People gather next to the Merlion statue at Marina Bay in Singapore on Sept 20, 2022. (ROSLAN RAHMAN / AFP)
SINGAPORE – Singapore wants to be a crypto asset hub but does not accept trading and speculations in cryptocurrencies, said Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), at the Singapore Fintech Festival (SFF) 2022 which concluded on Friday.
Managing director of the Monetary Authority of Singapore Ravi Menon said Singapore wants to be a crypto hub for experimenting with programable money, applying digital assets for use cases like atomic settlement, and tokenizing real and financial assets to increase efficiency and reduce risks in financial transactions
Menon said Singapore wants to be a crypto hub for experimenting with programable money, applying digital assets for use cases like atomic settlement, and tokenizing real and financial assets to increase efficiency and reduce risks in financial transactions.
This is the third time in about three months for MAS to showcase its policy stance on digital assets and crypto assets.
Menon said in late August that many items with value, including financial assets like cash and bonds, real assets like artwork and property, and even intangible items like carbon credits and computing resources, can potentially be tokenized and become digital assets.
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When deployed on distributed ledgers, digital assets are referred to as crypto assets. MAS wants to make Singapore one of the most conducive and facilitative jurisdictions for digital assets. At the same time, it wants Singapore to be one of the most comprehensive in managing the risks of digital assets, and among the strictest in areas like discouraging retail investments in cryptocurrencies.
In late October, MAS 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 ecosystem.
Despite its unsupportive attitude towards retail investment in cryptocurrencies and strict supervision, MAS does not ban cryptocurrency business in Singapore totally.
Asia Pacific Exchange (APEX), one of the three derivatives exchanges with the Approved Exchange and Approved Clearing House licenses in Singapore, launched its Bitcoin Perpetual Futures in July, the first such product approved by MAS. Before this, the exchange launched the Bitcoin Monthly Futures Contract in May. Both two products do not accept Singapore's retail investors.
Ben Charoenwong, assistant professor in finance at the National University of Singapore Business School, told Xinhua that MAS restricts retail investors from trading in the APEX market with the perpetual futures contract as investor protection.
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The introduction for institutional investors is appropriate in so far as "convenient leverage" is a problem for retail, the expert said, calling the restriction a double-edged sword.
In good times when bitcoin does well, retail investors wail against regulators for not allowing them to take on so much leverage. But in bad times, if retail investors do have access to leverage and lose their life savings, they complain about the lack of regulation, he said, adding that no matter what the regulators do, retail investors can be unhappy.
According to Menon, cryptocurrency is only one of the four forms of programable money. The other three forms are stablecoin, tokenized bank deposit, and central bank digital currency or CBDCs. MAS is essentially discouraging retail investment in cryptocurrencies, facilitating stablecoins through sound regulation, allowing tokenized bank deposits, and experimenting with CBDCs. MAS's attitude to other forms of programable money is quite different from that of cryptocurrencies.
Charoenwong is more optimistic about CBDCs, saying that CBDCs are pure efficiency boosts and potentially privacy-reducing relative to the existing financial system. Such a product does not seem particularly innovative and likely can be adopted with little friction, though there may be implications for how monetary policy can propagate through the markets and what the role of existing banks become, he added.
But Menon said, "rather than debate the pros and cons of retail CBDCs, we have taken the approach of asking ourselves what are the purposes we want to achieve with programable money, and working from there."
At the SFF 2022 event, MAS announced the successful completion of Phase 1 of Project Orchid, which is a multi-year, multi-phase exploratory project examining the various design and technical aspects pertinent to a retail CBDC system for Singapore. Phase 1 of Project Orchid explored the concept of purpose-bound digital Singapore dollar (SGD), which enables senders to specify conditions, such as validity period and types of shops, when making transfers in digital SGD.
"MAS and the industry will further sharpen our capabilities in programable money," Menon said. "We will improve the user experience, strengthen security and privacy, and increase accessibility to broader segments of the population."
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Besides digital currencies, MAS believes that real innovation with vast potential is tokenization, which involves using a software program to represent the ownership rights over any item of value as a digital token or asset. Menon said that tokenized financial assets, physical assets and intangible assets, among others, can potentially facilitate more efficient transactions, enhance financial inclusion, and unlock economic value.
Charoenwong said that he agrees with Menon that the tokenization of assets can facilitate more transactions. But he added that for the tokenization to have real economic benefits, there will need to be a clear incentive for trade and transactions.
"While the tokenization can allow more efficient transfer of ownership of assets and allow investors to own, say, 0.142 percent of a piece of real estate or corporate bond, which can plausibly increase financial inclusion, the platforms allowing such trading and designated market makers will also play important roles so that the transactions of these tokens will have sufficient liquidity," the scholar said.
Compared to liquidity, MAS is more concerned with risk control. Menon said that asset tokenization can enable decentralized Finance, or DeFi, where borrowing, lending and trading activities can be performed autonomously through smart contracts, potentially enhancing the efficiency and accessibility of financial services. But DeFi is still in its infancy and is not without significant risks.
In that case, MAS launched Project Guardian in May. Through this project, MAS and the financial industry are laying the structures and protocols that will help harness the benefits of tokenized assets and DeFi while managing their risks.
The first industry pilot under Project Guardian that explores potential DeFi applications in wholesale funding markets has completed its first live trades. In this pilot, DBS Bank, JP Morgan and SBI Digital Asset Holdings conducted transactions in tokenized foreign exchange and government bonds.
Han Kwee Juan, DBS head of group planning and strategy, said that the early explorations in DeFi solutions are believed to ensure the competitiveness and relevance of Singapore as a cutting-edge financial center.
Menon announced at the SFF 2022 that two new industry pilots of Project Guardian have been launched already.
"There is much more to the digital asset ecosystem than cryptocurrencies," he said. "The real value in the crypto industry comes not from speculating in cryptocurrencies but from tokenizing assets and placing them on a distributed ledger for use cases that increase economic efficiency or enhance social inclusion."