Singapore, once the go-to place for major cryptocurrency companies, is now looking at losing a few as it tightens regulations and seeks to have stronger oversight.
The city state recently passed regulation that will tighten rules for cryptocurrency service providers based there.
The Financial Services and Markets Bill requires all cryptocurrency firms based in Singapore to be licensed. This requirement now applies even to firms that exclusively serve offshore clients.
The development could serve as an important playbook for countries looking to attract cryptocurrency firms and eventually profit from them through taxes. However, they need to balance it with their ability to stay compliant with evolving regulations on anti-money laundering (AML) and anti-terrorism (ATL) around the world.
Live and let live
Cryptocurrency service providers operating in Singapore were already regulated by the Monetary Authority of Singapore (MAS).
But the new law gives the regulator the power to inspect Singapore-based service providers operating overseas, as well as the legal mandate to assist foreign regulatory bodies and agencies on investigations.
The new legal and regulatory framework indicates a proactive willingness on Singapore’s part to acclimatize to the cryptocurrency ecosystem, in contrast to outright banning the asset class in some countries, experts told Forkast.
“So long as this provision is in place, and so long as licenses prove difficult to acquire, it’s unlikely that Singapore can maintain any credible ‘Crypto Capital of Asia’ narrative,” Andrew M. Bailey, an associate professor at Yale-NUS College in Singapore and a fellow at Bitcoin Policy Institute, told Forkast.
See related article: Singapore tightens regulations on crypto, again
Singapore was once the go-to destination for cryptocurrency firms fleeing crypto crackdowns in China. But the exponential growth and “crypto hub” image came with increased global scrutiny that prompted the MAS to step in with newer regulations, experts said.
Crypto’s promised land?
Already, Singapore-based cryptocurrency exchanges Crypto.com and Bybit have announced they will be setting up offices in Dubai, as the industry continues its migration towards the United Arab Emirates (UAE).
Binance moved its operations away from Singapore and recently announced its successful acquisition of crypto licenses in Dubai.
“It is true that some of them (crypto companies) are moving away,” David Lee Kuo Chuen, a professor at Singapore University of Social Sciences, told Forkast. “I must admit that the pace of the license granting is not to the expectation of the industry.”
Since the commencement of the Payment Services Act (PS Act), which came into effect in January 2020, around 170 applicants have applied to provide Digital Payment Token (DPT) services. But only four financial institutions have been granted licenses so far, according to the MAS website.
“Investor protection and economic stability serve as key foundational priorities for us, and digital payment token (DPT) service providers are regulated under the Payment Services Act, primarily for money laundering and terrorism financing risks, as well as technology risk,” a MAS spokesperson told Forkast.
However, while they await a license, many firms currently operate under an exemption from the MAS. The exemption is in force until the application is approved or rejected by the MAS, or withdrawn by the applicant.
Meanwhile, Singapore slipped from its top spot as world’s most crypto-friendly country in a ranking compiled by Coincub.com.
Government decisions to restrict the advertising of cryptocurrency services by Virtual Asset Service Providers (VASPs) outside of their websites, and a clampdown on Bitcoin ATMs, pushed the city state to second place, according to the latest Coincub Global Crypto Ranking research.
Singapore had ranked first in the previous quarter due to a progressive cryptocurrency economy, Coincub noted.
“Standards and best practices around security, outages, reporting, custody and market integrity set the bar high, and for this reason not every application is viable,” observed Ben Caselin, the head of research and strategy at cryptocurrency exchange AAX, told Forkast.
“Standards are still being articulated, and the general requirements on exchanges are not easily achieved by the majority of exchanges,” Caselin said. “We can only speculate as to the exact reasons, however, but what we can say is that this is a delicate process that needs time.”
Andrew Sullivan, founder and writer at AsianMarketsense.com, told Forkast that Singapore earlier welcomed cryptocurrency companies, especially after China’s clampdown, but has been slow in actually setting out the regulatory framework for how they could operate.
Sullivan said that Singapore, like a lot of places, is trying to work out how much to regulate the sector, balancing the attractiveness of having the business without being seen as an easy touch, especially under know-your-customer (KYC) and money laundering worries.
“Dubai currently is taking a more open approach and allowing operations with little regulation,” Sullivan said. “Interestingly, it is also the center of a number of crypto conferences.”
See related article: Is Dubai the new crypto promised land?
Finding the right balance
While the regulator restricts cryptocurrency service providers from marketing or promoting their services to the general public, firms are allowed to advertise on their own websites, official social media accounts and mobile apps, as long as associated risks are clearly outlined.
See related article: Singapore central bank warns against crypto marketing, promotion
“MAS will continue to work with both the financial industry and the broader ecosystem to find the right balance in harnessing the benefits while managing the risks,” the MAS spokesperson told Forkast.
Industry experts believe that Singapore is prioritizing institutional priorities over retail.
It is more likely, therefore, to seek institutional investment, and custodial services, to gaming and finance (GameFi) and non-fungible tokens (NFTs).
“MAS strongly welcomes innovative blockchain technology development, and our doors are open to crypto players looking to explore developments in value-adding use cases,” the MAS spokesperson told Forkast.
“We recognize the blockchain technology underpinning cryptocurrencies can bring potential benefits, and that such technologies can be used to enhance efficiency and cost effectiveness of cross-border payments and trade finance,” the MAS spokesperson added.
See related article: How Singapore is reimagining its ‘Asian crypto hub’ image
Though some may relocate to other jurisdictions where regulations and policies are evolving, Singapore may still remain the first port of call for firms being banned outright.
“It’s an inflow-outflow issue,” Lee Kuo Chuen added. “I expect more people to move into Singapore over the next 12 months.”
“Of course, this exponential growth cannot continue because there must be some tipping point,” he said. “You cannot have an overheated market.”
AAX’s Caselin concurred: “We shouldn’t think too exclusionary at this stage in the development of this nascent industry,” he said. “Many crypto firms, especially exchanges, will be looking for multiple licenses to serve different markets differently,” he added. “Even exchanges taking a step back (from Singapore), may in future re-approach the regulator.”
“Unfortunately, in a euphoria, when a market is hot, people tend to forget about risk-management, and sometimes regulators have to cool it down,” said Lee Kuo Chuen.