Crypto players waiting on Singapore's playbook

Authorities treading fine line between keeping regulations and stifling innovation, observers say

Dec 07, 2021

THE Singapore regulator is faced with a large backlog of crypto-related licence applications.

According to the Monetary Authority of Singapore's (MAS) website, close to 70 applicants seeking to be licensed as digital payment token (DPT) service providers remain on the waiting list. These entities are operating under a regime that allows them to be exempted from holding a licence while their applications are under review.

More keenly associated with risks of money laundering than fiscal dollars, the cryptocurrency industry remains difficult to regulate. As Singapore continues to want to build itself up as a place for crypto infrastructure, crypto players are waiting on Singapore's playbook over its ambitions on this front. Authorities are thus treading a fine line between maintaining regulations and stifling innovation, some observers say.

The MAS has to date granted just 4 licences to DPT service providers. That's since January 2020, when the Payment Services Act came into force to govern payment services - these include those provided by crypto exchanges, which are meant to be licensed.

"The main challenge will be to maintain this conducive environment and to balance regulatory restrictions and incentives in a level manner," said Hagen Rooke, fintech counsel at ReedSmith.

"At present, the Singapore regulatory framework for crypto firms is viewed as well-calibrated. However, various regulatory changes are in the pipeline to ensure Singapore remains aligned with international standards for anti-money laundering. The MAS will need to ensure it addresses relevant risks without overregulating or unnecessarily subduing the innovation factor," Rooke added.

Clarence Guo, a director at Jacque Law, said the movements in Singapore's crypto space are reflective of the overall international regulatory landscape, where each regulator closely references guidance from the Financial Action Task Force.

The intergovernmental body announced updates to its guidance for virtual assets and virtual asset service providers (VASPs) at the end of August which, among other things, recommends international standards to address money laundering and terrorist financing risks.

Guo said these guidelines "may not be the clearest or most business-friendly", adding: "Many other island jurisdictions which have introduced their own virtual asset rules have encountered a huge exodus of companies and projects, and slowdown of crypto-related businesses."

In the case of Singapore, both Huobi and Binance have stopped users here from trading cryptos on their global platforms. On Nov 10, another crypto exchange, Delta Exchange, sent an email informing Singapore users that they will no longer be able to trade spot pairs on its platform "due to compliance reasons". Trading of derivative products can continue, it added.

But Huobi and Binance have set up separate Singapore units - Huobi Singapore and Binance Singapore, respectively - that are awaiting licences to operate legitimately here. That would require them to show that the local operations would ring fence assets from the global entities, to protect local users.

Sources close to Binance have recently said that the crypto bourse might withdraw its Singapore application and turn elsewhere in its hunt for a global base. Binance Global's chief executive Zhao Changpeng has also been quoted in reports citing France, Dubai and the United Arab Emirates as regions coming up with "very friendly crypto regulations".

Yet, the tough stance of Singapore's regulators continue to make the city-state a draw to other crypto players.

"The reputational and credibility benefit of securing a crypto licence in Singapore, will help them secure licences elsewhere as Singapore is well known to have higher and more stringent regulatory standards," said Chia Hock Lai, co-chairman of Blockchain Association Singapore and chair of Asean Blockchain Consortium.

Huobi Singapore's chief executive Edward Chen said it will continue to base the company in Singapore, even if it were to expand operations.

"Singapore is one of the most important players for fintech in the Asia region. It already has very good influence and power in the traditional finance space.

"It is also going to be a key player for cryptocurrency-related businesses," Chen said.

Regulators here have been active in engaging with licence applicants, he noted, noting that there have been discussions on widening the offerings of Singapore-based exchanges. Huobi Singapore plans to soft-launch its exchange at the end of this month. A small pool of users will be invited to test it, Chen said. Huobi Global has reportedly picked Singapore as its Asia base.

Despite Singapore's small retail market, the city-state presents other advantages such as professional talents, political stability and strong infrastructure. Jacque Law's Guo also highlighted the ease of fundraising here due to the access to reputable investors and other family offices.

"From our experience dealing with projects raising funds, or infrastructure or business-to-business providers, the Singapore market is still attractive for crypto market participants," he said.

Still, for these exchanges to truly operate a hub-and-spoke model out of Singapore, their Singapore units must be allowed - and their offerings must be attractive enough - to serve consumers outside the city-state.

"For Singapore to be a hub, other countries will need to permit their residents to be onboarded by Singapore financial institutions. Otherwise, the industry may only have domestic markets and product offerings," said Chris Holland, a partner at Holland & Marie specialising in advising financial services.

Holland added: "Without comfort that regulators will not penalise financial institutions for accepting international customers on a reverse enquiry basis, financial services and cryptocurrency offerings may become purely domestic businesses, which would be a remarkable difference from how the cryptocurrency industry operates today."