The interview was conducted by Joy Macknight, Editor of The Banker. 

Summary of remarks by Mr Ravi Menon

There are three distinguishing features that make up the crypto ecosystem.

• First, the blockchain. It is a distributed ledger where ownership of assets is recorded and verified, and transactions take place peer-to-peer and are irrevocable.
• Second, the concept of tokenisation.  This enables all manner of assets or items of value to be represented digitally through a smart contract on a blockchain 
• Third, cryptography. This is a secure way for transactions to be performed.

Taken together, these features make the crypto ecosystem a potentially transformative technology. It enables high value assets to be fractionalised and this can unlock new economic value, enhance financial inclusion, and enable more seamless and efficient financial services. This is the greater vision that MAS is focused on, much beyond cryptocurrencies. 

There are two parts to MAS’ approach.

One, grow digital asset capabilities. 

The digital asset ecosystem comprises an entire range of crypto related services, and we are working hard to enable a conducive environment for such activities to flourish in Singapore.  

• We are clarifying the tax treatment.
• We are encouraging talent development.
• We are providing grants to bring in some of this innovation.
• We are collaborating with industry to explore the potential of blockchain technology through real value experiments. 

We have also been quite successful in anchoring high quality strategic players at the forefront of digital asset innovation. 

• JP Morgan has partnered DBS Bank and Temasek to establish Partior, which is a multi-currency, cross-border settlement platform, leveraging blockchain technology. 
• R3, a global distributed ledger technology provider with roots as a banking consortium, has grown its innovation hub in Singapore to be the regional headquarters for Asia. 

Two, manage the risks.

There are four risks in the crypto ecosystem that MAS is watching closely: 

• money laundering and terrorism financing risks
• technology and cyber risks
• consumer protection and 
• potentially, financial stability.

MAS regulates digital assets-related services and service providers on an activity basis rather than an entity-based approach. We try to mitigate the specific risks posed by specific activities, while allowing latitude for innovation. 

• If the digital asset represents a security such as a share or a bond, it is regulated under the Securities and Futures Act, similar to other capital markets products. 
• If the digital asset is used as a means of payment, then it is regulated as a digital payment token under the Payment Services Act. 

In the last two years, we have granted licences or in-principle approvals to 11 digital payment tokens service providers. 

• They include global stablecoin players like Paxos, crypto exchanges like Coinhako as well as established financial institutions like DBS Vickers. 
• We have also issued in-principle approvals to Revolut and Luno just this week.

The licensing process is stringent because we want to be a responsible global crypto hub, with innovative players but also with strong risk management capabilities. We only approve applicants with strong governance structures, fit and proper board and management, and we go through their track record. 

For the digital payment tokens service providers, regulation has been limited to anti-money laundering, technology risk, and access to retail public. We have taken quite a tough line on unfettered access to retail public because retail investors should not be dabbling in cryptocurrencies. Many global regulators share similar concerns about retail exposure to cryptocurrencies. 

Our approach is to be adaptive, continually evolving and consultative as this is a fast-moving space. We also issue guidelines before we use legislation. This is the approach we have taken for the marketing of digital payment tokens to the public. We also do a lot of public and industry consultations on new areas so that we get it right, such as on stablecoins. We want to continue to provide clarity to the industry on our regulatory thinking and our concerns, but at the same time, leave the door open for opportunities to co-create solutions with industry.

On the international front, the community could do more to itemise the various risks, rather than to speak of them as a basket of risks. Money laundering risks would require a specific kind of regulation. Technology and cyber-related risks are also important in this space and thirdly, investor protection. We also do need to address the question of stablecoins. They are gaining in prominence and they are promising. But we need to be sure that there is backing for stablecoins, and the extent to which the backing is liquid and available when required. 

Regulators can learn from one another on these issues. At the Bank for International Settlements (BIS) and the Financial Stability Board, there are very active discussions on these issues. There is also a clear understanding that we do need to regulate this space. 

MAS’ expectations of crypto service licensees

Crypto service providers need to have the ability to manage the risks, have a strong board and management, a strong risk governance culture, and capabilities. Many of them are young players, and while they are innovative, nimble and think out of the box, they have little experience of being regulated. As such, we need to bridge the culture issue. 

The primary risk that is inherent in the nature of crypto activities is money laundering and terrorist financing risks. 

First, MAS expects crypto service licensees to do risk assessment of new products and technologies. They need to have a formalised approach to identify and assess money laundering and terrorist financing risks before they offer new products and technologies. 

• For example, the risk assessment should consider whether a product has characteristics that promote anonymity, whether the product is known to be used by criminals for illicit purposes, and whether the volatility and liquidity of the product render it susceptible to market manipulation and fraud. 

Second, MAS expects them to conduct proper customer due diligence for all digital payment transactions. If a potential customer is assessed to have higher money laundering risk, then we expect the crypto service provider to take enhanced customer due diligence measures to mitigate and manage these risks. 

Third, crypto service licensees should monitor their business relations with customers on an ongoing basis, ensure that transactions are consistent with the knowledge of the customer or the business risk profiles. All the stuff that we expect banks to do, we expect them to do.

They also need to comply with value transfer rules. Digital or crypto service providers must be able to transmit the necessary originator and beneficiary information to the beneficiary service provider immediately and securely.

Fifth, we look at technology risk management and licensees are expected to comply with MAS Guidelines on risk management and cyber hygiene requirements.

Main takeaways of Project Dunbar

MAS is collaborating with the BIS, Bank Negara Malaysia, South Africa Reserve Bank and the Reserve Bank of Australia to try to solve the problem of instantaneous cross-border payments and near real time settlement. The cross-border payments landscape today is very far from that. The G20 and Financial Stability Board are focused on this. 

Project Dunbar focuses on a shared platform that would enable international settlements using digital currencies issued by multiple central banks. MAS had experimented bilaterally with the Bank of Canada under Project Ubin a few years ago. We are now trying to scale that through this effort with the BIS, to have multiple CBDCs issued by 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 such a multi-CBDC platform that is shared across central banks. There are issues like:

• Governance – how do we get multiple central banks to share a common platform and mitigate national security concerns associated with sharing critical infrastructure? 
• Access – who should participate in such a shared platform? Non-banks should be included because not everyone has a bank account. 
• Regulations - jurisdictional boundaries and the reconciliation of different laws, regulations, guidelines and protocols that govern payments. 

Our dream is to have a common settlement platform where the central banks of the world can come together and issue wholesale CBDCs to effect seamless cross-border payments.

MAS’ stance on central bank digital currencies 

It is useful to make a distinction between retail CBDCs and wholesale CBDCs.

MAS has already issued a wholesale CBDC four or five years ago, as part of Project Ubin, to effect fund transfers across borders. Wholesale CBDCs are contained within the banking system, and they play a powerful role in cross-border situations.

A retail CBDC is a central bank digital currency that is issued to members of the public, who have an account with the central bank. This is a direct liability of the central bank to the public. But there does not seem to be a compelling case for it yet. Its use cases are not clear, given that today’s digital payment system is already effective and efficient in transferring money. There is thus no need to hold the CBDC with the central bank, as long as there are innovative private sector solutions. Most of our money is already in digital form in the form of bank deposits, and it is not inconceivable that many countries will come down to very low usage of cash. 

If the central bank were to hold CBDCs in the form of money held by the general public, that means it is a migration of some deposits from the banks to the central bank. But central banks are not in the business of lending money to businesses. Banks have the competence to do that. As such, the credit creation process will be interfered with when deposits are transferred to the central bank. 

Although we do not have the intention to issue one, we will have to be conscious of the risks, if we eventually do issue one. We are, in a sense, rehearsing for the future. We want to make sure we have the technology, governance, and policy structures to launch a retail CBDC, if necessary.

From a monetary or economic point of view, there is no necessity but socially and politically, if the general public wants to hold a digital form of cash with the central bank, then it becomes incumbent on the government and central bank to look for those options. 

We are keeping an open mind and watching this closely. But for now, we do not think that is the biggest problem to solve. 

Decentralised finance and whether it is the future 

Decentralised finance will be part of the future. There will be a case for having direct, peer-to-peer financial services provided through decentralised protocols like the blockchain, in a Web 3.0 world. Smart contracts that are self-executing and where you do not need an intermediary.  This will disintermediate the banks to some extent. But there will be a large category of financial services which will still require customisation, and direct connection between a financial institution and a customer. The two forms of finance will coexist, but it will be a very interesting dynamic to watch in the coming years.