Ravi Menon

Singapore’s central bank governor provides insight into its regulatory approach to the crypto sector, which aims to mitigate risks while leaving the door open for opportunities to co-create solutions with the industry.

Q: What guides the Monetary Authority of Singapore’s (MAS’s) approach to the cryptocurrency market and ecosystem?

A: We look at the larger digital asset ecosystem, in which cryptocurrencies are just a small part. There are three distinguishing features: blockchain or distributed ledger, tokenisation and encryption. Taken together, these features make the crypto ecosystem potentially a transformative technology.

Given this vision, our approach is focused on growing capabilities and managing risks. We are encouraging talent development, providing grants to bring in innovation, and collaborating with the industry to explore the potential of blockchain technology through real value infrastructure experiments. For example, JPMorgan partnered with DBS Bank and Temasek to establish Partior, a multi-currency, cross-border settlement platform leveraging blockchain technology.

However, the ecosystem will not succeed if we don’t manage the risks. And there are four risks in the crypto ecosystem that MAS is watching closely: money laundering and terrorism financing risk; technology and cyber risk; consumer protection; and financial stability.

There are four risks in the crypto ecosystem that MAS is watching closely: money laundering and terrorism financing risk; technology and cyber risk; consumer protection; and financial stability

Our approach is to regulate digital asset related services and service providers on an activity basis, rather than an entity-based approach. The risks depend on the underlying characteristics of the digital asset — you can’t have a one-size-fits-all approach towards regulation.

In the past two years, we’ve granted licences, or approvals in principle, to 11 digital payment token service providers, including stablecoin players like Paxos and crypto exchanges like Coinhako, and established financial institutions like DBS Vickers.

The licensing process is stringent because we want to be a responsible global crypto hub. We examine their track record and only approve applicants with strong governance structures, a fit board and proper management.

Our approach will continue to be adaptive, evolving and consultative to regulate this fast-moving space. We use guidance before we use legislation.

Q: What can other global central banks learn from MAS’s approach?

A: Be clear about the specific risks that are being posed and regulate for those risks. We want to do this in a way that surgically addresses the risks that the crypto ecosystem throws up, while maximising the space for innovation. This is why we’ve taken an activity-based approach.

Internationally, one of the issues we need to address is the question of stablecoins. They are gaining in prominence and I think they are promising. But if stablecoins are pegged, or equivalent in value, to fiat currencies, then it’s almost as good as a deposit. If that’s the case, then we must pay close attention to how much of this backing is real, liquid and available when it’s required.

Q: What were the main takeaways from Project Dunbar?

A: This is exciting work that we’re doing with the Bank for International Settlements (BIS), together with Bank Negara Malaysia, South Africa Reserve Bank and Reserve Bank of Australia. The ‘Holy Grail’ is instantaneous cross-border payments and real-time settlements to remove risk of uncollateralised positions. We also want lower costs and very high security.

Project Dunbar is focused on a shared platform that would enable international settlements using central bank digital currencies (CBDCs). MAS experimented bilaterally with Bank of Canada on Project Ubin a few years ago. We are now trying to scale that through this effort with BIS to have CBDCs issued by multiple central banks for the purpose of payments and settlements within a decentralised platform.

We also want to use the opportunity to identify the challenges of implementing a multi-CBDC platform that is shared across central banks, such as national security concerns that are associated with sharing critical infrastructure.

Access is another question being looked at. We do need the non-banks in the picture because not everyone has a bank account. In addition, there are issues about jurisdictional boundaries, such as reconciling different laws, regulations, guidelines and protocols that govern payments.

We just finished phase one of Project Dunbar, which has developed a blueprint that can facilitate future discussions on some of these key issues that are not resolved yet. I hope we will see the germ of a common settlement platform in the not-too-distant future.

Q: Does decentralised finance (DeFi) present risks or opportunities for the traditional financial system?

A: I think DeFi will be part of the future, but I don’t think it will be the future. There will be a need to, and a case for, having direct peer-to-peer financial services provided via decentralised protocols, like blockchain, in a Web 3.0 world. With self-executing smart contracts, you don’t need an intermediary. I can imagine a range of simple financial services that could be provided in that way and will disintermediate the banks to some extent.

But there’ll be a large category of financial services that will still require customisation, a degree of trust and direct connection between a financial institution and customer. I think the two will coexist and it will be a very interesting dynamic to watch in the coming years.

This interview, conducted during the FT/The Banker Crypto and Digital Assets Summit on April 28, has been edited for brevity and clarity.

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