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In late October, the Monetary Authority of Singapore (MAS) published two consultations to solicit public comments on new proposed regulatory measures for digital payment token services. One deals with plans for consumer protection, market integrity and corporate governance, while the other introduces a new regulatory regime for certain types of stablecoins.
Identifying the five main risks in cryptoassets
The two consultation documents were widely expected, as MAS director general Ravi Menon announced them in a speech at an event in August. He also talked about the five areas of risk in cryptoassets that the agency’s regulatory approach is focused on. These seek to:
- fight against the risk of money laundering and terrorist financing;
- technology and cyber risk management;
- damage protection for small investors;
- support the promise of stability of stablecoins; and
- mitigate potential risks to financial stability.
These areas of risk should be familiar to anyone following regulatory developments in Singapore. Earlier this April, Menon spoke about monitoring similar risks in the crypto ecosystem – specifically, money laundering (ML) and terrorist financing (TF) risks, technology and cyber risks, consumer protection and, potentially, financial stability. In fact, MAS’s regulatory approach seems prescient, given the events that have transpired in the interim – such as the collapse of TerraLuna and the bankruptcy of Three Arrows Capital – and those still ongoing such as the FTX saga.
Therefore, the proposals in the two consultations aim to address and mitigate risks that the current regulation limited to anti-money laundering (AML), technology risk and access to the retail public does not. Interestingly, none of the consultation papers directly address the risk that the crypto sector poses to financial stability, although the proposed regulation of stablecoins is likely related. Such a risk assessment would not come until a month later in the Financial Stability Review (FSR) published by the MAS at the end of November.
Assessing the financial stability risk posed by crypto
The FSR is an annual report that helps market participants, analysts and the public better understand the issues affecting Singapore’s financial system. It is the culmination of MAS’s regular assessments of Singapore’s financial system for potential vulnerabilities and its resilience to potential shocks and risks. Although red flags in cryptocurrencies have been mentioned before in previous editions, the sector has never been highlighted as much as this year with a special feature titled “Implications for the Financial Stability of the Global Crypto-Asset Ecosystem”.
The report highlighted the growing connection between the global crypto ecosystem and the traditional financial system. It is argued that this link increases the likelihood of shocks arising from vulnerabilities in the crypto ecosystem that could spill over into the broader financial sector. Any negative impact may also be exacerbated by the leverage taken by crypto participants and financial institutions.
Another potential risk to financial stability arises as a result of new forms of financial intermediation and changes in the structure of the financial system. This is due to the use of decentralized finance (DeFi) and permissionless services through which crypto-based financial activities can be conducted that can circumvent regulations designed to ensure market functioning, market integrity and resilience.
MAS noted that recent events – such as the collapse of crypto exchanges – have shown some of the fragility of the crypto ecosystem. This includes concentration risk arising from the same entities undertaking multiple financial services, as well as contagion risk from systemically important crypto entities, whose collapse could potentially negatively impact other market participants and trigger a broad-based sell-off of cryptocurrencies.
Mitigating cryptocurrency vulnerabilities to take advantage
MAS acknowledged that the liquidity events did not significantly impact the broader global financial system due to its limited ties to the crypto-asset. However, it is added that “[given] The potential of the cryptoasset ecosystem for rapid growth, its associated vulnerabilities and their implications for financial stability warrant continued close monitoring and proportionate regulation”.
Despite this, MAS also illustrated an unbiased approach to the financial stability risk posed by crypto. The agency reiterated its position that financial innovations have the potential to improve the process of financial intermediation and the overall functioning of the financial system. In particular, the technologies underpinning cryptoassets and DeFi “can be shown to increase the efficiency of the financial system to the benefit of market participants and other agents in the real economy.”
For MAS – similar to other risks to financial stability – firm-level regulation and oversight of other financial intermediaries’ exposure to cryptocurrencies will play an important role in mitigating its vulnerabilities. The role of international standard-setting bodies and other international organizations in coordinating and achieving globally consistent results will also be crucial.
The inclusion of such a crypto-specific feature in the FSR, as well as the publication of two consultation documents, strongly signals to the market that Singapore remains committed to its vision of being a crypto hub. However, that hub – as MAS CEO Ravi Menon mentioned at another event in November – will deal with experimenting with programmable money, implementing use cases like atomic supplements and tokenizing assets to increase efficiency and reduce risk in financial transactions, instead of promoting speculation at the expense of consumer protection, market integrity and financial stability.
MAS’s vision of a crypto hub resonates well with Elliptic’s own vision that “a world powered by crypto is a freer, fairer and safer world for all”. As a blockchain analytics company, we remain committed to helping crypto firms, financial institutions, regulators and law enforcement agencies detect and deter criminal cryptocurrency exploitation through accurate and actionable insights.
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