Crypto: A regulatory balancing act
BY any measure, 2022 was a disastrous year for cryptocurrencies. The collapse of Terra Luna and its sister coin TerraUSD sparked a wave of failures, including Singapore-based hedge fund Three Arrows. The shockwaves intensified later in the year when crypto exchange FTX failed amid charges of fraud against its founder Sam Bankman-Fried.
While FTX was not a regulated entity in Singapore, Singapore users reportedly accounted for the second-largest share of web traffic to FTX. It also emerged that alongside other institutions, Temasek was an investor in FTX. It has said it would write down its investment of US$275 million.
Not surprisingly, the crises spurred selling pressure and wiped out much of the value of tokens like Bitcoin. At its peak, the overall crypto market was valued at around US$3 trillion in 2021. As at February this year, the market had lost some US$2 trillion in value. The fallout from the series of bankruptcies has yet to settle.
Just last week, the US Securities and Exchange Commission (SEC) brought a fraud suit against the founder and company behind TerraUSD. The SEC and Commodity Futures Trading Commission have also filed separate complaints against Bankman-Fried.
Amid the ongoing upheaval, Hong Kong’s Securities and Futures Commission (SFC) has signalled the city’s ambition to establish itself as a digital assets hub, in stark contrast to mainland China which has banned crypto trading and mining. The SFC’s just-published consultation paper proposes to license digital-asset trading platforms and allow retail investors to trade, subject to “robust” safeguards. These include provisions for safe custody of assets, cybersecurity, and measures to prevent money laundering and market misconduct. Client onboarding, for example, may feature suitability, knowledge and risk assessments. Tokens allowed on platforms may be limited to large-cap assets. The licensing regime is expected to begin in June.
Hong Kong’s stance may well usher in a flood of monies, as other jurisdictions – notably the US – move to tighten investor access. In New York, regulators ordered Paxos Trust to stop creating more BUSD tokens; BUSD is a stablecoin pegged to the US dollar launched by Binance and Paxos. Separately, the Kraken exchange was ordered to cease providing interest to retail investors who lend it cryptocurrency, a process called “staking”.
On its part, Singapore has taken a cautious stance, particularly with regard to retail investors, even as it seeks to build an “innovative and responsible” digital asset ecosystem. With regard to retail investors, the Monetary Authority of Singapore (MAS) has said its “targeted” regulatory measures seek to “anchor high-quality players with strong risk management and value propositions, mitigate the risks of consumer harm, and educate consumers…”.
Under a proposed framework for digital payment token services, retail investors would not be allowed to borrow to purchase crypto or to engage in leveraged transactions. Platforms would also be barred from staking or lending out retail investors’ assets. Neither can platforms use incentives to entice retail clients, nor utilise celebrity endorsements.
To be sure, MAS will monitor Hong Kong’s progress closely. Singapore’s ambitions are broader than cryptocurrency trading, and extend into innovation in blockchain applications for finance. A licensing framework with restrictions on certain activities may well deter some players and dampen fund inflows. But on the flip side, stable institutions are likely to vote in favour of a regime with strong governance and deterrents for fraud and theft.
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