January 4, 2023
Over the last few years, Singapore – the Lion City – has roared when it comes to digital assets regulation, constantly attempting to thread a needle between openly welcoming cryptocurrency businesses and strictly regulating an emerging and sometimes volatile space.
As the cryptoverse moved at F1 speed, the Monetary Authority of Singapore (MAS), an early adopter of crypto-specific regulation, moved quickly to find the balance between creating critical guardrails and over-regulating a nascent space.
In this piece, we look back at digital asset developments in 2022 in Singapore, and look ahead to what to expect from the Lion City in 2023.
“Yes to digital asset innovation, no to cryptocurrency speculation”
Need to sum up MAS’s approach to crypto regulation?
Look no further than the title of MAS Managing Director Ravi Menon’s landmark speech on Singapore’s approach to digital assets — “Yes to digital asset innovation, no to cryptocurrency speculation”
MAS’s focus on digital assets goes back to 2016 when it launched Project Ubin, a four-year long endeavor to explore the use of blockchain and DLT for clearing and settlement of payments and securities. Since then, MAS has launched multiple experiments, including two new projects in 2022:
- Project Guardian, which “tests the feasibility of applications in asset tokenization and DeFi while managing risks to financial stability and integrity.” Project Guardian’s first industry pilot, led by DBS Bank, JP Morgan, and SGX and Temasek-backed digital markets infrastructure operator Marketnode, involved the “creation of a permissioned liquidity pool comprising tokenized bonds and deposits”.
- Project Orchid, which explores design and technical aspects of a potential retail CBDC system for Singapore. Orchid’s first phase involved the development of Purpose Bound Money (PBM), “a protocol that specifies the conditions upon which an underlying digital currency can be used”. As a digital bearer instrument, PBM could be used to digitalise vouchers and support government payouts. Local stablecoin issuer StraitsX and regional superapp Grab successfully piloted the use of PBM vouchers at the Singapore Fintech Festival, where they could be used to purchase food and beverage items.
However, Singapore’s enthusiasm for digital asset projects has been seen by some in the industry as an “apparent contradiction” to its rigorous digital assets regulatory regime. In his speech, Mr Menon tackled the question by distinguishing between digital assets and cryptocurrencies, which are a subset of the former. He reiterated MAS’ concerns around retail speculation in cryptocurrencies, which had led, according to Mr. Menon, to “extreme volatility” and “prices that have nothing to do with any underlying economic value related to their use on the distributed ledger.”
In the speech, Mr. Menon further distinguished between cryptocurrencies, which MAS views as “unsuitable for use as money and as highly hazardous for retail investors” and stablecoins, which had “good potential” provided they were “securely backed by high quality reserves and well regulated.”
MAS’ policy actions in 2022 reinforced Mr Menon’s narrative. The regulator started the year with new restrictions on public advertising by digital asset service providers via public ad placements, mass media and third parties such as social media influencers, including a moratorium on digital asset ATMs.
Then, a number of events rocked the Singapore digital asset space in 2022:
- We saw the crash of stablecoin Terra, whose issuer, Terraform Labs, was headquartered in Singapore.
- In the wake of Terra, Singapore based hedge fund Three Arrows Capital, crypto lender Vauld, and trading platforms Zipmex and Hodlnaut also collapsed. Neither Three Arrows nor Vauld held an MAS license at the time of collapse. However, Zipmex had been operating under a licensing exemption from the MAS while its license application was pending, and Hodlnaut had been issued an in-principle license approval just months before its insolvency.
- Finally, FTX collapsed. While FTX did not have an MAS license or exemption, according to CoinGecko, Singapore investors were the second largest users of FTX.com, accounting for 5% of its web traffic, or an average of 240,000 unique visitors each month. The collapse also affected Singapore sovereign wealth fund Temasek, which had invested in FTX. Singapore’s deputy PM Tharman Shanmugaratnam acknowledged that the FTX failure had not only caused “financial loss to Temasek, but also reputational damage.”
MAS to investors: caveat emptor
Since the inception of its regulatory efforts, MAS, like many global regulators, has focused on the need for anti-money laundering best practices and cyber security. Specifically, Singapore has closely referenced the Financial Action Task Force (FATF) standards and recommendations, and was one of the first jurisdictions to implement the FATF Travel Rule for VASPs.
On the consumer protection front, MAS has emphasized that participation in the digital assets ecosystem is very much on a caveat emptor basis (at the risk of the participating party). It has also actively discouraged retail participation in cryptocurrency trading via the advertising restrictions, as well as its consumer education efforts.
However, post-Terra, MAS has found that consumers are “increasingly still trading in cryptocurrencies” despite restrictions and warnings. This has led the regulator, which had already been “carefully considering [...] additional consumer protection safeguards” as well as “actively reviewing” its stablecoin approach, to propose a “more comprehensive set of measures to [...] reduce the risk of consumer harm”.
- Consumer protection measures include the prohibition of sign-up incentives for new customers, and the introduction of a knowledge and risk assessment for retail investors looking to invest in digital assets.
- On the stablecoin front, only issuers of single currency stablecoins that are backed 100% by cash or equivalents would be able to apply for an MAS stablecoin issuance license, consistent with Mr. Menon’s pledge to “uphold the promise of stability in stablecoins” by ensuring they were “indeed stable”.
MAS also reminded the Singapore public of the risks of investing in cryptocurrencies, highlighting that “regulation does not shield consumers from the risk of their cryptocurrency holdings losing value, or, if [...] service providers collapse due to unsustainable business models, fraud or excessive risk taking”.
A high bar for licensing
MAS has continued to hold a high bar for VASPs hoping to operate in Singapore. Since the commencement of the Payment Services Act in 2020, MAS has issued just 11 licenses for digital payment token services out of hundreds of applications. In his speech, Mr Menon acknowledged that the process “has not been easy for industry players or for MAS,” given how new and fast-moving the digital asset space was. He however emphasized that MAS could not “compromise its due diligence process just to make it easy for digital asset players to get a license.”
We caught up with Grace Chong, regulatory liaison for ACCESS, the Singapore Cryptocurrency and Blockchain Industry Association, and Head of Financial Regulatory at Gibson, Dunn and Crutcher Singapore, on industry sentiments about digital asset regulation in Singapore:
“After the events of 2022, regulators everywhere have accelerated their push for enhanced guardrails, and the industry will need to gird itself for an onslaught of enhanced regulations. While the industry itself also recognises the need for enhanced risk management and regulatory oversight, regulatory approaches should be balanced, and not exclude anyone from access to crypto, and the Web3 ecosystem more broadly. In this vein, ACCESS has, in its response to MAS’ consultations, suggested that the focus should be not to issue outright bans on services and products, but to enhance the robustness of digital assets service providers’ credit risk management, and to focus on better practices, such as identifying and mitigating conflicts of interests. The digital assets community will have to take great strides to rebuild trust with regulators and their users. However, it is important not to forget the technology’s underlying potential and the commitment to build new use cases.”
For more from Grace, check out our TRM Talks on Crypto Regulation in Singapore.
Full steam ahead for 2023
After a busy 2022 what should we expect from Singapore in 2023?
Fundamentally, MAS will continue to lean into regulation for the Lion City.
With the public consultation period for enhanced user protection measures and stablecoin framework concluded, MAS will begin the process of reviewing responses and refining its proposals, before issuing its consultation response. Here are a few key areas to watch in 2023:
•User protection: MAS has already signaled its intent to issue new Guidelines as a first step to implementing the enhanced user protection proposals. While not legally binding, Guidelines are often used to set out MAS’ regulatory expectations and licensed players are generally expected to comply.
•Stablecoins: On the stablecoins front, MAS will likely begin the legislative work necessary to enact the new regime. We may also see more from MAS on its plan to expand the regulatory ambit of digital payment token services to include custody and transfer of digital assets.
•Licensing: On the licensing and supervision front, more digital asset players will gain clarity on their licensing status in Singapore, for better or worse. As the pool of licensed VASPs grows, MAS faces the task of ongoing supervision for these players, and it will be interesting to see how it approaches the job.
•Global position: On the global stage, with Singapore at the helm of the FATF and the IOSCO Fintech Taskforce, as well as active in other international forums such the FSB, we can look forward to more thought leadership from the Lion City as discussions on international standards for digital asset regulation ramp up.
All in all, 2023 will be another busy year for digital assets in Singapore. We can expect to see MAS continue to lean into the promise of blockchain technology, while maintaining regulatory rigor and working to develop safeguards for consumers and investors in the digital asset ecosystem.
For more perspectives, check out our recent blog post looking at global digital asset regulatory trends in 2022/23.
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