A Deep Dive into the Regulation Surrounding Cryptocurrency

Singapore’s excellent reputation as a financial centre is built on the rule of law and regulatory transparency and diligence. However, pressing issues have emerged in the cryptocurrency space that require further study to find solutions.

This is the topic that Rachel Phang, an assistant professor of law at Singapore Management University, has been devoting herself to recently, since realising in her private sector that disruptive technological innovation is making financial regulation much more difficult.

In 2023, Professor Phang authored two highly regarded research papers on regulatory developments surrounding stablecoins, the second of which won an award at a prestigious industry event. Stablecoins are cryptoassets that have the potential to serve as a convenient medium of exchange because they are designed to maintain a stable value.

The first paper, titled “Singapore’s Emerging Regulatory Approach to Stablecoins,” critically analyzes the Monetary Authority of Singapore’s (MAS) regulatory framework for stablecoins, which was finalized in August 2023. Singapore, the paper states, “presents a particularly interesting case study due to its vibrant digital asset landscape, its position as a global financial center, and the regulator’s relatively dynamic approach.”

Unstable parts?

As the article points out, the first stablecoins appear to have emerged in 2014, as the world sought a more reliable means of payment compared to the wild price fluctuations of other cryptocurrencies. However, the term “stablecoins,” as many have pointed out, may be a misnomer as they may not be “stables” or “coins,” even though they are broadly defined as cryptoassets “designed to maintain a stable value relative to another asset…or basket of assets.”

Depending on how a stablecoin is designed, it may be backed by collateral such as currencies, commodities, or other cryptoassets. Other stablecoins may not be backed by any collateral at all, but may rely on algorithms to adjust their supply and thus stabilize their price.

So the label “stablecoins” can be misleading, says Assistant Professor Phang in the Office of Research. Many of them, particularly algorithmic stablecoins, may not involve robust stabilization mechanisms. The abrupt collapse of algorithmic stablecoin TerraUSD, for example, contributed to the “crypto winter” of 2022, which saw the prices of major cryptocurrencies like Bitcoin and Ethereum fall by more than 55% each.

How can regulation enable stablecoins to deliver on their promise of stability of value, while addressing other pressing regulatory concerns? Key concerns around money laundering and terrorist financing remain, as stablecoins, like many cryptoassets, are often pseudonymous. Other concerns abound as well, such as user protection, market integrity risks, issuer solvency, and stability of value.

To address some of these concerns, MAS has since confirmed its intention to introduce a new category of MAS-regulated stablecoins under its latest framework, says Prof Phang, and is working on the necessary legislative amendments on which it will consult in the future.

Singapore’s authority has generally been “a very progressive regulator,” keen to support innovation rather than get ahead of it, she said.

As Professor Phang points out in his paper, the Singapore case study highlights the merits and problems of an approach that “(a) places the majority of stablecoins (i.e., algorithmic stablecoins and most asset-linked stablecoins) in the same category as other cryptoassets, not designed to maintain a stable value; and (b) introduces a new regulatory category and tailored regulatory treatment only for single-currency stablecoins that meet specific criteria.”

The MAS approach, she adds, also shows how certain policy tools can be used to regulate stablecoins. These include inflow regulation, as well as anti-money laundering and counter-terrorism financing, asset reserves, timely repayment, disclosure requirements and solvency.

Tale of Three Cities

In the other award-winning research paper, which is a natural follow-up to the first, Professor Phang analyses and compares the emerging regulatory frameworks for stablecoins between Singapore, New York and London, which she describes as “innovative”.

“Regulatory Frameworks for Stablecoins in Global Fintech Hubs: Perspectives from New York, London and Singapore” was one of four winning papers at the industry’s flagship event, DC FinTech Week, held in Washington DC, USA, in November 2023.

Notable regulatory developments, according to the paper, include New York State’s June 2022 guidance on the issuance of U.S. dollar-backed stablecoins; legislative amendments in the United Kingdom that established a new concept of digital settlement assets; and Singapore’s August 2023 finalization of its regulatory framework for stablecoins. In doing so, the paper notes, each jurisdiction has “created a new sui generis regulatory category for a specific subset” of single-currency stablecoins.

There are commonalities and differences in the approaches of regulators around the world, including in other jurisdictions such as Hong Kong and Dubai, but cryptocurrency regulation, Professor Phang reminds the Office of Research, is very much a work in progress. Regulators in the various fintech hubs must constantly keep pace with technological innovation and market developments. This is consistent with her paper’s observation that the perspectives presented are “only part of the narrative and ongoing developments” in stablecoin regulation.

The debate “takes place in the shadow of larger and older debates: about the history and functions of money, and about the competition between private and public money,” among other things, the document notes.

But given the instability triggered by so-called stablecoins, such as the estimated $60 billion crash caused by the collapse of TerraUSD and its sibling token Luna, should regulators be even more proactive?

“In developing the current regulatory approach, lessons have already been and must be learned from past crises and failures, both in traditional and crypto markets.”

However, cryptocurrency regulation is still evolving, she adds. She hopes it will be “a quick and smooth process” that draws on lessons learned over the years from traditional financial services regulation.

“Ultimately, as different regulatory approaches develop, the hope is that this will eventually forge a critical mass of best practices for regulating stablecoins.”