In the same week that Gary Gensler, chair of the US Securities and Exchange Commission, sought additional powers to protect investors from “Wild West” cryptocurrency markets, Singapore was poised to grant regulatory consent to a cryptocurrency exchange for the first time.
Australia’s Independent Reserve has secured an ‘in-principle’ approval from the Monetary Authority of Singapore (MAS) to offer digital payment token services. It was one of around 170 applicants to seek regulatory approval and it is widely expected that other exchanges will receive the green light in the coming months as the city-state seeks to position itself as a crypto-friendly business hub.
Monsur Hussain, head of financial institution regulatory research at Fitch Ratings, says Singapore’s move is in line with efforts by US and European regulators to regulate cryptocurrency exchanges on anti-money laundering (AML) and due diligence measures, but not on trading activities.
The MAS regime is highly progressive and very strict
“The implications of MAS’s approval will be to strengthen customer protection mechanisms, transaction screening and AML processes, which will help counter financial crime,” Mr Hussain says.
Regulatory approval is part of the process of separating the transparent and professional exchanges from the less-reputable outfits operating in the sector, says Alexandros Seretakis, an assistant professor focused on alternative investment regulation at Trinity College in Dublin. “It will help make crypto a less dodgy business,” he says.
The Singaporean regulator is known for its high standards in areas such as risk management and audit controls, as well as AML and countering financial terrorism. “The MAS will reject any application that does meet those standards,” says Peiying Chua Heikes, a Singapore-based financial regulation partner at law firm Linklaters.
“The MAS regime is highly progressive and very strict,” says Haydn Jones, a blockchain and crypto specialist at PwC.
China and CBDCs
Singapore is seeking to position itself as a crypto-friendly jurisdiction by striking a balance between encouraging innovation and ensuring investor protection. It introduced the Payment Services Act in January 2020 to encourage the development of the fintech sector, which led to a flurry of cryptocurrency exchange license applications.
The exchanges play a vital role in the overall crypto ecosystem by facilitating trading between parties to establish prices. However, unregulated exchanges have been subject to controversy in relation to hacking and AML controls.
Chinese authorities have cracked down on crypto activities this year and the mining of bitcoins has been banned in several provinces. Mr Seretakis says Singaporean authorities may have had an eye on events in China because various exchanges have been operating through Hong Kong. “Singapore is now well positioned to gain some of this business,” he says.
Singaporean regulators may also have been monitoring the development of central bank digital currencies (CBDCs), says Mr Jones. “Bitcoin will continue to be important, but the future of crypto may rest with stablecoins and CBDCs and, by granting regulatory approval, they will be seeking to be at the forefront of any future developments,” he says.
Other jurisdictions
Authorities around the world have been taking steps to regulate the cryptocurrency industry.
The UK Financial Conduct Authority (FCA) has approved a handful of firms under its crypto regime, which mostly focuses on determining whether companies are compliant with AML rules. The FCA said in June that a “high” number of digital asset companies have not met its standards and that at least 51 had withdrawn their applications.
In the US, cryptocurrency exchange ItBit is registered as a bank with oversight from the New York Department of Financial Services, which means it is subject to the provisions of the US Bank Secrecy Act, the US Patriot Act and the General Regulations of the Banking Board.
Other exchanges, including Coinbase, are licensed as money service businesses, meaning they must register with the Financial Crimes Enforcement Network in the US and the FCA in the UK. Luxembourg, meanwhile, licenses cryptocurrency exchanges as payment institutions.
“Singapore’s move will trigger a shakeout in other jurisdictions as to how they approach the sector,” Mr Jones says. “The rising tide of regulation is working its way up the shores to clean up the crypto industry.”