The Monetary Authority of Singapore (MAS) has published two consultation papers proposing regulatory measures to reduce the risk of consumer harm from cryptocurrency trading and to support the development of stablecoins as a “credible medium of exchange” in the digital asset market.
These measures will be part of the Payment Services Act.
The regulator said trading in cryptocurrencies, also known as digital payment tokens or DPTs, is “highly risky and not suitable for the general public”.
But it said that cryptocurrencies “play a supporting role in the broader digital asset ecosystem, and it would not be feasible to ban them”. Therefore, to reduce the risk to consumers from speculative trading in cryptocurrencies, MAS will require that DPT service providers ensure proper business conduct and adequate risk disclosure.
The proposed measures cover three areas –
- Consumer Access: DPT service providers will be required to provide relevant risk disclosures to enable retail consumers to make informed decisions regarding cryptocurrency trading. They must also disallow the use of credit facilities and leverage by retail consumers for cryptocurrency trading;
- Business Conduct: DPT service providers will be required to implement proper segregation of customers’ assets, mitigate any potential conflicts of interest which arise from the multiple roles they perform, and establish processes for complaints handling; and
- Technology Risks: Similar to other financial institutions such as banks, DPT service providers will be required to maintain high availability and recoverability of their critical systems.
Stablecoins
The MAS said that stablecoins have the “potential to be a medium of exchange to facilitate transactions in the digital asset ecosystem, provided they are well-regulated and securely backed”.
The current regulatory framework, which primarily addresses money laundering and terrorism financing risks, and technology and cyber risks, will be expanded to ensure that regulated stablecoins have a high degree of value stability.
The Singapore watchdog will regulate the issuance of stablecoins which are pegged to a single currency (SCS), where the value of SCS in circulation exceeds S$5m (£3.1bn, $3.6bn, €3.5bn).
The key proposed issuer requirements relate to –
- Value Stability: SCS issuers must hold reserve assets in cash, cash equivalents or short-dated sovereign debt securities, that are at least equivalent to 100% of the par value of the outstanding SCS in circulation, and these assets must be denominated in the same currency as the pegged currency;
- Reference Currency: All SCS issued in Singapore can be pegged only to the Singapore dollar or any G10 currencies;
- Disclosures: Stablecoin issuers will be required to publish a white paper disclosing details of the SCS, including the redemption rights of stablecoin holders; and
- Prudential Standards: SCS issuers must, at all times, meet a base capital requirement of the higher of S$1 million or 50% of annual operating expenses of the SCS issuer. They are also required to hold liquid assets which are valued at higher of 50% of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down.
Banks in Singapore will be allowed to issue SCS as well, and no additional reserve backing and prudential requirements will apply when the SCS is issued as a tokenised form of bank liabilities given the existing rigorous capital and liquidity frameworks applied to banks.
For non-issuance services, DPT service providers can offer all types of stablecoins provided that they clearly label the MAS-regulated SCS to distinguish them from the unregulated ones.
Next milestone
Ho Hern Shin, deputy managing director of financial supervision at the MAS, said: “The two sets of proposed measures mark the next milestone in enhancing Singapore’s regulatory approach to foster an innovative and responsible digital asset ecosystem. Regulations go hand-in-hand with innovation in financial services.
“The enhanced regulatory regime for stablecoins aims to support the development of value-adding payment use cases for stablecoins in Singapore. As we continue to partner industry players to explore the potential benefits of tokenisation and distributed ledger technology, MAS will make appropriate adjustments to its regulatory regime to address the associated risks.”
The MAS has invited interested parties to submit their comments on the proposals by 21 December 2022.
Positive sentiment
This comes as KPMG has found interest in digital assets among family offices and high net worth investors (HNWIs) in Hong Kong and Singapore has surged, with more than half already invested in the asset class.
The report, which is also co-authored by Aspen Digital, a digital asset management platform, found that 58% of respondents were already invested in digital assets and a further 34% are planning to make such investments.
The report also found that 60% of family offices and HNWIs are currently allocating less than 5% of their portfolios to digital assets, while 54% say they want to allocate between 5% and 30% to the asset class.
Currently, cryptocurrencies dominate investments with all of the respondents who are investing in digital assets owning Bitcoin and 87% owning Ethereum.
Meanwhile, 60% of respondents invest in non-fungible tokens, 58% of respondents invest in digital asset services providers such as cryptocurrency exchanges and 47% invest in decentralised finance tokens.
New products
Digital assets have taken off rapidly with a total market capitalisation now exceeding $1trn (£860m, €1trn).
KPMG partner Paul McSheaffrey said that the recent growth in the market means that new products will likely continue to emerge.
“Increasing allocation to digital assets requires related hedging and derivative products to allow investors to effectively manage risks. The development of such products outside of popular tokens such as Bitcoin and Ethereum will help to drive allocation to a wider range of digital assets,” he said.
He also noted that as institutional investors are looking for more regulatory certainty, this would likely lead to more regulatory developments.
Yan He, chief executive of Aspen Digital, noted that the rise in digital assets would also lead to changes in research methodology.
“Compared to traditional equities, digital assets require a new fundamental analysis framework for screening investment opportunities. For example, on-chain data is a new metric to measure the network robustness of digital assets. As more institutions are expressing their interests to explore digital assets, we expect a more mature research methodology to evaluate the emerging asset class,” he said.
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