Could Singapore be a cryptocurrency hub?

IF 2018 was volatile for markets generally, then for cryptocurrencies, it was an adrenalin-inducing roller-coaster ride of soaring asset prices, speculation and massive slumps.

Fortunes were made and, in many cases, lost. A new capital-raising phenomenon, the Initial Coin Offering (ICO), saw billions of notional value raised by blockchain ventures, many of which have failed to deliver on the promises made to investors. And in its tenth year, the first cryptocurrency, bitcoin, reached a valuation approaching US$20,000 before slumping to US$3,200. Legendary investor Warren Buffett even described bitcoin as "rat poison".

Plenty then to fuel the argument that cryptocurrencies are a fad. Except that, with due respect to the detractors, they are not. Much like the technology boom and bust of 2000, focusing only on the short-term price action clouds the long-term paradigm shift at hand.

Underneath the hype, the underlying applications for blockchain and cryptocurrency-backed digital assets are only now being explored. The cryptocurrency markets themselves are maturing quickly and institutional investors are taking note. Having been a trader in the markets for over 25 years, I am more excited about cryptocurrencies and the flood of related disruptive technologies than about the Internet. It's the most exciting transformation in my professional life.

So why have cryptocurrencies tanked?

Part of what we saw towards the end of 2018 was a predictable (if painful for many) shakeout of some of the more speculative aspects of the market. In our view, as liquidity providers and market-makers, it wasn't the end of cryptocurrencies, rather a shift to the next phase of the development cycle just as we have seen in other asset classes. But for cryptocurrencies and digital assets to become truly mainstream, some basic building issues need to be patiently and prudently addressed.

BUILDING TRUST

Part of the ethos of cryptocurrencies is that they are decentralised; however for institutions and governments to be comfortable with cryptocurrencies, know-your-customer (KYC) and anti-money laundering (AML) concerns are critical issues. Nobody wants to trade digital assets that support terrorism or organised crime or be exposed to the risk that represents.

Such is the concern around KYC and AML that many cryptocurrency firms are being denied bank accounts, a very basic inhibitor of the digital asset economy. Regulatory clarity is essential. Among the region's regulators, the Monetary Authority of Singapore has taken a welcome lead, for example in the area of Initial Coin Offerings.

The industry also needs to do its part. From the perspective of a market maker and liquidity provider, we apply the same rigorous standard of KYC and AML that we would to any counter-party in any asset class. There are some characteristics peculiar to cryptocurrencies that need to be addressed, such as chain of custody of ownership on the blockchain.

Technology providers are beginning to address these particular problems while banks too are looking at how they serve the cryptocurrency economy. We may see disruptive new technologies and ideas but for now these are necessary first steps to building trust.

CUSTODY

Another foundation stone of a robust market is custody. That is knowing that the assets you are investing in are being held in a safe place.

Cryptocurrencies are distinct from traditional assets in that they are kept in digital wallets, dubbed hot and cold wallets, reflecting various characteristics and levels of security.

Wallets present challenges for traditional custodians and new processes and capabilities are needed. Already, US investment giant Fidelity and niche providers such as Gemini Trust Company have begun to develop robust frameworks and are providing custody services for some digital assets.

Once custody is cracked and becomes more mainstream, institutional can flow more freely into the asset class and the market will be able to develop more depth across lending, financing and treasury.

LONG VERSUS SHORT-TERM THINKING

There is no doubt that in the ICO boom of 2018, there were elevated and unmet expectations. There was speculation and some bad actors. Even for the better ICOs, very little thought was placed on the after-market value of the tokens being sold to investors.

In 2019, we expect fewer ICOs and as the regulatory picture becomes clearer, more STOs or Securitised Token Offerings. These are tokens pegged to underlying assets, increasingly regulated as securities.

For these ICOs and STOs to be successful, blockchain startups will need to think more like traditional companies planning a stock market flotation. This means considering not only the short-term gain of raising money through issuance, but also the long-term liquidity and "token-nomics" of what they are issuing. This includes supporting a robust ecosystem of their post-launch tokens. If they don't, their businesses won't be sustainable.

As market makers, we're already looking at how we can play our part in helping promote a healthy and sustainable after-market.

THRIVING ECOSYSTEM

The centre of gravity of digital asset markets is already in Asia. As these important building blocks are put into place, the market can only become more robust. As important will be encouraging an active and thriving ecosystem backed by sound oversight and regulation. Singapore, as one of the top three ICO centres, already has the former and with progressive and careful oversight is ideally positioned to be a global leader as the cryptocurrency markets mature. Trust, legitimacy and prudent privacy protection will drive digital assets forward. These are notions the Singapore brand can well be associated with.