IMPACT ANALYSIS: Singapore’s innovative approach to regulating crypto-assets

The collapse of stablecoin TerraUSD has underlined the need for regulators in the Asia-Pacific region to devise a streamlined approach to crypto-asset regulation.

The Monetary Authority of Singapore (MAS) is at the cutting edge of crypto innovation. It has adopted an activity- rather than an entity-based approach to the regulation of digital assets and services, and in the past two years has graned licences and in-principle approvals to 11 digital payment token service providers, as well as welcoming opportunities to partner with cryptos.

MAS is also working with the Bank for International Settlements and the Financial Stability Board, and with other national regulators, to devise a cross-jurisdictional approach to crypto-asset regulation.

Risk management

MAS has balanced its crypto innovation with a firm emphasis on risk management. It conducts detailed due diligence on licence applicants and only approves those with strong governance structures and proven track records. Firms wishing to obtain a licence in Singapore must conduct customer due diligence, and providers are expected to undertake enhanced customer due diligence to offset
and manage the risks.

MAS has emphasised the need for stablecoins to have adequate backing which is liquid and available when required.

Licensees are also expected to monitor their business with customers on a continuous basis and ensure transactions are consistent with customers’ knowledge levels and business risk profiles. The regulator requires crypto firms to undertake the same level of customer due diligence as traditional banks.

Licensees must also comply with transfer rules and be able to transmit the necessary information about the originator and the beneficiary information to the beneficiary service provider immediately and securely. MAS has long been concerned about about retail investors’ exposure to cryptocurrencies, and has chosen to take a tough line until more of the technology risks have been ironed out.

MAS also continues to review the risks associated with digital payments, anti-money laundering, technology and access to the public on
a case-by-case basis.

MAS expects crypto firms to manage risks

MAS has made it clear that crypto service providers need a strong board and management to direct risk culture governance. It has acknowledged that senior management at many of the crypto firms tend to be younger, and may have no experience of being regulated, but expects such firms to obtain professional assistance to bridge this gap and ensure risks are properly managed.

MAS has identified the primary risks posed by crypto activities as money laundering and terrorist financing activities. Before a crypto service can receive a licence, it must assess whether the product can be used by criminals for illicit purposes, or whether it can be susceptible to market manipulation and fraud.

International collaboration

MAS is working with the Bank for International Settlements, Bank Negara Malaysia, the South Africa Reserve Bank and the Reserve Bank of Australia to resolve the logistics of instantaneous cross-border payments and real-time settlements. The need for regulators to find a solution has become increasingly urgent as more and more financial institutions begin to offer crypto-asset funds, stoking retail
investors’s interest.

Singapore is concentrating on wholesale central bank digital currencies (CBDCs), which are contained within the banking system. MAS does not see a compelling case for retail CBDCs to be held at a central bank and issued to members of the public, instead considering the existing digital payment system to be effective at transferring money. It has pointed out that most public money is already in digital form, for example, bank deposits acting as a digital payment system.

MAS is also involved in Project Dunbar, which has developed prototypes for a shared platform that would enable international
settlements using digital currencies issued by multiple central banks. It is working especially with BIS to have multiple CBDCs issued by central banks to facilitate payments and settlements within a decentralised platform.

The approach would be to have a common platform which central banks could use to issue wholesale CBDCs, thus ensuring seamless cross-border payments. A number of issues still need to be ironed out, however.

Innovative approach

MAS acknowledges the role some crypto-assets can play in the financial sector and has taken an innovative approach to regulation. It has acknowledged that crypto-assets in different forms are here to stay, and has fully embraced the need for international regulators to take a consistent approach to protect investors’ interests and to offset risks.

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