Singapore Regulators Favor Private Networks Over Public Networks in Digital Assets Framework

The “fundamental principle” of Project Guardian is to build an “open and interoperable private network” that enables the exchange of tokenized assets through DeFi protocols.

The Monetary Authority of Singapore released a framework on June 26 detailing the benefits of decentralized finance (DeFi) and how it fits into the world's financial system.

The regulator believes that private blockchain networks are the best choice for financial market infrastructure due to their centralized nature.

The regulator's report, titled "Project Guardians: Towards an Open and Interoperable Network," was released in collaboration with the Bank for International Settlements, as well as a number of prominent global lenders including HSBC and JPMorgan.

The “fundamental principle” of Project Guardian is to build an “open and interoperable private network” that enables the exchange of tokenized assets through DeFi protocols. These networks can only be accessed by trusted parties selected through regulatory mechanisms to eliminate the risk of illicit financial activities.

The project also intends to establish best practices for the tokenization of financial assets such as equities, fixed income, foreign exchange and investment funds.

Public networks are risky

Digital assets and distributed ledger technology have emerged as potential "alternative financial infrastructure," the regulator said in the report. However, due to their "new life", there is a distinct lack of understanding of their opportunities, risks and limitations.

In the report, the regulator pointed out that private networks are preferable to public networks because of the high risk of the latter and the controllability of the former. Regulators use Ethereum (ETH) as an example of a public network.

Public networks are inherently vulnerable to illicit activity due to the lack of a centralized governing body and their openness, meaning anyone can become a validator and interact with the network without regulatory approval, the report said.

Furthermore, the "new life" of the public network means that many protocols cannot support "enterprise-grade requirements".

On the other hand, the regulator said private networks make regulators and controllers more “selective,” allowing only trusted parties to participate in the ecosystem, which significantly reduces the risk of fraud and illicit financial activity.

Regulate DeFi

The report also highlights the challenges of regulating DeFi and the crypto industry as a whole and how they can best be addressed.

One of the biggest obstacles to regulating the industry is the cross-border nature of the industry and how transactions are subject to rules in multiple jurisdictions, the report said. This excessive complexity is further exacerbated by the fact that the laws and regulations of the crypto industry are still in the early stages of development.

These issues can only be addressed through concerted international cooperation, the report said, and urged countries to adopt a unified approach to developing rules for an industry that recognizes the challenges.