Outlawed by China, facing a clampdown in South Korea and new restrictions in Hong Kong, the cryptocurrency industry has seized upon Singapore as an unlikely Asian alternative.
The country of 5.5m people has long relied on financial services to help power its $344bn economy, and it is now locked in an intensifying race with Hong Kong and Tokyo for the crown of global financial hub in Asia.
Its embrace of the sector has extended to fintechs seeking to disrupt traditional banking. In a socially conservative country, authorities have not just extolled the potential benefits of crypto but backed it up with legislation.
Since January 2020, crypto companies have been able to apply for operating licences under the Payment Services Act — a law that regulates companies handling digital payments and trading of tokens such as bitcoin.
“Technologies that underpin crypto products and digital tokens have the potential to power the new generation of financial services,” Loo Siew Yee, assistant managing director of the Monetary Authority of Singapore’s policy, payments and financial crime group, told the Financial Times.
Beneath the receptiveness, however, lies a cold calculation from policymakers: opening Singapore’s doors to the mushrooming crypto industry could yet prove a key weapon in the country’s quest to be the dominant financial hub in Asia, and ultimately, one to be reckoned with globally.
Singapore’s openness stands in sharp contrast to the increasingly bitter exchanges in other jurisdictions. Coinbase, the biggest listed crypto exchange, in September fired a broadside on Twitter against the US Securities and Exchange Commission complaining about “sketchy behaviour”.
Discomfort over Binance
But as Beijing, Seoul and Hong Kong cool on crypto, the potential hazards of its approach are emerging. Nowhere is this clearer than in its management of Binance, one of the largest global crypto exchanges whose influential founder, Changpeng “CZ” Zao, is based in Singapore.
The company has been the subject of censures by other regulators this year over issues including consumer protections and compliance with anti-money laundering rules. Binance has said it takes its compliance obligations seriously and has tightened some of its customer verification requirements.
MAS in September put Binance’s global site on its investor alert list, a move that effectively prevented Singaporean customers from using it. But the regulator left the local, strictly regulated version of the site unaffected, meaning Singaporeans could use that local site, even as the company came under fire globally.
When operators of crypto exchanges are in open revolt against financial watchdogs elsewhere, analysts say there may be ground to be gained by those regulators who play the good cop.
“Singapore balances being extremely socially conservative with being bold in capital markets,” said Haseeb Qureshi, managing partner of Dragonfly Capital, a global crypto-focused VC fund with a Singapore presence. “They have to show they are open to innovation, friendly to business and to people taking financial risk,” he said.
In contrast to the US Congress, the Singaporean government has taken a lead role in shaping the development of the industry.
Alongside Binance, some of the world’s biggest crypto exchanges, including Gemini, Coinbase and Crypto.com, have all applied for licences to operate. While they wait, many have been granted exemptions, meaning they can serve retail and institutional investors. On Friday, the regulator granted the first full licence to Australian-base exchange Independent Reserve.
Taking notes on Ethereum
The approach has drawn applause from those in the fast-growing industry.
“Singapore thinks so long-term about this stuff,” said the founder of one cryptocurrency start-up which caters to high net worth individuals and family offices. “Years ago I went to go hear Vitalek Buterin [Ethereum’s co-founder] speak in town and in my row there were three people from the MAS painstakingly taking notes.”
Authorities’ encouragement of the industry — and regulation of it — offers important safeguards, said Sander Laugs, head of institutional clients at crypt-focused Swiss bank Seba, which is expanding its presence in Singapore.
Almost 20 per cent of applications have been withdrawn or rejected by the MAS for not meeting its standards on money laundering controls, terrorism financing or technology risks.
“Companies that haven’t had established standards, they’re going to probably have a difficult time obtaining licences or being able to conduct business how they normally do,” said Laugs.
Nor is it just foreign crypto exchanges expanding into Singapore. The country’s domestic banks are trying to muscle in on the boom.
The brokerage arm of DBS, the country’s biggest bank, received approval “in principle” from the MAS in August to begin offering crypto services such as trading bitcoin to institutional investors. The bank last year launched a digital exchange offering cryptocurrency trading and custodian services to some accredited investors.
“It is important for Singapore to remain a global financial hub and to prepare ourselves for the digital mainstream,” said Eng-Kwok Seat Moey, head of capital markets at DBS. “Now is the time for us to help transform capital markets.”
The appetite for crypto has extended to Singapore’s sovereign wealth fund, GIC, which this year invested in the Hong Kong-based parent of crypto exchange OSL. Vertex Ventures, a venture capital fund owned by state-backed investment company Temasek, is a backer of Binance Asia, the exchange’s Singapore unit.
Beijing’s declaration last week that all crypto activities were illegal didn’t just sharpen the appeal of Singapore, it left little doubt that Tokyo is now the country’s biggest threat in the fight to be Asia’s crypto centre.
Japan’s regulator has spent the longest trying to balance the risk and reward of embracing crypto. The Financial Services Agency was the first to recognise the legality of crypto assets, and the Japanese government was the first in the world to define a crypto exchange business in 2017.
They did so in a bid to establish a reputation for embracing innovation in this new area of finance. But Japan’s experience also highlights the potential pitfalls facing Singapore.
Even as the FSA moved to draw up regulations, Japanese courts were still unravelling the collapse of the Tokyo-based Mt. Gox exchange, which once handled 80 per cent of global bitcoin trading. Not long after Japan had taken the lead in legitimising the exchanges, Japanese customers of Coincheck fell victim to a virtual heist of XEM coins then worth about $500m.
The episode damaged the FSA’s reputation, and its implicit assertion that by legalising crypto first, it was also further ahead in knowing how to protect customers from the many potential perils.
The head of one crypto exchange registered in Japan who deals with the FSA says the regulator is wrestling with a dilemma.
“They are desperate to present Japan as the pre-eminent hub of financial innovation and a welcoming face for crypto is a good way to do that,” the crypto executive said. “At the same time, they can see how significant the risks are because of just how many young Japanese are heavily invested in this now.”
The surge this year in the price of Bitcoin, the best-known cryptocurrency, has attracted high-profile investors such as Paul Tudor Jones and Stanley Druckenmiller.
ARK founder Cathie Wood is an evangelist for the cryptocurrency, forecasting it will be worth $500,000 in five years.
The biggest question for governments, said Wood, will be how they decide to balance the threat of disruption posed by crypto, and the benefits of the financial activity that comes with it.
“It’s going to be very difficult to shut decentralised financial services down,” said Wood. “Countries understand that if they want to attract innovation they need friendly regulatory regimes, working alongside the innovators as opposed to, at cross purposes.”
Singapore is gambling it has struck the right balance.