Singapore recently passed a law that will tighten rules for cryptocurrency service providers in the city-state.
The legislation, the Financial Services and Markets Bill, requires digital asset providers created in Singapore but that conduct business overseas to be licensed and subject to local Anti-Money Laundering (AML) and Combating the Financing of Terrorism (CFT) requirements.
“The new law plugs a gap where no single jurisdiction has sufficient regulatory hold over a specific crypto service provider due to the internet and digital nature of its business,” said Adrian Ang, co-head of Allen & Gledhill’s fintech practice and its environmental, social and governance and public policy practice. “The effect of the new bill is that crypto service providers will need to be at least licensed or registered in the jurisdictions where they are created,” he added.
Cryptocurrency players operating in Singapore are already regulated by the Monetary Authority of Singapore (MAS), but the new law also gives the financial watchdog the power to conduct inspections of digital token service providers doing business overseas, and also to assist foreign regulatory bodies and agencies on investigations.
New legal and regulatory frameworks indicate a proactive willingness on Singapore’s part to acclimate to the cryptocurrency ecosystem, unlike its neighboring countries, which have imposed outright bans on the digital payments sector. China has opted for complete prohibitions on cryptocurrency trading; so has Indonesia and, most recently, Thailand.
Singapore has been cautious with its approach, though. In January, the MAS issued guidelines that cryptocurrency service providers should not promote their services to the general public in the city-state. In exercising its caution, the MAS has also denied applications to more than 100 cryptocurrency firms seeking to launch operations on its soil.
Last year, MAS ordered Binance, one of the world’s largest cryptocurrency exchanges, to stop providing payment services in Singapore and to cease soliciting business from its residents. MAS also placed Binance.com on its Investor Alert List in September to warn consumers in Singapore that the platform is not regulated or licensed in the city-state to provide payment services.
The Singapore affiliate of Binance has since announced that it has withdrawn its local license application and wound down its digital payment token business in Singapore.
“The new law will affect the attractiveness of Singapore as a crypto hub,” said Chia Ling Koh, director at Osborne Clarke’s Singapore office—known there as OC Queen Street. “Crypto players in Singapore will have to revisit their business models and assess the need for licenses.
“Still, Singapore’s new law may boost the credibility of crypto players who remain in Singapore, given the stricter regulatory requirements and MAS oversight. Greater credibility is certainly a boon for crypto players, especially given crypto’s poor repute as a lemons market,” said Koh.
Indeed, history has so far shown Koh to be right. In spite of stricter regulations, investment in the cryptocurrency and blockchain sector in Singapore grew tenfold last year. According to a KPMG fintech report, Singapore saw 82 deals worth a combined $1.48 billion in 2021.
Some recent high-profile cryptocurrency deals include a $150 million partnership between Bybit, a Singapore-based cryptocurrency exchange established in 2018, and Red Bull Racing. The deal means that Bybit, which has over 6 million registered users globally, will become Red Bull Racing’s exclusive cryptocurrency exchange partner. The partnership also means that Red Bull will be able to boost fan engagement by issuing “fan tokens” and by distributing its digital assets.
As the cryptocurrency market continues to grow, lawyers say it’s important for the frameworks governing cryptocurrency to be even more robust.
“There needs to be regulation around the crypto exchanges in the same way that the stock exchanges or the stockbrokers are regulated,” said Danny Ong, a Rajah & Tann partner who recently acted on a landmark fraud case that succeeded in recovering about $7 million in cryptocurrencies that were stolen from an American entrepreneur last year.
“There should be regulation around capital maintenance, and compliance and risk frameworks need to be employed,” said Ong. “Compliance in terms of the depth of AML that is done in relation to account holders. I don’t see why they should be treated any differently. And given the anonymous nature of the crypto transactions, in fact, one could say that they should be treated more stringently.”
Allen & Gledhill’s Ang highlights other gaps in the governance of cryptocurrency service providers and transactions. An industry standard for operating systems that can address AML and CFT risks needs to be developed and be implementable from a practical perspective, he says.
All three lawyers agree that more regulations are likely. In January, Singapore passed the Payment Services (Amendment) Act 2021. It has yet to take effect but when it does, certain activities relating to cryptocurrencies, including the transmission of cryptocurrencies, brokerage services for cryptocurrencies and custodial services for cryptocurrencies, will be regulated.
“I expect that there will be an increasing focus on the incidental and secondary parts of the proposed business activities of crypto service providers, as more aspects of crypto activities become regulated,” said Ang. “Lawyers will need to ensure that seemingly minor or incidental parts of a crypto business activity do not invariably trigger any additional regulated activities.”
Stricter regulations will prove a boon, as well, for fintech lawyers in Singapore.
“In the near term, there would likely be an increased volume of legal work for lawyers providing crypto advice,” said Koh. “Legal assistance would certainly be required for crypto players to perform a cost-benefit analysis of remaining in Singapore in light of encroaching regulations.”
It’s a difficult balance to strike. Singapore has great ambitions to become a global cryptocurrency hub, but to realize that goal, it needs to first grapple with and address the multitude of risks the fast-growing sector presents.
“I think Singapore wants innovation to take off—not the crypto market per se,” said Koh. “With heavy regulation, innovation will naturally take a beating. It’s hard to balance innovation and Singapore’s reputation as a global financial hub. In the end, something has to give way.”