Tokenised Deposits vs Stablecoins: Critical Lessons from Project Guardian

Table Of Contents

• Understanding the Digital Asset Landscape

• Tokenised Deposits: A New Form of Digital Money

• How Tokenised Deposits Work

• Regulatory Framework and Backing

• Stablecoins: The Current Market Standard

• Types of Stablecoins

• Regulatory Challenges

• Project Guardian: Singapore's Pioneering Initiative

• Key Objectives and Participants

• Trial Results and Insights

• Comparative Analysis: Tokenised Deposits vs Stablecoins

• Risk Profiles

• Transaction Efficiency

• Integration with Traditional Finance

• Implications for Wealth Management

• Looking Ahead: The Future of Digital Assets in Singapore

The financial landscape is undergoing a profound transformation with blockchain technology reshaping how assets are created, traded, and managed. At the forefront of this revolution are two significant innovations: tokenised deposits and stablecoins. Both aim to bridge traditional banking with digital finance, but they differ in fundamental ways that impact their utility, risk profile, and regulatory treatment.

Singapore has emerged as a global leader in navigating this new frontier through initiatives like Project Guardian, spearheaded by the Monetary Authority of Singapore (MAS). This pioneering project provides valuable insights for institutional investors, family offices, and wealth managers seeking to understand how these digital assets might fit into sophisticated portfolio strategies.

This article examines the critical distinctions between tokenised deposits and stablecoins through the lens of Project Guardian's findings, offering wealth management professionals and Ultra-High Net Worth Individuals (UHNWIs) a comprehensive understanding of their potential implications for asset allocation, risk management, and regulatory compliance in Singapore's evolving financial ecosystem.

Understanding the Digital Asset Landscape

The digital asset ecosystem continues to evolve rapidly, presenting both opportunities and challenges for sophisticated investors. Two key innovations—tokenised deposits and stablecoins—represent different approaches to achieving similar goals: creating digital representations of value that combine the programmability of cryptocurrencies with the stability of traditional currencies.

While both aim to facilitate seamless transactions within blockchain ecosystems, they differ significantly in their design, backing, regulatory status, and risk profiles. Understanding these distinctions is crucial for wealth managers advising clients on digital asset allocation and strategy.

Industry trends suggest that institutional interest in regulated digital assets has grown substantially, with traditional financial institutions increasingly exploring ways to participate in blockchain-based finance while managing regulatory and operational risks appropriately.

Tokenised Deposits: A New Form of Digital Money

Tokenised deposits represent a direct digital representation of traditional bank deposits issued on a blockchain. Unlike cryptocurrencies or standard stablecoins, tokenised deposits maintain a direct connection to the banking system and the regulatory frameworks that govern it.

How Tokenised Deposits Work

At their core, tokenised deposits function as digital representations of actual money held in a regulated financial institution. When a deposit is tokenised, the corresponding amount is typically ring-fenced in the issuing bank's balance sheet, and a token representing that deposit is issued on a blockchain.

This process creates a direct claim against the issuing financial institution, essentially digitalizing existing banking relationships rather than creating an entirely new asset class. The tokenisation process enables these deposits to leverage blockchain technology's programmability while retaining the backing and security of traditional banking.

Tokenised deposits can be programmed with specific conditions, automated through smart contracts, and transferred between parties without intermediaries, all while maintaining a clear connection to the underlying fiat currency and issuing institution.

Regulatory Framework and Backing

The regulatory treatment of tokenised deposits is one of their most distinctive features. Since they represent actual deposits at licensed financial institutions, they fall under existing banking regulations and deposit insurance schemes in most jurisdictions, including Singapore.

In Singapore, MAS has taken a thoughtful approach to regulating tokenised deposits through Project Guardian, emphasizing their status as bank liabilities rather than creating an entirely new regulatory category. This approach provides clarity for financial institutions and investors, as tokenised deposits inherit the regulatory protections afforded to traditional banking products.

The 1:1 backing by actual deposits held at regulated financial institutions provides a level of security that differentiates tokenised deposits from many other digital assets. This direct backing by institutional balance sheets also means that tokenised deposits carry the counterparty risk of the issuing institution—a familiar risk paradigm for wealth managers and institutional investors.

Stablecoins: The Current Market Standard

Stablecoins emerged earlier than tokenised deposits and currently dominate the digital asset markets in terms of transaction volume. These digital assets are designed to maintain a stable value relative to a reference asset, typically the US dollar, through various backing mechanisms.

Types of Stablecoins

Stablecoins come in several varieties, each with distinct risk characteristics:

1. Fiat-collateralized stablecoins: Backed by reserves of fiat currency held by the issuer or a custodian. Examples include USDC and USDT, which claim to maintain dollar reserves equivalent to their circulating supply.

2. Crypto-collateralized stablecoins: Secured by other cryptocurrencies, typically over-collateralized to account for volatility. DAI is the most prominent example, backed by cryptocurrencies locked in smart contracts.

3. Algorithmic stablecoins: Maintain their peg through algorithmic supply adjustments rather than direct collateralization. Historical examples have shown significant volatility and depegging events.

4. Hybrid models: Combine multiple stabilization mechanisms, such as partial collateralization with algorithmic controls.

Each model presents different risk profiles and degrees of decentralization, with market data indicating that fiat-collateralized stablecoins currently dominate the market due to their relative stability and ease of understanding.

Regulatory Challenges

The regulatory landscape for stablecoins remains in flux globally. Unlike tokenised deposits, most stablecoins operate outside the traditional banking system, creating regulatory complexity and uncertainty.

In Singapore, MAS has maintained a cautious approach toward stablecoins, developing a regulatory framework that distinguishes between different types based on their backing, redemption rights, and stability mechanisms. This framework aims to address concerns about financial stability, consumer protection, and anti-money laundering compliance.

Challenges persist around transparency of reserves, redemption rights, governance structures, and the potential for systemic risk if widely adopted. The lack of standardized global regulation creates additional complexity for cross-border transactions and institutional adoption.

Project Guardian: Singapore's Pioneering Initiative

Project Guardian represents Singapore's forward-thinking approach to exploring the potential of blockchain technology and tokenisation in financial markets. Launched by MAS in 2022, this collaborative initiative brings together financial institutions, fintech companies, and technology providers to test the feasibility and benefits of asset tokenisation.

Key Objectives and Participants

Project Guardian aims to explore four primary areas:

1. Open, interoperable networks that connect different blockchain ecosystems

2. Trust anchors—regulated financial institutions that screen, verify and issue credentials to entities wanting to participate in DeFi protocols

3. Asset tokenisation, including the exploration of both tokenised deposits and other financial assets

4. Institutional-grade DeFi protocols designed with appropriate safeguards

Participants include major financial institutions like DBS Bank, JP Morgan, and SBI Digital Asset Holdings, alongside technology providers and market infrastructure operators. This multi-stakeholder approach ensures diverse perspectives and expertise.

Trial Results and Insights

The trials conducted under Project Guardian have yielded valuable insights regarding the practical implementation of tokenised deposits compared to stablecoins. These findings highlight both the promise and challenges of these technologies in real-world financial applications.

Key learnings from the trials include:

• Tokenised deposits demonstrated strong potential for integration with existing banking infrastructure and settlement systems

• The trials showed enhanced efficiency for cross-border transactions and atomic settlements when using tokenised assets

• Regulatory clarity proved essential for institutional participation and trust in the ecosystem

• Technical challenges around interoperability between different blockchain protocols were identified as areas requiring further development

• Privacy and compliance requirements can be better addressed through purpose-built solutions rather than adapting existing public blockchain infrastructure

These findings provide practical context for understanding the comparative advantages and limitations of tokenised deposits versus stablecoins in institutional settings.

Comparative Analysis: Tokenised Deposits vs Stablecoins

Risk Profiles

Tokenised deposits and stablecoins present distinctly different risk profiles that wealth managers must carefully evaluate:

Tokenised Deposits: - Credit risk limited to the issuing financial institution, similar to traditional deposits - Typically covered by deposit insurance up to jurisdiction-specific limits - Regulatory oversight through existing banking frameworks provides additional protection - Smart contract and technological risks remain present but are generally shouldered by the issuing institution

Stablecoins: - Reserve risk varies significantly depending on the transparency and composition of backing assets - Limited or no deposit insurance protection in most jurisdictions - Regulatory uncertainty creates compliance and operational challenges - Algorithmic or crypto-collateralized versions carry additional market and technical risks

For family offices and institutional investors, the risk profile of tokenised deposits generally aligns more closely with traditional banking relationships, making them potentially more suitable for risk-averse portfolios or for clients seeking regulated exposure to blockchain technology.

Transaction Efficiency

Both solutions offer significant improvements over traditional financial infrastructure for certain use cases:

Tokenised Deposits: - Settlement times typically align with the underlying blockchain (minutes to seconds) - Can be programmed for conditional payments and automated workflows - Integration with traditional banking systems enables seamless on/off-ramps - May face throughput limitations based on the blockchain platform used

Stablecoins: - Generally offer faster settlement and greater availability (24/7 operations) - More widely accepted across decentralized finance protocols and exchanges - Lower transaction costs for certain types of transfers, particularly cross-border - May face congestion issues during periods of high blockchain activity

The choice between these options often depends on specific use cases, with stablecoins currently offering greater interoperability across decentralized finance, while tokenised deposits provide stronger integration with traditional banking services.

Integration with Traditional Finance

The degree to which these digital assets integrate with existing financial infrastructure represents a key consideration for wealth managers:

Tokenised Deposits: - Direct connection to issuing bank's systems enables seamless integration with existing accounts and services - Compatible with traditional banking compliance frameworks and reporting systems - Supports gradual adoption of blockchain technology without abandoning established financial relationships - Typically enables direct redemption to fiat currency through the issuing institution

Stablecoins: - Currently offer broader integration with cryptocurrency exchanges and trading platforms - May require additional steps or intermediaries for conversion to traditional banking assets - Often face limitations in direct integration with core banking systems - Regulatory status may complicate accounting and compliance procedures

For sophisticated investors seeking to bridge traditional and digital finance, tokenised deposits often provide a more straightforward path with clearer regulatory standing.

Implications for Wealth Management

The emergence of tokenised deposits and stablecoins presents several strategic considerations for wealth managers serving UHNWIs and family offices in Singapore:

Portfolio Diversification and Asset Allocation

As digital assets mature, wealth managers should evaluate how tokenised deposits and selected stablecoins might fit within broader portfolio strategies. These instruments can potentially serve multiple functions:

• As cash equivalents with programmable features for efficient treasury management

• As gateways to accessing yield-generating opportunities in digital asset markets

• As hedging tools against traditional banking system disruptions

• As experimental allocations to gain exposure to blockchain innovation

The appropriate allocation depends heavily on client risk tolerance, regulatory concerns, and investment objectives.

Operational Efficiency

Beyond investment considerations, these technologies offer potential operational benefits for wealth management firms and their clients:

• Automated compliance through programmable smart contracts

• Reduced settlement times for asset transfers

• Potential cost savings for international transactions

• Enhanced transparency and auditability of transactions

Wealth management firms exploring these technologies should conduct thorough due diligence on technology providers, regulatory compliance requirements, and integration capabilities with existing systems.

Client Education and Guidance

As with any emerging asset class, client education remains critical. Wealth managers should develop clear frameworks for explaining:

• The distinct risk profiles of different digital assets

• Regulatory status and protections (or lack thereof)

• Technical considerations including custody solutions and security practices

• Strategic rationales for inclusion in portfolios

By providing thoughtful guidance on these topics, wealth managers can help clients navigate the complexities of digital assets while avoiding common pitfalls.

Looking Ahead: The Future of Digital Assets in Singapore

Singapore's proactive approach through initiatives like Project Guardian positions the city-state at the forefront of regulated digital asset innovation. Industry trends suggest several developments on the horizon that wealth managers should monitor:

Regulatory Evolution

The regulatory framework for digital assets in Singapore continues to mature, with MAS actively refining its approach based on market developments and Project Guardian findings. We anticipate:

• Increased clarity around the treatment of different types of digital assets

• Enhanced disclosure requirements for issuers of tokenised deposits and stablecoins

• Potential expansion of regulatory sandboxes to facilitate controlled innovation

• Greater international coordination on standards and supervisory approaches

Institutional Adoption

As regulatory clarity improves and technology matures, institutional adoption of these technologies is likely to accelerate:

• Major Singapore-based banks are exploring issuing their own tokenised deposits

• Traditional asset managers are developing expertise in digital asset markets

• Corporate treasuries are evaluating these tools for cash management

• Market infrastructure providers are building supporting services and platforms

Convergence of Traditional and Digital Finance

Rather than existing as separate ecosystems, traditional and digital finance appear to be converging, with tokenised deposits representing an important bridge between these worlds:

• Traditional assets increasingly leveraging blockchain for efficiency and programmability

• Digital asset platforms adopting more robust governance and risk management frameworks

• Hybrid financial products combining elements of both traditional and decentralized finance

• Increasing emphasis on interoperability between different systems

For forward-thinking wealth managers and family offices, this convergence presents opportunities to create more efficient, transparent, and flexible financial solutions for clients while maintaining appropriate risk management and regulatory compliance.

The distinction between tokenised deposits and stablecoins represents more than a technical nuance—it embodies different visions for the future of finance and wealth management. Project Guardian's pioneering work in Singapore provides valuable lessons for understanding these distinctions and their implications.

Tokenised deposits, with their direct connection to regulated financial institutions and clear regulatory framework, offer a more conservative but potentially more sustainable approach to bringing blockchain technology into traditional finance. They provide the programmability and efficiency benefits of blockchain while maintaining the regulatory protections and institutional backing that sophisticated investors typically require.

Stablecoins, despite their current market dominance, present a more complex risk profile and regulatory picture, but offer greater flexibility and integration with the broader digital asset ecosystem.

For wealth managers serving UHNWIs and family offices in Singapore, understanding these distinctions is increasingly essential. As blockchain technology continues to reshape financial markets, the ability to evaluate different digital asset solutions based on their risk profiles, regulatory status, and operational characteristics will become a core competency for sophisticated wealth management.

Singapore's leadership in this space through Project Guardian positions the city-state as an ideal jurisdiction for exploring these innovations within a thoughtful regulatory framework. As these technologies mature, they promise to enhance efficiency, reduce friction, and create new possibilities for wealth preservation and growth—goals that align perfectly with the long-term orientation of family offices and institutional investors.

Contact Us

Contact us at info@iwcmgmt.com for more information on how IWC Management can help your family office or institutional portfolio navigate the evolving landscape of digital assets, tokenisation, and blockchain-based finance in Singapore.

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Note that views and figures as subject to change without notice. IWC Management shall not be held liable for any losses or damages to any parties that may arise due to views, figures and inaccuracies that may arise in the articles. Perusing or reading this article means understanding and acceptance of this condition.