MAS addresses ‘mixed signals’ when it comes to digital assets

The MAS’ Managing Director, Ravi Menon recently addressed the development and risks associated with digital assets and cryptocurrencies, admitting there had been uncertainty for current and prospective players in these markets.

In his speech, at the recent ‘Green Shoots’ seminar, Ravi shared Singapore’s strategy and vision to develop an innovative and responsible digital asset ecosystem. He also explained why cryptocurrencies are unsuitable for use as money and highlighted areas of risk in digital assets that the MAS is focused on. Public consultations on proposals to minimise harm to consumers and on the regulatory approach for stablecoins will soon follow.

This latest speech from Ravi gives some useful insight into the future of digital assets and crypto for anyone interested in the market in Singapore.

Building the digital assets ecosystem

The MAS is actively promoting innovation in the digital asset ecosystem through industry collaboration, experimentation and exploration. To this end, the authority is taking a four-pronged approach to building the digital assets ecosystem.

1. Exploring the potential of Distributed Ledger Technology (DLT)

Digital assets are typically placed on distributed ledgers that record the ownership, and transfer of ownership, of these assets.

The MAS sees several promising developments in Singapore for DLT use cases. The most promising related to financial services are in cross-border payment and settlement, trade finance, and pre- and post-trade capital market activities. For example, in capital markets, Marketnode (a joint venture between SGX and Temasek) is leveraging DLT to tokenise assets. This reduces the time needed to clear and settle securities transactions, from days to just minutes.

2. Supporting tokenisation of financial and real economy assets

Tokenisation is the process of converting any rights or assets into a digital token that can then be used, owned and transferred. This enables the monetisation of any tangible or intangible asset, making it easier to fractionalise an asset or split up its ownership.

Tokenisation also allows assets to be traded securely and seamlessly without the need for intermediaries.

The MAS has launched its own initiative, called Project Guardian, to explore the potential of tokenised real economy and financial assets. Led by DBS Bank, JP Morgan, SBI Group and Marketnode, this initiative explores the institutional trading of tokenised bonds and deposits to improve efficiency and liquidity in wholesale funding markets.

3. Enabling digital currency connectivity

In the digital asset ecosystem, there are three popular ‘currencies’ that facilitate transactions: cryptocurrencies, stablecoins and central bank digital currencies (CBDCs). The MAS regards cryptocurrencies as unsuitable for use as money and as highly hazardous for retail investors for the following reasons:

Cryptocurrencies lack the three fundamental qualities of money: medium of exchange, store of value, and unit of account.

Cryptocurrencies serve a useful function within a blockchain network, rewarding the participants who help to validate and maintain the record of transactions on the distributed ledger. Outside a blockchain network, cryptocurrencies tend to only serve as a vehicle for speculation.

Since 2017, the MAS has been issuing warnings about the substantial risks of investing in cryptocurrencies. Despite this, it still sees potential in stablecoins, provided they are securely backed by high quality reserves and are well-regulated. The MAS also recognises the future of wholesale CBDCs, especially for cross-border payments and settlements.

4. Anchoring players with strong value propositions and risk management

The MAS is aiming to anchor crypto players who can add value to the digital asset ecosystem and have strong risk management capabilities. To do this it will continue to closely scrutinise licence applicants’ business models and technologies, to better understand the risks. The MAS will also continue to closely assess applicants’ understanding of MAS’ rules and their ability to meet standards. The due diligence process will take a considerable amount of time to accurately identify and approve those who demonstrate strong risk management capabilities.

Areas of risk in digital assets

Money laundering and terrorist financing (ML/FT) risks were the key areas of concern when digital asset activities took off more than five years ago. Now, with the rapid growth in scale and complexity of digital asset activities, other risks have surfaced. Because of this, regulators including the MAS are stepping up their responses to these new risks in five key areas.

ML/FT risk: Cryptocurrencies have made it easier to conduct illicit transactions, as users’ IDs are masked by wallet addresses and pseudonyms. The MAS’s AML and CTF rules and requirements are consistent with the FATF standards. Earlier in 2022, these rules were expanded to Singapore-incorporated entities providing digital asset services overseas.

Technology and cyber risk: Technology and cyber risks are continually evolving, for example, coding bugs in smart contracts and compromise of digital token wallets or their encryption keys. The MAS is reviewing measures to manage these and other technology and cyber risks, including further requirements to protect customers’ digital assets.

Risk to retail investors: It is risky for the public to put their monies in cryptocurrencies, as the perceived valuation of these cryptocurrencies plummet rapidly when sentiments shift. The MAS has issued numerous advisory warning to consumers and, since January 2022, has restricted digital asset players from promoting cryptocurrency services at public spaces. This has led to the dismantling of Bitcoin ATMs and the removal of advertisements in MRT stations. But, despite these warnings and measures, surveys show that consumers are increasingly trading in cryptocurrencies. In this regard, the MAS is considering further measures to reduce consumer harm including suitability tests and restricting the use of leverage and credit facilities for cryptocurrency trading.

In addition to price instability, the cryptocurrency market is also fraught with risks of market manipulation. The MAS intends to address this by enhancing regulation and being actively involved in international regulatory reviews to enhance market integrity and customer protection in the digital asset space. The MAS has been sharing its concerns with the industry and inviting views on possible measures to minimise harm to consumers. It intends to issue a consultation paper by October on its proposals to safeguard consumers from these risks.

Risk of instability in stablecoins: Stablecoins can realise their potential only if there is confidence in their ability to maintain a stable value. Some of the assets backing these stablecoins – such as commercial papers – are exposed to credit, market and liquidity risks. The MAS intends to propose a consultation on the regulatory approach for stablecoins, also by October.

Financial stability risks: As the digital asset ecosystem grows, it will be natural for linkages between the traditional banking system and digital assets to grow. There is risk of contagion to financial markets through exposures of financial institutions to digital assets. The MAS is working closely with other regulators to design a prudential framework for banks’ exposures to digital assets.

How we can help

Bovill helps firms who offer digital capital markets products and cryptocurrencies with their MAS licence applications. We also provide regulatory and compliance support, including internal audit services. If you are keen to expand your business footprint in Singapore, particularly in the digital assets space, we will be happy to take you through the MAS’ regulatory landscape and partner you in your business expansion journey.