Market innovation is intrinsically tied to a permissionless culture that celebrates entrepreneurship. Crypto companies want to set up in Singapore not only because of its attractive business laws but also because the city-state is primed to be an exciting cultural hub for the latest crypto-related festivals and conferences.
Banning the culture sends signals to crypto hedge funds and businesses that work against that end. It signals that Singapore isn’t ready to be a crypto hub of Asia, let alone the world.
There’s a popular saying in intellectual circles: If you’re so smart, why aren’t you rich? That retort mocks economists and public intellectuals who make bold market predictions, most of which fail to come true.
That same thinking is unfortunately rarely applied to politicians, who are commonly assumed to be prescient and all-knowing 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 as of last month — have been approved while the vast majority are still waiting.
The government claims this is the “responsible” way to regulate crypto. But these political euphemisms mask the key assumption underlying this approach, which is that our policymakers are equipped beforehand to know what will and what will not work in crypto.
They don’t. The costs of getting these decisions wrong are severe. It hamstrings Singapore’s market position in one of the fastest-growing sectors of the past decade.
Just as with any emerging technology, the crypto sector is fuelled by hype. Crypto currently sits on the growth stage of the S-Curve. Many of the ideas and products today will likely not be around in a few years.
But some will. And here’s the key point: Nobody — neither policymakers nor entrepreneurs — knows which companies and projects will survive. The Terra blockchain, for instance, was widely recognized as a “blue-chip” crypto token at a market cap of US$41 billion at its peak, and yet it has spectacularly fallen from its top.
That’s why countries that strive to lead in crypto innovation need to adopt a relatively open arms approach to entrepreneurial experimentation. This does not mean zero regulation. But forbidding the mass majority of crypto companies from operating until they receive an in-principle regulatory approval goes against the very grain of market innovation and growth.
Battle for a crypto hub
Web3 is the next big thing and global policymakers are waking up to that. Countries from France and Canada to Dubai are pivoting to position themselves as an attractive blockchain innovation hub.
In the race to be a crypto hub, Singapore, too, has very early on signaled its interest in harnessing blockchain technology and rejected the harsher regulatory clampdowns in the Southeast Asia region and internationally. Thanks to that foresight, the city-state has enjoyed the reputation of a crypto-friendly jurisdiction and attracted many players.
Unfortunately, its slow approach to licensing crypto companies and a series of regulatory measures are starting to hurt that perception as of late.
Most notably, Binance — the world’s largest crypto exchange — was not granted a license by the Monetary Authority of Singapore (MAS) to offer digital payment token services. After a series of regulatory restrictions that saw Binance being ordered to halt its payment services, the company withdrew its crypto exchange services from Singapore. Binance retains significant operations here, but that is a reflection of Singapore’s attractive corporate tax laws rather than its crypto-friendly laws. The crypto exchange Huobi similarly announced halting of its global services in Singapore late last year, presumably from difficulty obtaining a license.
Bybit, previously based in Singapore, has also jumped ship to Dubai. Major crypto venture fund DeFiance Capital was placed on MAS’ seemingly arbitrary “investor alert list.” Singapore-based companies such as Crypto.com and Three Arrows Capital began splitting their manpower and setting up regional bases in Dubai. The latter is now going up in flames, but the point remains: Major crypto players are increasingly finding Singapore to be less and less attractive as a crypto hub.
Costs of slow issuance
Singapore is starting to reap the costs of its crypto policies. Why the delay in issuing licenses?
Crime is reportedly one of Singapore’s prime concerns. In a recent interview, MAS Managing Director Ravi Menon reiterated “money laundering and terrorism” as motivating factors for its slow regulatory approach.
But the idea that crypto is predominantly used for criminal activity is a persistent myth that the industry hasn’t been able to shake off.
Research by Chainalysis shows that cryptocurrency transaction volumes tied to criminal activity are a minuscule fraction of total trading volumes, puncturing the narrative that crypto serves as a vehicle for the criminal underworld. In 2021, this was a mere 0.15% of all crypto trading volumes, down from 0.62% in 2020.
When we break down that data further, most of these “criminal” transactions fell in the category of “stolen funds” (scams within crypto) – not terrorism, human trafficking or drugs that regulators are chiefly concerned with.
Protecting retail investors
The Singaporean government’s hesitance is also predicated on protecting retail investors. In that vein, Singapore moved to ban crypto ads and ATMs in January. In a parliamentary sitting last week, MAS Chairman Tharman floated the idea of additional restrictions on retail participation, such as the use of financial leverage in trading crypto.
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 in crypto — but that’s a pipe dream.
Market innovation is intrinsically tied to a permissionless culture that celebrates entrepreneurship. Crypto companies want to set up in Singapore not only because of its attractive business laws but also because the city-state is primed to be an exciting cultural hub for the latest crypto-related festivals and conferences.
Banning crypto culture sends signals to crypto hedge funds and businesses that work against that end. It signals that Singapore isn’t ready to be a crypto hub of Asia, let alone the world.
As with any new financial innovation, some retail investors will get burned, and mitigating that is a worthy public policy goal. But regulators should pursue these objectives in a way that does not overly impede the barrier of entry for crypto entrepreneurs. For example, focus on prosecuting fraud and wrongdoing after the fact, just like in traditional financial markets, rather than be a preemptive gatekeeper in a sector where the rate 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 license issuance needs to be less strict as crypto companies won’t wait. The future of finance is in code, and its owners can take them elsewhere easily with a click of a button.
Some may point out that other countries like Japan, Germany or the U.K. have also banned big crypto companies. But this comparison overlooks the fact that Singapore’s economic growth does not have the luxury of depending on a domestic economy. Singapore’s prosperity depends on excelling in the knowledge economy, and we only have one shot at attracting the best crypto talent who are already starting to leave and build elsewhere. Mess this up, and future generations will be left picking up the pieces.
