At a Green Shoots seminar in late August, Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), succinctly summarised the central bank’s stance on cryptocurrencies and digital assets in his opening address aptly titled "Yes to Digital Asset Innovation, No to Cryptocurrency Speculation". Although the headlines that ensued may lead you to believe otherwise, this didn’t come as a surprise to many in the industry.
Even as far back as 2017, MAS has consistently made its position clear: Cryptocurrencies are risky investments and are not suitable for retail investors. This is primarily due to speculation, causing cryptocurrencies to seemingly take on a “life of their own” outside of the distributed ledger, resulting in prices that are not tied to any underlying economic value.
That said, MAS has repeatedly acknowledged the transformative economic potential of distributed ledgers for use cases such as cross-border payments, trade finance, and pre- and post-trade capital market activities. The problem here is that a distributed ledger simply cannot work without cryptocurrencies; they go hand-in-hand. So how do we tame the proverbial beast without stifling innovation?
The cost of networking
Before we answer the ‘how’, we need to understand why cryptocurrencies and distributed ledgers are so intrinsically linked.
The advent of the Internet brought about a new generation of networks, such as email, social media, and marketplaces. And naturally, the more participants a network has, the more valuable that network becomes – this is known as the network effect.
However, getting these networks to scale to critical mass is a Herculean task. It costs a lot of money to acquire users to get to that point, which is the bootstrapping challenge faced by all networks. At the same time, these networks also need to rely on centralised intermediaries to verify transactions for a fee, known as the cost of networking.
Distributed ledgers can solve these problems. With distributed ledgers, the network is able to incentivise participants with native tokens (or cryptocurrencies) to scale the network and create a positive feedback loop. This, in turn, incentivises behaviour that strengthens network effects. Ultimately, this allows the platform to be bootstrapped in a decentralised and open manner while lowering the cost of networking and allowing the platform to scale.
This has given rise to new and innovative solutions to solve real problems. For example, Ripple uses the XRP Ledger and its native cryptocurrency, XRP, to enable faster and cost-effective cross-border payments, and currently moves billions of dollars of value internationally.
Helium uses the Helium Blockchain and its native HNT token to build a decentralised wireless infrastructure. Filecoin uses the Filecoin Blockchain and FIL token for data storage and retrieval. These are just some of the many use cases that distributed ledger technology can solve, which would not have been possible to scale without cryptocurrencies.
Balancing demand and supply
Under Singapore’s Payment Services Act enacted in 2019, some cryptocurrencies are categorised as digital payment tokens (DPTs), and can be used as a medium of exchange to facilitate near-instantaneous transfers – at a fraction of the cost of fiat transactions. This is due to the substantially faster transaction speed and lower transaction costs of such DPTs, resulting in considerable cost savings.
However, not everyone has the ability to contribute to and benefit from these networks directly, while some network participants will want to offset their costs or unlock the value of their native tokens in order to support their activities on the network.
This is where the secondary market comes in – and where there are markets, there is always the risk of speculation.
Indeed, as the old Wall Street adage goes, “Markets are driven by two powerful emotions – greed and fear”, and retail investors are especially vulnerable to speculation. This is precisely when market interventions are appropriate in order to avoid a market failure.
In fact, we’ve seen this before. In 2011, retail investors in Singapore were speculating heavily in contracts for differences (CFDs) and leveraged foreign exchange products (LFX). CFDs and LFX expose retail investors to considerable risks, given the excessive leverage offered to investors and the unlisted nature of such products. This rightly led to the MAS reviewing the regulatory requirements for such products in 2012 to ensure appropriate disclosures and consumer safeguards were put in place.
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Taming ‘animal spirits’
The cryptocurrency markets are also at the mercy of such irrational market behaviour and the ‘animal spirits’ as identified by John Meynard Keynes. Adding friction for retail access to cryptocurrencies to protect consumers is therefore a positive step for the industry.
However, it is also important to acknowledge that a fundamental underlying objective and principle of financial supervision in Singapore is that of “well-informed and empowered consumers''. In addition to ensuring appropriate consumer safeguards and disclosures are put in place, it is important that MAS also focuses on consumer education. This will ensure retail investors are able to make informed and empowered investment decisions.
Implementing an industry code of conduct could also be used as an interim measure before introducing regulations, or as a complement to regulations. This would allow MAS, and the industry, to collect feedback and establish best practices. At present, such codes of conduct exist for credit rating agencies and collective investment schemes in Singapore.
Yes to Innovation, No to Speculation
It is clear that digital assets and cryptocurrencies will increasingly play a critical role in underpinning the networks of the future, and MAS has the unenviable task of balancing that innovation with consumer protections. However, it is also important to acknowledge that these are not problems that have not been dealt with before, and there are tried and tested policy solutions that the MAS can leverage.
It is also clear that underlying technology is not the root cause of speculation, and therefore any market interventions should adopt a technology-agnostic approach. MAS’s stance should therefore be “Yes to Innovation, No to Speculation”, with responsible industry participants ready to stand by their side to help bridge the gap.
Rahul Advani is the policy director for APAC at Ripple