Outgoing Monetary Authority of Singapore chief executive Ravi Menon said at the Singapore FinTech Festival that stablecoins could possibly play “a useful role as digital money,” adding that Paxos Digital and StraitsX “substantively comply” with the regulator’s upcoming stablecoin framework.
At the same time, he made clear that the city-state would continue to take a cautious overall stance on cryptocurrency. Digital assets like Bitcoin “have performed poorly as a medium of exchange or store of value, their prices are subject to sharp speculative swings, and many investors in cryptocurrencies have suffered significant losses,” Menon said.
Stablecoins in Singapore
In recent years, Singapore has often been described in media reports as a “crypto hub” or some variation on that term. The reality is more nuanced. As Menon emphasized at the recent FinTech Festival, crypto remains rife with risk. The biggest losers of the industry’s worst hacks and scandals – such as the FTX implosion – have been ordinary retail investors. Even when institutional investors have suffered heavy losses, they are better able to absorb the hit than retail investors, who can lose their life savings in a worst-case scenario.
With that in mind, Singapore seems to be betting that stablecoins have staying power and will play an increasingly important role in the future of financial services. The decision to regulate them is consistent with the city-state’s interest in developing itself as a digital asset hub for institutional investors – which are allocating more of their crypto portfolio, 45%, to stablecoins than any other segment per a new report by crypto exchange Bybit.
It also gives Singapore a leg up on Hong Kong, which is going all in on crypto, but has yet to introduce any regulatory framework for stablecoins.
With its regulatory framework, the MAS aims to legitimize fiat-backed stablecoins as a credible digital medium of exchange that can bridge the gap between fiat currencies and the digital asset ecosystem. To that end, the MAS will require reserves that back stablecoins to be held in low-risk and highly liquid assets that must equal or exceed the value of the stablecoin in circulation at all times. This stablecoin regulatory framework will apply to single-currency stablecoins (SCS) pegged to the Singapore dollar or any G10 currency issued in the city-state.
At the same time, other types of stablecoins – SCS issued outside of Singapore or pegged to other currencies or assets – will continue to be subject to the existing digital payment tokens (DPT) regulatory regime. “MAS will continue to monitor developments in the stablecoin landscape, with a view to bringing other types of tokens into the SCS framework,” the regulator said in its consultation paper.
The Japanese approach
Besides Singapore, Japan has been the country in Asia thus far to take the most active interest in stablecoins. However, the Japanese approach is different from the centralized, MAS-led strategy in Singapore. Rather, in Japan, financial institutions are experimenting organically with stablecoins while regulators and lawmakers are also working to gradually facilitate their adoption into the Japanese financial system.
For instance, in March three Japanese banks said they would use a system developed by Web3 infrastructure company GU Technologies to experiment with stablecoins backed by assets. The proof-of-concept project experiment led by Tokyo Kiraboshi Financial Group, Minna no Bank and The Shikoku Bank is being done on the Japan Open Chain, a public blockchain compatible with EthereumETH 0.0%ETH 0.0% and compliant with Japanese law. Also. In March, Japanese megabank Mitsubishi UFJ Financial Group and domestic blockchain firms Datachain, Progmat Coin and Soramitsu began working on a project of their own that aims to launch a stablecoin interoperability pilot.
In June, Japan’s revised Payment Services Law went into effect, making Japan one of the first countries to develop a framework for the use of overseas stablecoins. The legislation authorizes banks, trust companies and funds transfer operators to issue stablecoins. Stablecoins must be pegged to the yen or other legal tender and guarantee holders the right to redeem them at face value. The legislation seems aimed at safeguarding against likely problematic scenarios, such as issuers lacking the real assets to back stablecoins as well as assets being entangled in shady, non-transparent investments.
While some payment services companies, notably Circle, have expressed interest in issuing stablecoins in Japan, none have done so to date. It remains to be seen how hard it is for such companies to meet regulatory requirements.
The role of resistance
In contrast to Singapore and Japan, the two largest countries by population in Asia remain skeptical towards stablecoins. Because of how economically important China and India are, this trend is significant. Stablecoins would struggle to gain a strong foothold in trade and investment flows in the Asia-Pacific region if they were effectively banned by the Middle Kingdom and subcontinent.
Circle CEO Jeremy Allaire seems to well understand the implications of a Chinese ban on stablecoins – which may explain why he mooted the possibility of yuan-backed stablecoins to The South China Morning Post in July. “If eventually the Chinese government wants to see the RMB used more freely in trade and commerce around the world, it may be that stablecoins are the path to do that more than the central bank digital currency,” he said.
While Allaire should be commended for speaking candidly, it is hard to see Beijing relinquishing the type of control it can wield with the digital renminbi just to boost yuan internationalization with a type of cryptocurrency. China still wants to see its currency more widely adopted in the international financial system, but it has quietly shelved ambitious unofficial targets set in the early 2010s because it is more concerned about high capital outflows and associated systemic financial risk.
That said, Hong Kong is reportedly planning to launch a stablecoin regulatory regime in 2024. A discussion paper on the topic said that stablecoins which derive their value based on arbitrage or algorithm will not be accepted, which could lead to the exclusion of algorithmically stabilized tokens like UST.
It will be worth watching the evolution of this regulatory regime in Hong Kong as it may offer some clues as how to Beijing is thinking about stablecoins. The longer it takes, and the more restrictive the nature of the regime, the less of a chance that any form of digital asset liberalization on the mainland can be expected.
Finally, in keeping with its general skepticism about digital assets, the Reserve Bank of India (RBI) has thus far said “no” to stablecoins – viewing them as infringing on its monetary policy sovereignty. “We have to be very careful about allowing these sorts of instruments. From the past experience in other countries, it is an existential threat to policy sovereignty,” RBI Deputy Governor T Rabi Sankar said in July. “If large stablecoins are linked to some other currency, there is a risk of dollarization.”
Rather than focusing on stablecoins for payments, it would be better for countries to each have their own CBDC and then “create a mechanism by which the CBDCs can interface and transact with each other,” he added.
If it comes down to a binary choice between CBDCs and stablecoins, we expect that most central bankers will go with the former. Whether there is room for both across the region as seems to be in the case in Singapore and Japan remains to be seen.