Singapore’s bumpy road as a cryptocurrency hub

The author of this article, which looks at how Singapore’s regulators manage the cryptocurrency and digital asset space, argues that the Asian city-state offers a model for jurisdictions that want to carefully introduce such entities into financial systems.

In this article, Bryan Tan, a partner at law firm Reed Smith and a member of its dedicated cryptocurrency and digital asset group, On-Chain, discusses the state of regulation and business development in Singapore. The editors are pleased to share these views; customary editorial disclaimers apply. Join the conversation! Email [email protected]

Known for its robust financial sector and progressive regulatory environment, Singapore has emerged as a significant hub for cryptocurrencies and blockchain technology. The country’s strategic approach, characterized by clear regulations and an innovative mindset, has earned it a favorable position in the global cryptocurrency ecosystem. With a proactive regulatory framework and a favorable business environment, Singapore’s focus on fintech innovation, coupled with its strategic geographic location, has attracted many blockchain startups and established cryptocurrency companies.

The cornerstone of Singapore’s crypto-friendly environment is a clear and comprehensive regulatory framework. The Payment Services Act (PSA), passed in January 2020, is a key piece of legislation ensuring regulatory transparency of cryptocurrency operations. The PSA classifies various types of payment activities, including digital payment token services, under a harmonized regulatory framework. This Act requires crypto companies to obtain a license, ensuring compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.

Singapore’s commitment to supporting innovation is evident through initiatives such as the Singapore FinTech Festival (SFF), which provides a collaborative platform for global fintech and cryptocurrency stakeholders. Introduced in 2016, it is the largest of its kind. The country also boasts advanced technological infrastructure, including high-speed internet and solid cybersecurity measures, which are essential for the development of the cryptocurrency sector.

Slow and steady wins the race?
The Monetary Authority of Singapore (MAS), the country’s central bank and financial market regulator, has taken a balanced and progressive approach to bitcoin and cryptocurrencies, as opposed to unbridled enthusiasm or unjustified euphoria. The MAS clearly sees the potential of blockchain technology and digital currencies, while also emphasizing the need for regulation to mitigate the risks associated with cryptocurrencies.

To this end, MAS has issued clear guidelines on the use and regulation of cryptocurrencies. It distinguishes between utility tokens, which provide access to a service, and security tokens, which represent ownership or debt. This distinction helps in applying appropriate regulations based on the nature of the token. Similarly, PSA license applications have been scrutinized and many have been rejected.

While MAS supports cryptocurrency innovation, it also regularly issues warnings to the public about the risks associated with cryptocurrency investments. These warnings emphasize the volatile nature of digital assets and the importance of conducting thorough research before investing. It also places strict restrictions on advertising.

Retail access to cryptocurrencies in Singapore is relatively advanced, facilitated by a growing number of exchanges and crypto service providers. However, the MAS takes the position that cryptocurrency speculation is not suitable for the retail market and ensures that these services are regulated to protect consumers.

Singapore is home to several reputable cryptocurrency exchanges that provide retail investors with easy access to buying, selling and trading digital assets. These platforms are required to comply with the PSA regulations, ensuring they operate in a regulated environment where consumer protection is a priority.

One of the strictest regulatory regimes in the world
Nevertheless, the MAS remains steadfastly determined to maintain and even harden its current stance on cryptocurrencies. In a response published in Financial Times. In September 2023, the MAS agreed that “cryptocurrencies can be misused as a conduit for money laundering and also pose risks to retail customers. MAS only grants licenses to cryptocurrency players if they have robust anti-money laundering controls; most applicants have not been successful.”

It added that it “has also proposed and consulted on a wide range of regulatory measures aimed at mitigating the risks posed by cryptocurrencies to retail customers. As these measures are gradually implemented from the end of this year, Singapore will have one of the strictest regulatory regimes in the world governing retail access to cryptocurrencies.”

Perhaps this stance is supported by the views on the Bitcoin ETF (and upcoming ETF ETF). The US, UK, Hong Kong, and Thailand have all approved it in some form for their markets, while Singapore has not changed its stance.

MAS, on the other hand, favors distributed ledger technology, or blockchain, the technology that underlies cryptocurrencies. MAS’s Ubin project is proof of its proactive approach. This joint project with the financial industry aims to explore the use of blockchain for the clearing and settlement of payments and securities. The successful completion of multiple phases of Project Ubin has demonstrated the potential of blockchain technology to increase efficiency and reduce the costs of financial transactions.

Global picture
Compared to other jurisdictions, Singapore’s approach to cryptocurrency regulation and retail access stands out for its clarity and balance. In the US, the cryptocurrency regulatory landscape is fragmented, with different states having different regulations. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) play significant roles in regulating cryptocurrency activities, but the lack of a unified national framework creates uncertainty. Retail access is widespread, with major exchanges operating under strict compliance measures. However, regulatory ambiguity can be discouraging for new entrants.

The European Union is working on a comprehensive regulatory framework through the proposed Markets in Crypto-Assets (MiCA) regulation. MiCA aims to create a harmonized approach across EU Member States, providing legal certainty for cryptocurrency businesses and protection for investors. Retail access to cryptocurrencies is growing, and platforms support a large user base. However, the regulatory environment continues to evolve and full implementation of MiCA is awaited.

Japan is at the forefront of cryptocurrency regulation, being one of the first countries to recognize bitcoin as a legal payment method. The Financial Services Agency (FSA) oversees the regulation of cryptocurrency exchanges, ensuring rigorous compliance with AML and CTF regulations. Retail access in Japan is solid, with widespread acceptance of cryptocurrencies for a variety of transactions. A clear regulatory environment supports a thriving cryptocurrency ecosystem, but stringent requirements can be a barrier to entry for smaller businesses.

Hong Kong, a major financial hub in Asia, has a more laissez-faire approach compared to Singapore. The Securities and Futures Commission (SFC) regulates cryptocurrency exchanges that offer trading in at least one security token, while other crypto activities remain largely unregulated. Retail access is facilitated by numerous exchanges and OTC platforms.

Singapore’s strategic approach to cryptocurrency regulation, characterised by a clear and comprehensive framework, proactive support for innovation and a balanced stance by the MAS, has made it a leading cryptocurrency hub for serious players. The country’s commitment to creating a safe and transparent environment for both businesses and retail investors sets it apart from other jurisdictions.

While the regulatory landscape is constantly evolving around the world, Singapore’s emphasis on transparency, consumer protection and technological advancement positions it as a potential model for other countries looking to carefully integrate cryptocurrencies into their financial ecosystems.