Regulation and compliance - Singapore's crypto game in 2022

Singapore

SINGAPORE'S crypto players can expect greater regulatory scrutiny this year, but with that should also come more clarity on the space that exchanges and investors can participate in. Crypto licences will be doled out and consolidation will take place, say observers.

New regulations that take effect this year will grant the Monetary Authority of Singapore (MAS) more teeth in the regulation of digital payment token (DPT) services - which would include crypto exchanges.

For instance, MAS can require DPT service providers take steps to ensure the safekeeping of customer assets.

Entities offering custodian wallet services or facilitating transfers of DPTs will also have to be regulated, as the new rules recognise that these activities, too, carry risks of money laundering and terrorism financing.

The authorities have not stated when these amendments will take effect.

Hagen Rooke, a partner at Reed Smith specialising in fintech and financial regulations, expects the authorities to consult the industry on transitional arrangements that will allow crypto exchanges and custodians to continue offering their services on the basis of a temporary licensing exemption.

The industry is also awaiting the outcomes of 2 consultation papers. One is on a proposed omnibus Act that would require all Singapore-based entities that provide regulated DPT services to be licensed by MAS even if they only service customers outside the country.

The other touches stablecoins, and seeks input on the distinguishing characteristics of e-money versus DPTs.

"Stablecoins are an important part of the crypto ecosystem and could introduce systemic risk, including bank runs," said Chia Hock Lai, co-chairman of Blockchain Association Singapore and founding president of the Singapore FinTech Association.

"Stablecoin issuers must therefore be properly regulated, such as by ensuring they are backed by liquid assets."

The Financial Action Task Force's (FATF) updated guidance in October also paves the way for "broader supervision of the virtual asset sector" among the organisation's member countries, which include Singapore.

"The FATF has not provided any indication on a timeframe by which member countries should comply with the updated guidance, although going by past practice, an implementation review may be announced in due course," Reed Smith's Hagen said.

Compliance, coveted licences and consolidation

As regulatory pressure mounts, crypto companies will continue to beef up their compliance hiring to show regulators they have their houses in order.

Global recruiter Hamlyn Williams told The Wall Street Journal that chief compliance job searches among crypto and fintech companies last year were up 1.5 times, compared to 2020, as compliance hires have become "almost business-critical" in the industry.

A casual LinkedIn search also showed that companies offering various crypto-related services, from exchanges to blockchain gaming firms, are actively hiring for compliance roles.

As for licences, industry observers The Business Times spoke to are divided as to whether MAS will grant licences to DPT service providers at a faster pace this year.

In the almost 2 years since the Payment Services Act (PSA) came into force governing such licences, MAS has granted only 3: to DBS' securities and derivatives brokerage DBS Vickers Securities; payment fintech Fomo Pay; and Australia-headquartered crypto exchange Independent Reserve.

Chia from Blockchain Association Singapore said the pace "should accelerate", given that the number of licence hopefuls has shrunk to about 70 as at mid-December.

"The review for this first batch of DPT licence applications should conclude (in the next year)," he said.

At the same time, Reed Smith's Hagen expects MAS to continue its "very thorough and considered approach" to vetting licensing applicants.

"Ultimately, only those with the most robust compliance and governance frameworks and suitably experienced personnel are likely to make the cut," he said.

There may, however, be some pressure on MAS to act more quickly.

Daniel Lee, former head of business at DBS Digital Exchange, said aspiring licensees are experiencing fatigue. With Singapore's regulatory regime proving a tough nut to crack, and as more jurisdictions open up to crypto entrepreneurs, the city-state might see some players moving parts of their operations away, Lee said.

"When the PSA came in 2 years ago, many had high hopes. But people are now getting fatigued as they have been waiting for their licences for so long," he said.

Although Lee has left DBS, he remains in the crypto space and is looking to start a custodian and prime brokerage service.

Finally, both Chia and Lee think mergers and acquisitions are on the horizon - especially between licensed entities and the nonlicensed or late entrants.

Binance, for instance, has acquired an 18 per cent stake in local private securities exchange Hg Exchange - despite withdrawing an application to be licensed as a crypto exchange in the city-state.

Entering the crypto field

Lee said he is aware of other industry players looking to buy stakes in companies they perceived as "more likely to get a license", but declined to name them.

Gemini's former head of business development for Asia-Pacific Eugene Ng said there would also be consolidation between incumbent financial institutions and crypto companies as the former look to throw their hats into the crypto ring.

He pointed to Thailand's Siam Commercial Bank acquiring a 51 per cent interest in digital asset exchange Bitkub last year.

This should also mean a stronger resolve among crypto companies to comply with regulations, he said. Ng is working with Gemini's former managing director and Asia-Pacific head Jeremy Ng on a new crypto venture.

"To be truly successful, you need to play by the rules," he said. "You need to abide by the regulations. You cannot operate with no regard for compliance."

READ MORE: What beckons for the crypto-economy in 2022