Why Singapore needs to reconsider its approach to regulating crypto

by Arthur · July 11, 2022

Market innovation is inherently linked to an unlicensed culture that celebrates entrepreneurship. Cryptocompanies want to establish themselves in Singapore, not only because of their attractive business laws, but also because the city-state is ready to be an exciting cultural hub for the latest crypto-related festivals and conferences.

Banning culture sends signals to crypto hedge funds and companies working against it. It signals that Singapore is not ready to be a cryptocurrency hub in Asia, let alone the world.

There is a popular saying in intellectual circles: If you are so smart, why are you not rich? That remark mocks economists and public intellectuals who make bold market predictions, most of which do not come true.

Unfortunately, the same line of thinking is rarely used on politicians, who are generally believed to be foresighted and omniscient from their ivory towers. But it should be.

Take, for example, the Singapore government’s regulatory approach to crypto. Almost 200 crypto companies have applied for licenses to offer crypto services, but only a small fraction – 14 from last month – have been approved while the vast majority are still waiting.

The government claims that this is the “responsible” way to regulate crypto. But these political euphemisms mask the main assumption underlying this approach, which is that our decision-makers are equipped in advance to know what will and what will not work and crypto.

They do not. The costs of making these decisions are great. It hampers Singapore’s market position in one of the fastest growing sectors in the last decade.

As with all emerging technology, the crypto sector is driven by hype. Crypto is currently in the growth stage of the S-curve. Many of the ideas and products today are unlikely to exist in a few years.

But some want. And here’s the main point: No one – neither decision makers nor entrepreneurs – knows which companies and projects will survive. Terra blockchain, for example, was recognized as a “blue-chip” cryptocurrency with a market value of $ 41 billion at the top, and yet it has fallen spectacularly from the top.

This is why countries that strive to be leaders in crypto-innovation must adopt a relatively open-arm approach to entrepreneurial experimentation. This does not mean zero regulation. But banning the vast majority of crypto companies from operating before they receive a principled regulatory approval goes across market innovation and growth.

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Fight for a cryptocurrency hub

Web3 is the next big thing, and global policy makers are waking up to it. Countries from France and Canada to Dubai is about positioning itself as an attractive innovation center for blockchain.

In the race to be a cryptocurrency hub, Singapore has also very early signaled its interest in exploiting blockchain technology and rejected the stricter regulatory reductions in the Southeast Asia region and internationally. Thanks to this foresight, the city-state has enjoyed the reputation of being a crypto-friendly jurisdiction and attracted many players.

Unfortunately, the slow approach to licensing crypto companies and a number of regulatory measures have begun to hurt that perception lately.

Most notably, Binance – the world’s largest cryptocurrency exchange – was not licensed by the Monetary Authority of Singapore (MAS) to provide digital token services. Following a series of regulatory restrictions that led Binance to order the suspension of its payment services, the company withdrew its cryptocurrency exchange services from Singapore. Binance retains significant business here, but it is a reflection of Singapore’s attractive corporate tax law rather than its crypto – friendly laws. The crypto exchange Huobi similarly announced the suspension of its global services in Singapore late last year, presumably due to difficulties in obtaining a license.

Bybit, formerly based in Singapore, has also jumped to Dubai. The large cryptocurrency fund DeFiance Capital was placed on MAS ‘seemingly arbitrary “investor alert list.” Singapore-based companies such as Crypto.com and Three Arrows Capital began to split their workforce and set up regional bases in Dubai. The latter is now going up in flames, but the point remains: Large crypto players are increasingly experiencing that Singapore is less and less attractive as a cryptocurrency hub.

Costs of slow issuance

Singapore is beginning to reap the benefits of its crypto policies. Why the delay in issuing licenses?

Crime is reportedly one of Singapore’s main concerns. In a recent interview, MAS CEO Ravi Menon reiterated “money laundering and terrorism” as motivating factors for the slow regulatory approach.

But the idea that crypto is predominantly used for criminal activity is a persistent myth that the industry has failed to shake off.

Research from Chainalysis shows that cryptocurrency transaction volumes related to criminal activity are a small fraction of the total trading volume, which punctures the narrative that crypto serves as a vehicle for the criminal underworld. In 2021, this was only 0.15% of all crypto trading volumes, down from 0.62% in 2020.

When we break down this data further, most of these “criminal” transactions fell into the category of “stolen funds” (crypto fraud) – not terrorism, human trafficking or drugs that regulators are mainly concerned with.

Protect retail investors

The hesitation of the Singapore government is also based on protecting retail investors. In this way, Singapore moved to ban crypto ads and ATMs in January. At a parliamentary meeting last week, MAS chairman Tharman put forward the idea of further restrictions on retail participation, such as the use of financial influence in crypto trading.

In short, MAS wants to have its own cake and eat it too. MAS wants to attract institutional capital and prime itself as a crypto-friendly hub while protecting its citizens from losing money on crypto – but it’s a dream.

Banning cryptocurrency sends signals to crypto hedge funds and companies working against it. It signals that Singapore is not ready to be a cryptocurrency hub in Asia, let alone the world.

As with any new financial innovation, some retail investors will be burned, and reducing this is a worthy public policy goal. But regulators should pursue these goals in a way that does not too much obstruct the entry barrier for crypto entrepreneurs. For example, focus on prosecuting fraud and misdemeanors in retrospect, just as in traditional financial markets, instead of being a preventive gatekeeper in a sector where the pace of innovation is moving at breakneck speeds.

In Closing

Singapore wants to be a blockchain hub, but the city-state is sending out confusing signals. The speed of licensing must be less strict as crypto companies will not wait. The future of finance is in code, and owners can easily take them elsewhere with the click of a button.

Some may point out that other countries such as Japan, Germany or the United Kingdom have also banned large crypto companies. But this comparison overlooks the fact that Singapore’s economic growth does not have the luxury of being dependent on a domestic economy. Singapore’s prosperity depends on excelling in the knowledge economy, and we have only one chance to attract the best cryptocurrency that is already beginning to leave and build elsewhere. Mess this up, and future generations will be left to pick up the pieces.