Singapore is intensifying its scrutiny of cryptocurrency-related firms in the city-state ahead of planned regulatory changes, according to people with knowledge of the matter.  

The Monetary Authority of Singapore has sent a questionnaire to some applicants and holders of its digital-payments licence seeking highly granular information about their business activity and holdings, the people said, asking not to be identified as the process isn’t public.

The questions, which were sent over the last month, focus on gauging the financial soundness of the firms and their interconnectedness, they said, with some adding they’re expected to respond promptly. 

The regulator has asked for data including top tokens owned, top lending and borrowing counterparties and the amount loaned and top tokens staked via decentralised-finance protocols, according to the people and a spreadsheet seen by Bloomberg News that was sent to the firms.

The MAS is also checking with local crypto exchanges about the processes they follow to go live after getting a coveted digital payment token service licence to better understand the risks, one of the people said. 

The moves come ahead of anticipated changes to crypto regulation in the city-state, where authorities are grappling with encouraging innovation on the one hand, while limiting the fallout from collapsing firms and retail investors getting burnt by the volatility in the market.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

MAS Managing Director Ravi Menon will seek to address these tensions next week, and has already put the industry on notice that the scope of regulations will be broadened to cover more activities. 

“Licensees and applicants are expected to notify MAS of any events that materially impede or impair the operations of the entity, including any matter which may affect its solvency or ability to meet its financial, statutory, contractual or other obligations,” an MAS spokesperson said in response to queries from Bloomberg News regarding the questions sent to the crypto firms. MAS is unable to share details of dealings with individual firms, citing confidentiality, the spokesperson added. 

So far, the regulator has awarded more than 10 permits to crypto firms who have applied to provide digital payment token services in Singapore, a fraction of almost 200 applicants.

Singapore was early to study blockchain technology and tout its ambitions as a crypto hub. But the recent defaults of several entities with key operations in the city-state have thrust its regulatory regime for crypto into the spotlight. In particular, the interconnected collapses of companies including hedge fund Three Arrows Capital and platforms Zipmex, Hodlnaut and Vauld have highlighted the lack of extensive risk management rules for digital asset companies.

Digital payment token service providers licensed by MAS under the Payment Services Act are not currently subject to risk-based capital or liquidity requirements, nor are they required to safeguard customer monies or digital tokens from insolvency risk, an approach similar to most jurisdictions. Regulations focus on money laundering and terrorism financing risks as well as technology risks, the MAS has said.

This might soon change, according to legal experts.

“In light of the various insolvencies and counterparty defaults which have plagued the crypto industry recently, the MAS is likely to be assessing the need for additional regulatory measures to mitigate the risks that led to these distressed scenarios,” said Hagen Rooke, a partner at law firm Reed Smith LLP in Singapore. “It is possible that measures under consideration include requirements for MAS-regulated firms to obtain collateral when lending crypto, to conduct due diligence on their counterparties and to comply with liquidity and risk-based capital rules - similar to the requirements which financial institutions in traditional capital markets are subject to.”

MAS may also consider requiring retail investors to pass a suitability test before being allowed to trade cryptocurrencies or enhance mandatory disclosures to improve transparency, added Chris Holland, partner at Singapore advisory firm Holland & Marie.

While specifics on any upcoming changes remain to be seen, some companies have started to express concerns that MAS might crack down too hard. This could lead to burdensome and costly compliance requirements which will make it tough to do business in the country.

“While I appreciate the need for MAS to consider regulating the crypto space more thoroughly, I am concerned about an overreaction now, and taking decisions that potentially could stifle innovation and the country’s ability to be a leader Web3,” said Daniel Liebau, chief investment officer of the Modular Blockchain Fund at Modular Asset Management. BLOOMBERG