The MAS sets out a laundry list of prerequisites that would turn the average digital asset or crypto providers into fully-fledged banks. finews.asia takes a look at the meaning of stable in the crypto-universe.
Stablecoins are a funny thing. For the uninitiated or casual observer, even the light-touch investor, they are this vague conceptual digital asset, possibly a currency, that sort of hangs around the periphery of what is a deeply unsettled crypto market.
Still, given this year’s ups and downs after 2022’s so-called crypto-winter, that same group of people are probably doing their very utmost to keep deeply repressed FOMOs in check even if they have little idea of what to buy or invest in.
The name might pop up occasionally when someone like Paypal announces a US dollar-based stablecoin - but in the minds of most, they don’t hold a candle to the big dudes like Bitcoin and Ether – not that anyone besides devotees really understands how they work.
Steered by Fiats
But it seems that there are definitions out there in the market. Stablecoins are meant to maintain a constant level of value against fiat, or sovereign currencies. It can be one or many.
The other stuff can get value from practically anything. Bitcoins are reaped by PC mining which seems to be short for a distributed consensus system while Ether is a transactional token for programs and services on Ethereum.
Neither has any correlation to conventional financial markets or traditional securities or currencies.
Dose of Sanity
Earlier this week, the Monetary Authority of Singapore (MAS) decided to inject a dose of sanity into all this and try to redirect the things that they can in their own living room.
After undergoing a period of public consultation, the straitjacket the MAS intends to impose seems to be a rigid one. Companies that launch stablecoins based on Singapore dollars or in G-10 currencies issued in the city-state will have to comply. The others can continue to do business unhindered, but they can’t be labeled as «MAS-regulated» stablecoins.
They start off with reserve requirements. Anyone issuing labeled stablecoins will have to hold very low-risk reserve assets of at least 100 percent of the par value of the outstanding amount of currency they have in circulation on a mark-to-market basis.
Policy Mania
Then they dive into the matter. Issuers will have to have a robust and resilient risk management policy for the reserves that include credit, liquidity, and concentration risk. They will have to show the MAS how they review and set the buffers and make sure that the reserve is always 100 percent of the currency they have out in the market.
Although that will likely lead to annually scheduled parades to the regulator accompanied by frazzled compliance experts bearing risk policy documents scarred by an untold number of tracked changes, it is really just the start.
Management will have to keep the reserves in segregated accounts at custodians that have a minimum credit rating of A- and a branch in Singapore that allows them to provide those kinds of services. The same goes for client assets, which can be pooled together but must be kept separate from the company’s own or that of any connected intermediary. In other words, many thanks to Binance and many others - although the positive take is that many people now know what commingled means.
Much Prudence
There will also be an audit requirement that the reserve assets are independently attested on a monthly basis and published on the issuer’s website, and which must be submitted to the MAS «no later» than the end of the following month.
Then come the prudential requirements. Here the MAS is asking the stablecoin provider to front up S$1 million or half of their annual operating expenses, whichever is higher. At all times, the company must be liquid enough to comprise more than half of its operating expenses or an amount the company thinks is enough to stage an orderly wind-down or a full recovery.
They can also not undertake other activities that entail additional risk, which seems to leave Bitcoin and Ether out of the question for them. They can’t invest in or extend loans to other companies, including other stablecoin providers or digital payment token issuers, or take stakes in them unless it is a related company to begin with (i.e., a subsidiary). FTX and Sam Bankman-Fried anyone?
Timely Redemptions
The MAS continued apace. It set five business days as the deadline for providers to return funds to clients, even if intermediaries are involved, although that does not include exceptional circumstances or periods of market, when the MAS may provide specific instructions to the company in question.
It will also not allow multi-jurisdictional issuance of stablecoins related to the city-state. They will have to be issued solely from Singapore if they want the label.
If the provider, however, is undertaking other issues, such as e-payments that are not related to the issuance of stablecoins, they can adopt the current regulation for digital payment tokens under the Payment Services Act, which requires significantly less money behind it.
Enter the Bank
If you were beginning to catch on to what this is all going to look like, you are probably right. This all sounds suspiciously bank-like.
The main question now is whether there are going to be any takers and how many. For all intents and purposes, any stablecoin operation in Singapore is going to parallel that of a small financial institution - costs, expenses, salaries, policies, compliance, and everything else bundled up with it. The only thing not clear is the revenues and if there is a market in stablecoins proudly bearing a Singapore label – not to mention how large that it will be.
According to CryptoSlate, which seems to be a reliable market source of information (i.e., it has figures, and they aren’t unexplainably positive), the market capitalization of stablecoins has been declining continuously for 17 months now. If that wasn’t enough, you also have to deeply question the seriousness of a market that has stablecoins called «Magic Internet Money», «St Coins», and «UST (Wormhole)» (source: Dune).
Dollars Everywhere
Also, for a market that was supposedly created to get away from the overt politicization of the US dollar despite, or in spite, of its role as the world’s reserve currency, most currencies seem to be linked to – well, you guessed it…the dollar, which is one of the G-10 currencies the MAS mentions in its framework.
When you Google why, the answer for almost all is that they are aimed at providing a «more stable cryptocurrency alternative» for traders and investors looking to avoid the volatility of the digital asset market. In other words, the market is using traditional assets and currencies to protect itself – from itself?
It is probably why the MAS is drawing a line in the sand in areas where it can while putting things on a more serious, institutional footing. Still, it will just turn each stablecoin provider into a bank in everything but name. For some, particularly those who maintained they were these avowed industry disrupters, it is not something they ever wanted to be.
