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This can be a positive development if stablecoins can make payments cheaper, faster, and safer. But to reap the benefits of stablecoins, regulators must ensure that they are indeed stable. I will talk more about this later. CBDCs are the direct liability of, and payment instrument, of a central bank. This means that holders of CBDCs will have a direct claim on the central bank that has issued them, similar to how physical currency works today.
Wholesale CBDCs are restricted to use by financial institutions. They are akin to the balances which commercial banks place with a central bank today. Wholesale CBDCs on a distributed ledger have the potential to achieve atomic settlement, or the exchange of two linked assets in real-time. They have the potential to radically transform cross-border payments, which today are slow, expensive, and opaque.
Retail CBDCs are issued to the general public. They are like the cash we carry with us, except in digital form. The case for a retail CBDC in Singapore is not compelling for now, given well-functioning payment systems and broad financial inclusion. Retail electronic payment systems are fast, efficient, and at zero cost, while a residual amount of cash remains in circulation and is unlikely to disappear. MAS has been actively experimenting with digital currency connectivity since The project is exploring a common multi-CBDC platform to enable cheaper, faster and safer cross-border payments.
Domestically, MAS is working with the industry on Project Orchid to develop the infrastructure and technical competencies necessary to issue a digital Singapore dollar should there be a need to do so in future. A vibrant digital asset ecosystem will encompass a wide range of value-adding activities. Let me cite three examples. JP Morgan has established its digital asset capabilities in Singapore via its Onyx division, which has pioneered several DLT-based products and initiatives.
Offerings include round-the-clock real-time fund transfers with shorter settlement times and no intermediaries. Contour, a global trade finance network of banks, corporates and trade partners, has established its Future of Finance Lab in Singapore. It will conduct research to develop novel, digitally native trade finance solutions. Nansen is a Singapore-based company that analyses more than million blockchain wallet addresses across the world.
It provides insights on blockchain network activities and visibility on transacting parties, thereby helping to improve transparency in the digital asset ecosystem globally. Digital asset activities involving payment services must be licensed under the Payment Services Act. We recognise there is some frustration about MAS' licensing process.
Some industry players have described it as "a slow and tedious ordeal"; others as a "bugbear for the fast-moving space". Given how new the digital asset industry is, it has not been easy for industry players or for MAS. On MAS' side, we closely scrutinise licence applicants' business models and technologies, so that we can better understand the risks. On the part of applicants, many are not familiar with managing the risks of facilitating illicit finance.
MAS engages the applicants closely to assess their understanding of our rules and their ability to meet our standards. This takes a considerable amount of time — but it is necessary. MAS cannot compromise its due diligence process just to make it easy for digital asset players to get a licence. Given the large number of applicants for licences, we have been prioritising those who demonstrate strong risk management capabilities and the ability to contribute to the growth of Singapore's FinTech and digital asset ecosystem.
When digital asset activities took off more than five years ago, regulators around the world, including MAS, assessed money laundering and terrorist financing risks as the key areas of concern. With the rapid growth in scale and complexity of digital asset activities, other risks have surfaced. Regulators around the world including MAS are therefore stepping up their responses to these new risks. There are five areas of risk in digital assets that MAS' regulatory approach is focused on.
As users of cryptocurrencies operate through wallet addresses and pseudonyms, cryptocurrencies have made it easier to conduct illicit transactions. The online nature of transactions adds to the risk. In , MAS imposed on providers of digital asset services the same anti-money laundering requirements that apply to other financial institutions. Earlier this year, these rules were expanded to Singapore-incorporated entities providing digital asset services overseas. MAS is one of the earliest regulators to impose on digital asset players the same cyber hygiene standards and technology risk management principles that is expected of other financial institutions.
But technology and cyber risks are continually evolving, for example, coding bugs in smart contracts and compromise of digital token wallets or their encryption keys. MAS is reviewing measures to manage these and other technology and cyber risks, including further requirements to protect customers' digital assets and uplift system availability. These steps are in line with what other jurisdictions are considering, including in the EU and Japan. Prices of cryptocurrencies are highly volatile, driven largely by speculation rather than any underlying economic fundamentals.
It is very risky for the public to put their monies in such cryptocurrencies, as the perceived valuation of these cryptocurrencies could plummet rapidly when sentiments shift. We have seen this happen repeatedly. MAS has issued numerous advisories warning consumers that they could potentially lose all the monies they put into cryptocurrencies. MAS has taken early decisive steps to mitigate consumer harm. Since January this year, MAS has restricted digital asset players from promoting cryptocurrency services at public spaces.
But despite these warnings and measures, surveys show that consumers are increasingly trading in cryptocurrencies. This appears to be a global phenomenon, not just in Singapore. Many consumers are still enticed by the prospect of sharp price increases in cryptocurrencies. They seem to be irrationally oblivious about the risks of cryptocurrency trading. Consumer-related risks have gained the attention of regulators around the world.
MAS is therefore considering further measures to reduce consumer harm. Adding frictions on retail access to cryptocurrencies is an area we are contemplating. These may include customer suitability tests and restricting the use of leverage and credit facilities for cryptocurrency trading. But banning retail access to cryptocurrencies is not likely to work.
The cryptocurrency world is borderless. With just a mobile phone, Singaporeans have access to any number of crypto exchanges in the world and can buy or sell any number of cryptocurrencies. The cryptocurrency market is also fraught with risks of market manipulation. These risks include cornering and wash trades — actions that mislead and deceive market participants about prices or trading volumes.
They compound the inherent volatility and speculative nature of cryptocurrencies and can severely harm consumers. There is greater impetus now among global regulators to enhance regulations in this space. MAS will also do so. Safeguarding consumers from harm requires a multi-pronged approach, not just MAS regulation.
First, global cooperation is vital to minimise regulatory arbitrage. Cryptocurrency transactions can be conducted from anywhere around the world. MAS is actively involved in international regulatory reviews to enhance market integrity and customer protection in the digital asset space. Second, the industry has an important role in co-creating sensible measures to protect consumer interests. MAS has been sharing its concerns with the industry and inviting views on possible measures to minimise harm to consumers.
We will publicly consult on the proposals by October this year. Third, consumers must take responsibility and exercise judgement and caution. No amount of MAS regulation, global co-operation, or industry safeguards will protect consumers from losses if their cryptocurrency holdings lose value.
Many stablecoins lack the ability to uphold the promise of stability in their value. Some of the assets backing these stablecoins — such as commercial papers — are exposed to credit, market, and liquidity risks There are currently no international standards on the quality of reserve assets backing stablecoins.
Globally, regulators are looking to impose requirements such as secure reserve backing and timely redemption at par. MAS will propose for consultation a regulatory approach for stablecoins, also by October. Follow mikejcasey on Twitter I want to clarify something: Speculation is not a dirty word.
The argument is that if inflows into decentralized finance DeFi are to be more sustainable then the yields that attract investors must be based on services that deliver more tangible economic value. But after I spoke to a gathering of credit union executives hosted by financial services provider Allied Solutions this week, I feel compelled to qualify that position.
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Bubble booms Economist Carlota Perez has famously shown that at key technological turning points in history, speculative bubbles have been integral to how society incorporates transformative technologies into the economy. Even as it fuels hype, along with momentum trading and big price overruns, the cheap money generated by investor speculation flows into a growing variety of new projects and enterprises that are built on the new technology.
This helps to establish the technology and create a base for the economic transformation it later enables. A good example was the dot-com bubble of the late nineties. At the time, a great deal of attention went to investor losses from doomed projects such as Pets. There was far less discussion of how the financial capital unlocked during the bubble funded the rollout of fiber-optic cable, the development of key technologies such as algorithmic search or the advances in mobile computing.
That money laid the foundation for the creation of new, massively marketable services in the Internet 2. Bubbles in crypto play a similar function — including the derisively viewed ICO boom — and, arguably with even more impact, for two structural reasons. They possess an embedded level of speculative risk, with the potential for both reward and losses.
Their presence in a game turns both creators and players into investors. One of the best-known blockchain-based games is Axie Infinity, which allows players to unlock and earn in-game tokens called Smooth Love Potion. Those tokens can be traded on crypto exchanges or converted into currencies like the US dollar. Classic tactics like guilds, used by teams in traditional games such as World of Warcraft to grind for rare assets, emerged in games like Axie.
Game of trust For game engineers, scepticism of the model is linked to the perception that these games are bad experiences for players. Discussions on platforms like Reddit and Discord are rife with complaints from game developers that blockchain games are less concerned with being high quality or fun to play, and more focused on how much hype their financial assets can generate. That focus on hype over gaming experience leads to a breach of trust with players, developers say.
Studios are also becoming aware of the potential reputational damage they could incur from being involved in crypto without a clear focus, said Catherine Flick, a researcher who is working on a paper about the ethics of NFTs out of De Montfort University in the UK. Mark Venturelli, a game developer whose criticism of these kinds of games went semi-viral in gaming circles, said programmers dislike the focus on NFTs because they are lovers of video games and more tech-savvy than most.
In a bid to draw in new talent and players, Sky Mavis, the studio that developed Axie, made the intellectual property for Axie freely available to developers who wanted to build their own games on it. One of the top pitches for investing in NFT development was interoperability, a future scenario that would allow an item bought in one game to be used in another.
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