The Light Is Flashing Yellow For Crypto In Singapore

Bank runs, volatility, company prosecution, can crypto catch a break in Singapore?

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The cryptocurrency industry always runs ahead of regulators while the media builds its narratives based on the stories of exuberant founders and investors. This paradigm helps explain why Singapore has been perceived as the place to be for crypto – “hub” is the word of choice – for several years now even though the city-state’s government has been more modest in its ambitions.

Crypto firms have flocked to Singapore less because of anything specific the city-state has done and more because of what it has not forbidden. To be sure, Singapore has the Payment Services Act that paves the way for crypto payments in the city-state, but it has been ‘judicious’ about the number of licenses it issues. Further, the Financial Services and Markets (FSM) Bill passed in April 2022 regulates virtual asset service providers (VASPs) created in Singapore for anti-money laundering and countering of financing of terrorism (AML/CFT) purposes.

Otherwise though, like most jurisdictions, Singapore does not yet have a comprehensive regulatory framework for digital assets. If crypto firms focused primarily on such regulations, Japan would be an obvious choice as it has a more advanced regulatory system for digital assets than anywhere else in Asia.

In fact, the biggest draw of Singapore for crypto firms is its business-friendly environment, which they assume will eventually translate into the type of regulatory regime they want.

The jury is still out on that though, and if the crypto industry keeps careening from one catastrophe to the next, Singapore will continue to distance itself from the industry.

Reality And Hype

At first blush, 2022 looks like yet another cracking year for crypto in Singapore. After all, the city-state attracted $1.2 billion in crypto funding, the largest chunk of overall fintech investment which helped Singapore to reach a three-year in digital finance investment.

However, as noted by KPMG, crypto-related funding in Singapore last year actually fell by 21% from $1.5 billion in 2021. Investment slowed sharply in the second half of 2022 as the bear market dragged on and the dramatic failures continued.

Although Singapore-based crypto trading platform firm Amber managed to raise US$300 million in December, that was the exception rather than the rule. Among its backers are heavyweights like Temasek and Sequoia Capital. Amber has reportedly cut up to 40% of its staff as it tries to stay afloat amid the crypto industry’s worst slowdown to date.

On the other hand, Singapore is No. 3 in the world in blockchain investment after the U.S. and U.K. There have been 566 blockchain deals in the city-state that have raised $3.9 billion over the past six years, according to The Block.

But what Singapore wants to achieve with its blockchain investment may be different than what the crypto faithful are hoping for. For instance, the city-state’s Project Ubin successfully completed its experiment using blockchain for the clearing and settlement of payments and securities.

It is important to listen to what Singapore’s regulators say and not just repeat the same tired hyperbole.

“If a crypto hub is about experimenting with programmable money, applying digital assets for use cases or tokenizing financial assets to increase efficiency and reduce risk in financial transactions, yes, we want to be a crypto hub,” Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), said in in his opening address at the Singapore Fintech Festival 2022.

Rejecting High Risk

One of the reasons investors with a large appetite for risk love crypto is that investing in this asset class can be one heck of an exhilarating ride. It can be a total bust, but when it goes boom, it’s a big boom. Consider that the closing price of bitcoin was about $29,000 on January 1, 2021 and it surged to almost $69,000 by November 2021.

But Singapore has made clear it doesn’t want to be a hub for trading this mercurial asset class, especially not for retail investors. And how big a center can a jurisdiction be for crypto if it does not embrace the retail segment?

Menon said explicitly at the Singapore Fintech Festival: “But if it is about trading and speculating in cryptocurrencies, that is not the kind of crypto hub we want to be.”

Time and again, Singapore has rejected what it perceives as excessive risk to retail investors from crypto – at the expense of losing big business. For instance, in December 2021, Binance, the world’s largest digital assets exchange, withdrew its application for a permit to operate an exchange in Singapore after failing to gain regulatory approval, and shut down its operations in the city-state in February 2022.

Damage Control

As the crypto industry staggers from one crisis to the next, we expect that Singapore will continue to tighten scrutiny of relevant companies. It will not reverse its decisions on retail investing and may even hit the brakes on institutional investing if the situation deteriorates more drastically.

While the initial effect of the collapse of Silicon Valley Bank (SVB
VB
) and Signature on Singapore appears to be limited, given their exposure to crypto firms, it is more bad news for the struggling digital assets sector. U.S. regulatory agencies designated SVB and Signature on March 13 as a systemic risk to the financial system.

The peer-to-peer payments technology firm Circle, which was approved by the MAS to operate in Singapore last November, said it has $3.3 billion, or about 8% of total USDC
USDC
reserves, deposited at Silicon Valley Bank, and that the money would be be fully available when U.S. banks opened on March 14. Circle said it did not have any USDC cash reserves held at Signature Bank.

Exchange Coinbase, approved by the MAS last October, said that it had about $240 million in corporate cash at Signature Bank, and expects “to fully recover these funds.”

Meanwhile, Singapore’s new gambling regulator, the Gambling Regulatory Authority (GRA), recently said it has no plans to legalize the use of cryptocurrency in physical casinos. Speaking at a conference in Sydney in early March, GRA General Counsel Albert Yeo said that the city-state would make sure cryptocurrency was not used at its two integrated resorts – Marina Bay Sands and Resorts World Sentosa.

“Internally the idea is to just not allow it to begin with or to even allow it into the door. The moment you start even entertaining [the idea] you know it will be difficult to stop,” Yeo said.

Possible Bellwether

To get a sense of Singapore’s future crypto regulatory direction, it would be instructive to observe how Binance’s new bid for a crypto license pans out. In early March, Binance’s Singaporean custody unit Ceffu said it was planning to apply for a permit to offer payment services in the city-state.

Ceffu targets professional investors interested in custodial and other digital asset services rather than retail investors. It is for this business focused on professional investors that the exchange wants to be licensed in Singapore.

The unit’s vice president Athena Yu told Reuters that Ceffu would officially apply after relevant amendments to the Payment Services Act go live and the application for a custody license opens.

Previously, the MAS ordered Binance to stop soliciting business from retail investors in the country after it did so without a permit. Further, Singaporean authorities are still investigating the giant crypto exchange to determine if it broke any rules.

If Ceffu does get the green light from the MAS, that would signal that Singapore remains determined to cultivate itself as a top destination for institutional crypto investing. If Ceffu’s application is rejected or the approval process takes an especially long time, at a minimum it would suggest Singapore is taking a wait-and-see attitude to the broader cryptocurrency industry.