Monetary Authority of Singapore MD Ravi Menon on the good, the bad, and the ugly of crypto tokens
While crypto token began life as the medium of exchange within the blockchain ecosystem, it has now assumed a life of its own, outside the blockchain.
Mr Menon gave his remarks at Money20/20 Asia Conference.
“The past year has seen explosive growth in the trading and use of these crypto assets. We have also seen a roller-coaster ride in their prices,” said Mr Menon.
He cited the example of Bitcoin, the most well-known crypto currencies or assets which hit a high of nearly US$20,000 in December last year and then lost two-thirds of its value in just over a month.
According to Mr Menon, MAS has been watching the crypto space with great interest. Although its views are still evolving, he shared some of the current state of thinking and evolving regulatory approach.
Are crypto tokens money?
A common use case for crypto tokens is payment. However, it does not make them an equivalent to money, which is determined by its ability to fulfil the 3 basic functions of money: as a medium of exchange, a store of value, and a unit of account.
According to Mr Menon, no crypto token currently meets these three functions in sufficient measure to qualify as money.
He said crypto tokens are not widely accepted as a medium of exchange in any market, let alone across any variety of transactions, with the possible exception of the dark web.
He also pointed out that payment transactions in crypto tokens are often slower and more expensive than conventional electronic transfers of funds. Also, crypto tokens cannot be a store of value due to their high volatility.
However, Mr Menon did not rule out the possibility of crypto tokens becoming money.
He noted that a second generation of crypto tokens is emerging, to address some of the current challenges related to network congestion, transaction time, energy costs, money laundering risks, and importantly, price stability.
“The litmus test will be public trust and acceptance,” he said.
“Will people put their faith in money that is not backed by a trusted public institution like a central bank dedicated to protecting its value?”
The good, bad, and ugly of crypto tokens
Mr Menon acknowledged that whether crypto tokens become money or not, they are here and they pose a variety of issues. He continued his remarks on the good, the bad, and the ugly of crypto tokens.
The potential benefits of crypto tokens lie in the distinct characteristics of underlying blockchain technology.
First, it is a distributed ledger. It provides a record of who owns a given asset at any moment in time and an immutable record of all transactions in that asset.
Second, it is a protocol for establishing trust among diverse parties in a decentralised system: (1) where everyone has access to the same record; (2) the data are secured by advanced cryptography; and (3) transactions are executed by smart contracts in accordance with pre-agreed terms.
As such, blockchain is suited for applications where it is important to know the histories of ownership. Such application fields include supply chain management where blockchain can potentially provide the means for registering, certifying, and tracking the movement of goods across the supply chain, at low cost and low risk, or trade finance to make the trade finance process safer and more efficient.
Mr Menon also named facilitation of cross-border payments in traditional currencies one of the potentially strongest use cases of crypto tokens.
This is precisely the challenge that Singapore’s Project Ubin has set itself to solve: to use blockchain technology to enable entities across jurisdictions to make payments to one another: (1) without intermediaries; (2) with greater speed and efficiency; and (3) at lower risk and cost.
“Following two successful proofs-of-concept domestically, MAS has entered a collaboration with the Bank of Canada to test and develop a cross-border solution using crypto tokens issued by the two central banks”, Mr Menon shared.
Mr Menon pointed out the danger behind the hype around blockchains, “the blockchain is not a panacea to the problems of inefficiency and cost that we face in many economic transactions and processes. It does not make sense to put everything on the blockchain. Not all use cases being experimented on will succeed”.
There are many more potential risks to the use of crypto tokens.
For instance, the anonymity of crypto tokens has unfortunately made them well suited for facilitating illicit transactions.
“A significant portion of Bitcoin transactions globally is suspected to be for illicit purposes. Questions abound as to how sanctions lists, black lists, KYC or anti-money laundering controls apply in crypto token transactions,” said Mr Menon.
They have also facilitated ransomware, one of the fastest growing cyber crimes. Cyber criminals inject a malware into computers and restrict their access to files, often threatening permanent data destruction unless a ransom is paid, nearly always in the form of Bitcoins which do not leave a trace.
Mr Menon noted that crypto tokens have sparked a speculative fever across the world, with a vicious cycle of astronomical prices drawing a growing number of investors sparking further exponential price increases.
Despite speculative views that the current lower price is a buying opportunity, Mr Menon cautioned that the recent crash in prices ought to be a warning signal, as history tells us that speculative bubbles eventually end very badly.
He warned of the heightened risk of fraud that investors face as “these schemes are often conducted online by operators whose authenticity and credibility are difficult to verify”.
Managing crypto risks: the MAS approach
In face of the emerging crypto tokens, a common challenge for central banks and regulators is: how can we harness the potentially transformative benefits of blockchain technology and crypto tokens while containing some of their risks?
MAS has to-date chosen not to regulate crypto tokens directly. Instead, it is focusing on: (1) the activities associated with crypto tokens, (2) evaluating the different kinds of risks these activities pose, and (3) 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.
MAS and other regulators are studying the nexus between the crypto world and the financial system to assess how risks to financial stability may be transmitted, whether it is market risk from the direct exposure of financial institutions to crypto tokens; credit risk through unsecured lending to crypto token businesses; or leverage when borrowers pledge crypto tokens as collateral to borrow and buy more crypto tokens.
MAS assesses that the nature and scale of crypto token activities in Singapore do not currently pose a significant risk to financial stability.
Given the gaps in traditional information sources, MAS is exploring some unconventional ways in which to gather data about the scale and scope of crypto token related activities.
On one hand, the crypto token blockchains themselves can provide a wealth of information - including time stamps, recipient and sender addresses.
On the other hand, the Application Programming Interfaces (APIs) provided by crypto-exchanges present real-time insights on current flows in the crypto market, including information on the fiat currencies that are being exchanged for crypto tokens.
To combat the potential danger of crypto token activities being used in money laundering and terrorism financing, intermediaries are already required to report any suspicious transactions to the Commercial Affairs Department.
In addition, the proposed Payment Services Bill will require intermediaries that buy, sell or exchange virtual currencies to specifically address money laundering and terrorism financing risks. Intermediaries will be required to carry out customer due diligence and put in place controls and processes that are commensurate with their risks.
To protect investors from what Mr Menon called “the crypto mania”, MAS has implemented the following measures:
Where the crypto tokens represent ownership or a security interest over an issuer’s assets or any property, or a debt owed by the issuer, they may be regarded as securities under the Securities and Futures Act.
This means that unless exempted, issuers must comply with prospectus requirements prior to the offer of such tokens; intermediaries dealing in such tokens must meet licensing requirements; and platforms facilitating secondary trading of tokens must be approved or recognised by MAS.
Highlighting the risks in crypto tokens is also a priority of MAS in investor protection, it has advised the public to act with extreme caution should they wish to invest in crypto tokens.
To ensure market integrity and functioning, MAS is keeping itself abreast of international developments. It has noted that several cryptocurrency exchanges abroad have suffered cyber attacks and theft of their crypto tokens, and that there are rumours and reports of rampant market manipulation and other fraudulent activities on crypto-exchanges.
According to Mr Menon, MAS is watching with interest developments in the US, where futures contracts based on crypto tokens have been introduced on regulated exchanges. Such developments might offer some value on how to improve market integrity by establishing clear rules governing trade and post-trade activities.
“Such products could also potentially have a stabilising influence on crypto token prices as they provide two-way hedging opportunities for investors,” Mr Menon added.
However, he also highlighted that regulation cannot address all the concerns around crypto tokens. The industry too has a part to play in strengthening the ecosystem, for instance, by adopting best practices around transparency, cybersecurity, and record-keeping.
In conclusion, Mr Menon said crypto token itself is not the problem, “it is the enchantment with these tokens as a way to make a quick buck and their abuse for illicit activities that are at the root of our concerns”.
He called for all parties - regulators and the crypto industry - to work together to ensure that the society as a while harnesses the potential of blockchain technology for social good while mitigating the risks today’s tokens pose.