money market fund on Ethereum as part of the Project Guardian trial set. It used its own tokenization platform, and tested fund subscriptions and redemptions.

• Franklin Templeton is exploring the issuance of a tokenized money market fund and Schroders is exploring the tokenization of funds with fund distribution platform Calastone. Both are using Singapore’s fund-specific Variable Capital Company (VCC) structure.

• Ant International is trialling a global treasury management solution enabling multi-currency clearing and settlement.

So, Project Guardian is pulling on a dazzling array of threads with a wide range of systemic institutions whose clients operate in many time zones and market segments.  

All this may sound chaotic and uncoordinated, a free-for-all of transaction experimentation. This is what innovation sandboxes are supposed to look like: a lot of throwing things around to see what sticks. Only, Project Guardian isn’t a sandbox – these tend to be avoided by the “big players” as too small and too regional. It’s more an innovation umbrella that spans the globe, led by an entity that is both financial regulator and central bank for a key geopolitical power point.

Let’s dig deeper into why this is not just about experimentation for Singapore.

As one of the few jurisdictions in Asia without capital controls, Singapore’s long-term goal has been to act as a bridge between the east and west, facilitating access for deep pools of money to the region’s baffling mix of currencies and legal systems. It has minimal agriculture and no natural fuel deposits, yet over the years has leveraged its geographical position to import, refine and export commodities, chemicals and machinery. It does the same for finance: it’s economy is the 32nd largest in the world, and yet Singapore has muscled its way to the top tier of global financial centres. In other words, in the absence of a significant amount of local production, Singapore imports, refines and exports finance.

It has regional competition. For most of this century, Hong Kong has been Asia’s financial powerhouse, given its relatively open economy and its access to the vast Chinese market.

Not any more – in 2022, Singapore overtook Hong Kong in the global rankings to become Asia’s largest financial centre and the third largest in the world, behind New York and London.

(table via GFCI 34)

In part, this is due to growing doubts about Hong Kong’s independence. In part, it’s to do with the consolidation of trade globalization.

Only globalization itself is increasingly in question. Beyond the supply chain shocks delivered by the pandemic, shifting alliances and intensifying sanctions are rerouting not just established trade routes but also finance channels. Were the tensions between the US and China to reach military levels, the market turmoil could put in question Singapore’s global role and its future economic growth. Hong Kong has the economic activity of Chinese market to fall back on; Singapore needs global flows.

Perhaps this was not the initial driver for the region’s blockchain experimentation, but it certainly justifies it. If Singapore is to hold on to its influence in a changing world, it needs to get ahead of any upcoming shift in payment rails. It also needs to strengthen its global alliances and emphasize its agility and independence.

But there’s more: Singapore no doubt sees an opportunity to replace London as the world’s second largest financial centre. Between the 2022 and 2023 rankings it managed to close the gap, moving from eight points behind to only two. And while the UK’s central bank is involved in some cross-border trials, most of its blockchain work is focused on the digital pound. Put differently, the UK is focusing inward, while Singapore is emphasizing its international outreach.

But wait, China is also emphasizing its cross-border digital currency experimentation – won’t that help Hong Kong regain its rank? Not necessarily.

On the surface, Project Guardian looks very different from mBridge, in which the Monetary Authority of Singapore is not directly involved. mBridge is a consortium of global central banks led by the BIS and the central banks of China, Hong Kong, Thailand and the UAE, with 25 “observer” institutions. Its focus is applications and cross-border use for central bank digital currencies (CBDCs) and, unsurprisingly, it is largely led by China – the region has deep trading relationships with the other founding countries, the underlying blockchain was created by a Chinese lab, and China boasts the most advanced digital currency pilot.

What’s more, geopolitics plays a significant role in China’s recent focus on cross-border (as opposed to retail) CBDC experimentation. The economic giant needs to ensure that it can continue trading without interruption should the US once again decide to weaponize the dollar and attempt to curtail China’s ability to transact via current US-dominated payment networks. This could end up fracturing the existing landscape, with partners having to either navigate more than one system or choose one alliance over another.

Singapore, on the other hand, is vehemently neutral. This makes it a less risky trading partner for multinational financial firms, while consolidating its role as a financial and economic hub, channelling payments and goods between groups.

So, Project Guardian’s chaotic set of blockchain-based trials and pilots is not just about playing with financial innovation. It’s an integral part of Singapore’s growth and power strategy. By acting as the group’s coordinator, the city-state’s central bank gets to learn from the work of others while deepening its brand as a financial hub.

And in getting ahead of multi-year shifts in technological evolution and its impact on markets, Singapore reminds us of a key tenet of creative destruction: keep an eye on what the upstart contenders are investing in.

The spread of spot crypto ETFs

We will probably look back on 2024 as the Year of the Crypto ETFs. Sure, there will be other key industry milestones, such as new all-time highs, but the flurry of spot ETF listings is arguably an even bigger deal in terms of market impact.

With the US BTC spot ETFs now back to net inflows, attention turns to the possible listing of spot ETFs in Hong Kong.