The Monetary Authority of Singapore (MAS) has long maintained its stance that cryptocurrency is unsuitable for retail investors.
Earlier in August, MAS’ managing director Ravi Menon announced an intention to introduce consumer suitability tests, to determine whether an investor should be allowed to participate in the crypto market.
It has since been revealed that these tests would primarily assess customer awareness around crypto risks. Crypto service providers could soon be tasked with determining if their retail investors are educated on threats such as volatility, illiquidity, and cybersecurity.
For those who fail the test, MAS is considering options which the crypto companies might provide. These could include educational materials and the opportunity for reassessment after a cooling off period.
Such measures will lead to a longer and less convenient onboarding process for crypto exchanges and ultimately, this could slow down the speed of crypto adoption in Singapore.
Coinbase CEO Brian Armstrong believes that the hesitance around retail participation is unfounded. “I think that it’s vitally important for retail customers to have access to [crypto],” he said as part of his keynote during the recent Singapore FinTech Festival 2022.
Retail access to cryptocurrency
Armstrong agrees that crypto exchanges should make appropriate disclosures around risk, but questions the rationale behind any further restrictions. Consumer suitability tests might help curb speculative investing, but crypto is being used for a lot more than that today.
“People want to trade but they also want to [engage in] all these other things such as peer-to-peer payments, commerce, remittance, and borrowing and lending,” Armstrong explains. As per Coinbase’s findings, over 50 per cent of their users are now using crypto for purposes other than trading.
For Singapore to be a Web3 hub and simultaneously [prohibit retail participation] — those two things are incompatible in my mind. I would like to see Singapore embrace retail trading and self-hosted wallets.
– Brian Armstrong, Coinbase CEO
By introducing frictions to the crypto onboarding process, users would have a tougher time accessing legitimate crypto utilities. As it stands, convenience plays a key role in the adoption of blockchain technology. Once more use cases emerge, restrictive measures could have a host of unintended consequences.
“Increasingly in the future, users will want to do things that aren’t even related to finance such as having a decentralised identity, owning NFT artwork, or participating in DeFi games and DAOs,” adds Armstrong.
Fallout from the crypto winter
The 2022 crypto crash was perceived as a red flag by regulators around the world. It was a catalyst in the MAS’ decisions to further regulate the space, with regards to retail access and stablecoin regulations.
While the impact of the crypto winter has been significant — with blue chip coins such as Bitcoin falling over 60 percent from their all-time highs — looking at the broader economic environment adds perspective to the situation.
Since the start of the year, equity markets have echoed the price volatility seen in the crypto space.
People will say crypto came down so much this year, and a lot of people lost money. But [look at stocks like] Netflix and Spotify, they came down 80 per cent. These are regulated, approved assets that are out there. We are in a broad macro recession. This isn’t a crypto-specific thing.
– Brian Armstrong, Coinbase CEO
Although Armstrong agrees with the need for consumer protection, he doesn’t see this market crash as a reason to clamp down on crypto trading.
The ideal crypto regulations
For the crypto space to grow and evolve, regulators need to find the right balance which looks out for consumers without hindering innovation. In this regard, DeFi protocols have been a topic of contention.
On one hand, over US$700 million has been stolen from DeFi protocols in 2022 — as per research by Chainalysis — by hackers exploiting smart contracts. Affected users have had little by way of legal recourse since DeFi protocols aren’t governed by any authorities. Transactions are carried out anonymously and are irreversible.
The growing volume of theft has made DeFi an area of interest for regulators. Armstrong doesn’t believe this to be the right approach. In his view, regulators should keep their focus on centralised exchanges and custodians, which serve as the entry and exit points in the crypto space.
I think centralised exchanges should be treated just like other financial institutions. There should be AML protections, audits, appropriate disclosures, and no commingling of funds. Crypto should be treated, not at a disadvantage, but equally with other financial service regulations.
– Brian Armstrong, Coinbase CEO
This works because centralised exchanges actively take custody of user funds and thus, should be held accountable. On the other hand, DeFi protocols are merely lines of code which facilitate transactions. While using such protocols, the custody of funds still remains with the respective users.
“If you’re not taking possession of customer funds, I don’t think you should be regulated as a financial services business,” Armstrong explains. “You might be a software business or something else.”
Regulating DeFi would stand to erase the very purpose for which it was created — for users to transact without the need for a centralised institution.
Currently, anyone is free to write and publish a smart contract, which can then be used by people around the world. To treat these contracts as financial service business would “kill their benefit”, Armstrong believes.
Featured Image Credit: Singapore Fintech Festival 2022
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