Singapore mulls cryptocurrency AML guidelines amid growing demand for initial coin offerings

21 June 2017. By Tsering Namgyal.

Singapore is considering anti-money laundering guidelines for the bitcoin industry, but it remains unclear when exactly such norms could be rolled out.

As it woos fintech start-ups to set up shop through forward-looking regulations, Singapore is worried about risks in the bitcoin industry, a senior regulator in charge of innovation at the Monetary Authority of Singapore told a blockchain conference* in the city state yesterday.

Some bitcoin operators worry that a lack of clear regulation around the cryptocurrency in jurisdictions such as Singapore is hindering their efforts to successfully pull off initial coin offerings, or ICOs, which help raise funds by issuing bitcoin. One of their main gripes is that they are often unable to convert proceeds raised in bitcoin into traditional currencies due to objections by banks related to anti-money laundering and compliance concerns.

Such pain points may be addressed by issuing anti-money laundering guidelines for cryptocurrencies, which are in the making in Singapore, but which might take some time to take effect. The MAS innovation regulator said that could take two years or more, because such rules would be subject to approval by the national legislature.

Regulators in places such as Singapore are trying hard to juggle promoting innovation with risk management when coming out with new rules to govern the fintech sector.

The bitcoin industry, which is growing fast but still relatively small with a total worldwide market capitalization of around $100 billion, is currently not regulated in Singapore, so as long as it does not pose a major risk to the financial system, the city state's regulators are generally abiding by the mantra of proportionality, the MAS regulator said.

The work of regulators in the bitcoin sector is made challenging, however, by the fact that ICOs operate in multiple ways, and that the cryptocurrencies marketed often defy categorization, leaving regulators wondering how to classify them, and which financial rules might apply to them.

For instance, some ICOs work like gift-based crowdfunding, an unregulated activity, and are technically not within the ambit of financial regulation. They are hence outside the jurisdiction of banking regulators.

Other ICOs operate like securities, requiring regulators to examine paperwork, and whether they adequately disclose the rights of subscribers. Regulators consider whether they fulfill the definition of securities, potentially bringing them under securities law, in which issues such as market conduct assume paramount importance.

There have been concerns about "front-running" in the ICO market and "pump-and-dump" practices, which are illegal in the stock market, but since the bitcoin industry is not regulated, market authorities find their hands tied. That, of course, begs the question of why the bitcoin industry should be exempt from regulations governing securities.

"If these things become big enough, then we will find powers to do something," the MAS regulator said. In the end, he said, it was all about proportionality, and if the bitcoin providers were small-scale and not engaging in conduct that was fundamentally fraudulent – with any risks made known to investors from the outset – their behavior should be treated as acceptable under normal circumstances.

In some cases, ICOs also operate as mutual funds, marketed as a stake in a fund, which should bring them into the orbit of fund management rules. This could raise further questions, particularly whether they should be governed under capital rules and subject to capital requirements.

Some capital requirement exemptions could be granted under Singapore's new fintech regulatory regime for mutual fund providers that may be broadly categorized as fintech, but how ICO providers should be exempted from capital rules must be considered very carefully, the MAS regulator said.

Several European jurisdictions are regarded as more friendly towards cryptocurrencies, but efforts to regulate them can cut both ways. Since cryptocurrencies thrive in the alternative space outside regulation, regulating them may risk driving them away rather them luring them in, according to a German securities regulator speaking at the same conference.

Earlier this year, Japan became one of the first Asian countries to legalize the bitcoin sector, a move hailed by some industry players as a major step towards helping the cryptocurrency become more mainstream and publicly acceptable, but Singapore is not particularly keen on courting bitcoin market players, the MAS regulator said.

"We are not particularly looking to be initial coin offering center of the world," he said. "We want to be the innovation center of the world."

*Blockchain for Finance Conference Asia Pacific, Singapore, June 20-21, 2017