FT Cryptofinance: Lessons from Singapore

Welcome to the FT Cryptofinance newsletter. This week we are asking if there are lessons to be learned from Singapore’s approach to regulating the industry.

Broadly speaking, there have been two approaches when it comes to regulating crypto.

Some countries have sprung into action quickly, trying to turn themselves into a “crypto hub”. Usually driven by politicians driven by fear of missing out on the alleged future of finance. Others have been more cautious, worried about a weakening of regulatory standards. Singapore fell into the first camp; the EU the second.

Those jurisdictions trying to claim early mover advantage — that perhaps once looked at Singapore with envy — may want to pause.

This week the city-state effectively performed an inelegant manoeuvre and proposed a series of new regulations aimed at bolstering the jurisdiction’s grip on bad crypto behaviour.

The original plan was to leverage Singapore’s reputation as a stable, tech-friendly, educated country with an attractive tax environment. But that has recently been tarnished by a swath of high-profile controversies.

On Wednesday, the Monetary Authority of Singapore published two consultation papers. My colleague Mercedes Ruehl and I wrote about it here. MAS said:

“Several misconduct cases have been reported by international media, including where legal proceedings were commenced against entities that did not have sufficiently robust business conduct practices in place,” it said.

You can say that again. In just the past few months, Do Kwon’s disappearance, and collapses at Three Arrows Capital and Hodlnaut have undermined Singapore’s crypto approach, and now, the city-state’s regulator seems to have noticed.

Back in June, the MAS’s chief fintech officer Sopnendu Mohanty said Singapore would be “brutal and unrelentingly hard” on bad crypto behaviour. To propose tougher consumer protection laws — after the consumers you are meant to protect were left exposed to some of the worst failures in the crypto industry’s history — just doesn’t strike me as behaviour that lives up to a promise like that.

“This extraordinary Game of Thrones-like battle to be the crypto hub is absurd,” former chief of the SEC’s Office of Internet Enforcement John Reed Stark told me. “While the goal is admirable . . . crypto, blockchain and Web 3 are not the way to get you there. Ironically, they take you in reverse,” he added.

A city-state once described by industry giant Binance as a “crypto paradise” is no longer leading from the front but is instead looking at what Europe has done.

Buried deep in the MAS proposals, the regulator “encourages” digital payment token trading platforms to put “good industry practices” in place to detect and deter unfair trading — things such as market manipulation, misleading conduct and insider trading.

This is remarkably similar to parts of Europe’s long-debated, now imminent, Markets in Crypto-Assets regulation. Indeed, MAS acknowledged the debt, saying: “These practices are similar to regulatory proposals put forward in other jurisdictions such as in Hong Kong and the EU.”

But what it may ultimately reveal is that EU’s marquee legislation becomes the global approach. After all, the EU is a regulatory powerhouse regardless of the industry. It’s one of the world’s biggest markets. Size matters. When it makes decisions, other jurisdictions take notice.

But what was notable about MiCA was the degree of acceptance from the industry itself. Circle’s chief strategy officer and head of policy Dante Disparte said in the summer that MiCA offered a “pathway for Europe to emerge as a competitive region for the safe, sound development of an always-on financial system”.

In my view, industry buy-in can be interpreted two ways: that the crypto has successfully lobbied for rules it likes so it can continue as it likes, or that those rules aren’t going to be so prescriptive, unexpected and stultifying that people will look elsewhere to expand their businesses.

That’s the idea anyway; the question is whether MiCA will meet those goals when it comes into force, probably next year. But if nothing else, the slower approach is more likely to prevent the awkward dance performed by Singapore.

What’s your take on Singapore’s recent crypto moves? Email me at scott.chipolina@ft.com.

Weekly highlights

• Two years ago banks faced the problem of holding on to their most knowledgeable crypto people when the excitement and money were clearly to be found working in the digital assets industry. Now Washington regulators face the same issue. Letters published by Punchbowl show that big names on Capitol Hill like Elizabeth Warren and Alexandria Ocasio-Cortez have asked several US agencies why their talent keeps jumping ship to crypto.

• The US Department of Justice alleged two Chinese citizens paid a US law enforcement officer more than $60,000 in bitcoin in order to gain information on a probe and prosecution relating to a Chinese company. Catch up on the story here.

• Bitcoin mining platform Core Scientific has spooked the industry after warning it may file for bankruptcy as it expects to run out of cash by the end of the year. Industry observers have speculated whether flat bitcoin prices and high energy costs would claim big players in the mining industry. Definitely one to watch.

• Lisa Cameron, chair of the UK parliament’s group on crypto, has called on the UK’s latest prime minister, Rishi Sunak, to provide clarity over the UK’s commitment to digital assets. It’s probably not top of Sunak’s priority list but you never know — he backed plans for the UK to become a global tech hub. Perhaps we’ll hear more shortly of the government’s non-fungible token. Like what it’s supposed to represent, for instance.

Soundbite of the week: Remember when WhatsApp went down? Crypto has its say

You probably noticed WhatsApp go down this week.

Freed from the distractions of group chats, maybe you mused that an outage underlined the risks of relying on a centralised service.

If so, you’re not alone. Paolo Ardoino, chief technology officer at Bitfinex, offered similar counsel.

“Today’s outage on WhatsApp underlines the inherent vulnerabilities of Web2 applications that are reliant on a centralised, third party. As well as entrusting their privacy with applications such as WhatsApp, users are also placing business critical interactions at risk, should its services fail.”

Yes, that’s an executive of a centralised crypto exchange that, as it happens, suffered a hack of its own in 2016, which earlier this year came sharply back into focus in the wake of an alleged multi-billion dollar money laundering case.

Data mining

Digital asset investment products, like exchange-traded funds and notes, or closed-ended investment funds established as trusts, have been declining in popularity since the air came out of the crypto market.

According to data shared by data analytics platform CryptoCompare, average daily aggregate product volumes have fallen under $100mn this month. Barring a late surge, that would make it the worst month since June 2020, just as the bull run was about to get going.

The figures are part of a wider story. Last year, when popular cryptocurrency prices were surging, or going “to the moon” as the lingo has it, prices were buoyed by flattering narratives about digital gold or hedging against inflation.

This year’s crash proved those narratives no longer make sense and the result is a lot less excitement about crypto tokens.