Crypto-tokens & ICOs to be further integrated into financial ecosystem amid strengthening of PE/VC & securities market: Monetary Authority of Singapore
The Monetary Authority of Singapore (MAS), Singapore’s central bank and financial markets regulator, is focused on integrating cryptocurrencies into the city-state’s financial infrastructure and regulating operators in the emerging sector — the city-state has emerged as the third largest hub in the world for initial coin offers (ICOs) in 2017 — as its financial technology (fintech) sector matures. It is also exploring ways to enhance liquidity in Singapore’s securities sector, as well as enhancing its private capital markets.
In January 2018, the managing director of the MAS, Ravi Menon, had said at a UBS Wealth Insights event: “I do hope when the fever has gone away, when the crash has happened, it will not undermine the much deeper, and more meaningful technology associated with digital currencies and blockchain,” with the city-state’s regulator urging investors to be cautious in dealings with virtual currencies. The MAS is open to issuing a digital currency directly to the public in the city-state, though Menon doubts the viability of this.
Meanwhile, its attitude has shifted in recent months, with the MAS cautioning the general public against cryptocurrency investments due to the perceived opacity and volatility of cryptocurrency markets.
in January 2018, Tharman Shanmugaratnam, the chairman of the MAS, commented that the regulator was extending its mandate to encompass cryptocurrencies. He stated: “When it comes to money laundering or terrorism financing, Singapore’s laws do not make any distinction between transactions effected using fiat currency, virtual currency or other novel ways of transmitting value,” adding that MAS would impose AML/CFT requirements on cryptocurrency intermediaries through a payment services bill.
This point was reiterated by Menon in a speech at Money 20/ 20, where he noted:
MAS has to-date chosen not to regulate crypto tokens directly. But we are focusing on the activities associated with crypto tokens: evaluating the different kinds of risks these activities pose; and considering the appropriate regulatory responses; all the while, seeking to ensure that we do not stifle innovation. The key risks MAS is monitoring in the crypto world are in the areas of financial stability, money laundering, investor protection, and market functioning.
In an in-depth email exchange with representatives of the financial regulator of the Southeast Asian city-state, Venture Views discusses developments related to cryptocurrencies, initial coin offers (ICOs) and the financial inclusion of virtual currencies in the city-state’s financial ecosystem.
Additionally, Venture Views discusses efforts to enhance its private equity (PE) and venture capital (capital) infrastructure, in addition to boosting the liquidity of its local securities market.
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Cryptocurrencies, ICOs & financial inclusion
With reference to ICOs, Singapore has emerged as the ICO hub for Asia and MAS has publicly expressed an enthusiasm to have Singapore serve as a platform for ICOs, even as experts grapple with the evolving role of of virtual currencies in contemporary financial systems.
However, what’s has been less clear is its position on fund managers looking to conduct equity token offerings (i.e. tokenised investment funds), given that Singapore-based venture funds like Life.SREDA are exploring the launch of the BB Fund, which will have a corpus of $100 million to $200 million raised through issuing security tokens in the city-state.
Due to security token issuers operating in a legal grey area, most ICOs in the city-state continue to be utility token sales. However, they are potentially the next major trend in the crypto-finance space.
Asked about the legal ground that such fundraising activities stood on in Singapore, the MAS explained: “MAS made an announcement in August 2017 to clarify that the existing securities regulatory regime in Singapore will apply to an offer of digital tokens where the digital tokens constitute securities under the Securities and Futures Act (Cap. 289) (SFA). Issuers or intermediaries of such tokens would be subject to licensing requirements under the SFA and Financial Advisers Act, unless exempted, and the applicable requirements on anti-money laundering and countering the financing of terrorism (AML/CFT).”
They added, “MAS sees the risk that even legitimate ICO activities could potentially be abused for ML/TF, and fraud. Companies that provide such services should have effective AML/CFT controls, including robust customer due diligence and transaction monitoring processes that serve as preventative measures against illicit activities, to protect the integrity of our financial system.”
“On 14 November 2017, MAS published a Guide to Digital Token Offerings, on the application of securities laws administered by MAS, in relation to offers or issues of digital tokens in Singapore. We have also issued the consultation on the proposed Payment Services Bill which sets out proposed AML measures applicable to virtual currency intermediaries.”
However, the cryptocurrency community in Singapore has also expressed concerns about the closure of bank accounts of cryptocurrency enterprises, which inhibits financial inclusions of cryptocurrencies in the city-state’s financial ecosystem.
Asked how it planned to address this issue, MAS disclosed: “As part of our supervisory engagements, MAS has reiterated to banks that they should not de-risk whole classes of customers. Rather, MAS’ rules require banks to adequately assess the ML/TF risk of the customer and take appropriate mitigating measures to control the risk. Such controls could range from subjecting the customer to enhanced transaction monitoring or more frequent due diligence checks, to exiting the relationship. Customers, on their part, should provide banks with relevant and accurate information to allow them to do proper risk assessment.”
“Nevertheless, a bank’s decision to exit accounts could also be based on commercial reasons, not related to risk management. In which case, MAS does not intervene in those commercial decisions on individual customers. MAS maintains close contact with the industry, including FinTechs and payment services providers, and will continue to monitor developments in this space,” the regulator added.
Meanwhile, with Japanese banks considering the launch of a digital J-Coin while Estonia ponders the issue of the Estcoin virtual currency, MAS highlighted its own attempts to test the adoption and integration of blockchain technologies and virtual currency in Singapore in the form of Project Ubin.
MAs describes this endeavour as a “collaborative project with the industry to explore the use of Distributed Ledger Technology (DLT) for clearing and settlement of payments and securities” with the aim of developing efficient alternatives to current systems through the use of a digital central bank issued tokens.
The regulator is working with the The Association of Banks in Singapore (ABS) to in a consortium to explore how to develop and deploy blockchain technologies.
To date, it has developed software prototypes of three different models for decentralised inter-bank payment and settlements with liquidity savings mechanisms. In November 2017, it announced the release of a report and source-codes on distributed ledger prototypes for inter-bank payments, as part of the second phase of Project Ubin.
In a speech at the Singapore Fintech Festival 2017, MAS’s managing director, Ravi Menon, shared that the project, which was launched as a way to dis-intermediate the payments and settlements domain, had been extended beyond Singapore through a collaboration on cross-border payments with the Bank of Canada using blockchain technology.
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Securities liquidity & PE/VC ecosystem
Even amid the surge of venture capital into crypto startups, with heightened concern among Singaporean VC’s that they are losing on deal flow due to this, the MAS is also focused on strengthening the more traditional PE/VC segment of its financial ecosystem, as well the liquidity of its securities market.
Singapore is engaged in heated competition with Hong Kong to be Asia’s financial centre and claims it surpasses Hong Kong as an Asian business hub, which excels as a super-connector and gateway for China-focused enterprises.
While the city-state’s bourse lags in IPO volumesand aggregate market cap compared to Hong Kong — which has been propelled by a number of large-cap listings in recent years — it arguably excels in the listing of property and business trusts, as well as attracting and distributing international capital. However, it faces stiff competition from bourses across the Indo-Asia Pacific. This has seen both Hong Kong and Singapore institute dual-class share structures in order to strengthen their listing pipelines.
According to PWC reports, it will also continue to maintain an edge in property and mineral, oil & gas listings, with property and business trusts, as well as F&B to drive IPOs in 2018.
In January 2016, the Singapore Business Federation (SBF) proposed the use of funds from Singapore’s Central Provident Fund (CPF) to boost the liquidity of the local securities market in “A Position Paper for a Vibrant Singapore”.
Small states such as New Zealand have seen strong returns from investing in high-growth domestic enterprises, while the capital markets of Japan and Australia are underwritten by investments from their respective pension funds. The global advisory Willis Towers Watson estimates that at the end of 2016, Singapore’s CPF has assets under management (AUM) of $227.1 billion, making it the ninth largest pension fund globally.
Asked if something comparable could be implemented in Singapore, in order to boost the liquidity of the local bourse, the Singapore Exchange (SGX), MAS noted: “The Central Provident Fund Board (CPFB) invests CPF monies in Special Singapore Government Securities (SSGS) that are issued and guaranteed by the Government. However, the CPF Investment Scheme provides flexibility for individual members to invest in the local capital markets — members can invest their CPF savings in various instruments on the Singapore Exchange including shares and exchange-traded funds (ETFs).”
“A deep and vibrant capital market is vital to the functioning of a healthy financial ecosystem. MAS aims to develop vibrant public and private capital markets that can address the enterprise financing needs at different stages of a company’s life-cycle.”
The MAS added, “Singapore’s debt capital markets have been doing well, and our private funding market (venture capital and private equity) has been growing rapidly. But there is scope to strengthen our equity markets.”
According to the regulator, it it currently engaged in collaborations with industry players to “study ways to further reinvigorate our equity market, including possible ways to unlock domestic institutional liquidity into our equity market”, with measure that include enhancing the private markets and pre-IPO landscape.
One measure that could boost liquidity significantly in Singapore’s equities markets, as gauged by turnover velocity on the SGX, is the greater adoption of automated trading systems; the ageing demographics of the retail investor base in Singapore, coupled with its small population, necessitate greater automation of trading systems in the city-state’s stock market.
A Fortune report in 2013 noted that electronic trading accounts for 79% of stock trading volume in the US equities market while a recent account in The Washington Post estimates robot traders to be responsible for up to 90% of the trades on the stock market — a claim that correlates with a Bloomberg report.
Given the growing importance of such cognitive technologies to capital markets — specifically in domains such robotic process automation and machine learning — greater automation and adoption of robotraders, as exemplified by firms likes AlgoMerchant, which provides robo-traders to different categories of investors, as well as aligning with Singapore’s push to be an AI hub.
As for the private equity and venture capital sector? Traditionally, Hong Kong has been the centre for private equity (PE) and venture capital (VC) funds in the Indo-Asia Pacific, having been built on Western capital flows during its time as a British colony. MAS plans to position Singapore to challenge Hong Kong in this regard, havving announced in October 2017, a simplified regulatory regime for managers of VC funds.
MAS claims that the this simplified VC manager regime will “enhance the operating environment for VC managers to play a greater role in supporting start-up and growth stage businesses”, as part of a broader effort to enhance the city-state’s value proposition as a pan-Asian hub for fund management and domiciliation activities centre.
Currently, the regulator is in the midst of developing a new corporate structure known as the Singapore Variable Capital Companies (or S-VACC) for investment funds; these are meant to offer flexibility in accommodating both traditional and alternative (e.g. private equity) strategies.
The MAS notes: “The S-VACC tax framework recently announced at Budget 2018 will make Singapore more business friendly by availing S-VACC companies to tax exemptions. This aims to boost the venture capital and private equity ecosystem that can in turn support the financing of new Asian growth companies from Singapore. If done well, this can also create a stronger pipeline of companies that could be qualify for eventual IPO listing.”
The regulator is also focused on strengthening the talent and research ecosystem of the city-state, in terms of identifying crucial sectoral areas that play to Singapore’s strengths, as well as exploring the use of incentive schemes to enhance equity research in these sectorial domains.
See:
SGX needs international partnerships to remain competitive: Alex Frino, University of Wollongong
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