The answer is short: regulators globally are still trying to decide what to do about crypto. Several companies have applied to the US Securities and Exchange Commission (SEC) to approve their crypto ETFs only to get rejected.
Several ETFs track companies that are active in the crypto space. But none of these ETFs are currently holding cryptocurrencies.
Can we move out of this status quo, and what is the Monetary Authority of Singapore (MAS)’s stance in this?
Discussions have been ongoing since at least 2019, but the MAS has relatively few regulations for crypto in place and does not (entirely) recognise cryptocurrencies as legal tender. Regulations such as the payment services act are forward-looking but still mainly focused on KYC/AML.
Singapore has a clear opportunity to be the first, but MAS seems to follow a wait-and-see approach. However, this appears to be changing as DBS has recently gotten an in-principal approval to provide crypto services.
Once licensed, DBSV, as a member of DBS Digital Exchange (DDEx), will directly support asset managers and companies to trade in digital payment tokens through DDEx.
Anyway, that’s not an ETF yet, but definitely, a giant leap forward as this could bring the trading of crypto into the mainstream with a trusted institution.
The above is an exciting move from MAS, given the recent crackdown on other ‘new’ exchanges such as Binance.
Why do we want a crypto ETF? An ETF is a basket of securities, shares of which are sold on an exchange. They combine features and potential benefits similar to those of stocks, mutual funds, or bonds.
Ease of investing
If you are bullish on the crypto and blockchain industry and you want to get exposure without going down the technical rabbit hole, an ETF would be ideal. Such an ETF could hold the five to 10 coins with the largest market cap, rebalance from time to time, and an investor could apply a buy-and-hold strategy.
Cryptocurrencies are volatile, and no one knows which projects (Bitcoin, Ethereum or one of the 6,500 others) will win in the long term. By buying a group of cryptocurrencies, investors can achieve a healthy level of diversification.
Platform risks
Cryptocurrencies are traded through various platforms, each having its owns risks and challenges. An ETF could (partly) mitigate these risks.
Passively managed and low fees.
Investors could already work with licensed fund management companies (typically only available for accredited investors) to maintain a portfolio of cryptocurrencies. Still, they would be exposed to high management fees as the manager will ‘actively’ manage the portfolio and sometimes charge as high as five per cent per year.
As an ETF is passive management, a manager typically charges only 0.2–0.8 per cent per year.
So what’s stopping the MAS?
Custody or not?
A traditional company licensed as a fund manager typically takes custody of funds of her investors and invests those funds according to the scope of the mandate given to them.
The challenge with crypto is that a new generation of companies such as the exchange Binance could claim that they never take custody due to the decentralised nature of cryptocurrencies on the blockchain. Hence, they are just facilitating the transaction on the blockchain.
MAS is, however, actually quite clear on what kind of services should be licensed: Buying or selling DPT (“digital payment token”) or providing a platform to allow persons to exchange DPT in Singapore.
And with that statement, the discussion on custody is pretty much closed as almost every company providing services in the crypto industry will fall under this scope.
Security or commodity?
Singapore laid out the licensing rules for Capital Market Services (stock, bonds, funds etc.) in the Securities and Futures act.
In this same act, securities are classified as: shares, units in a business trust or any instrument conferring or representing a legal or beneficial ownership interest in a corporation, partnership or limited liability partnership.
Cryptocurrencies probably don’t fit the bill here, and so it seems that the Securities and Futures act does not apply to companies dealing with cryptocurrencies.
The question arises, though, how the MAS views an ETF purely holding gold or other commodities?
There seems to be room for exceptions to the previous definition: any other product or class of products prescribed.
It is not clear how and if this exception has was in the past.
SEC in the United States
The SEC in the US claims that cryptocurrencies are supposed to be classified as securities and not as a commodity like gold. Given the status of the SEC in the world, whatever they end up deciding will likely impact Singapore as well.
But, if we assume for now that (in Singapore) crypto is not a security, will it then be recognised as a commodity or currency?
Currency or not?
The Payment Services Act broadly covers the ‘fintech’ industry: Technology is transforming the world of payments and has opened up opportunities for transactions to be more convenient, faster and cheaper.
MAS has made some comments and seems to recognise stablecoins as a new form of ‘money because these coins’ value is stable.
With that, MAS also seems to think that ‘other’ non-stable cryptocurrencies are not to be recognised as a ‘new form of money and it even classifies stablecoins as ‘next-generation crypto: Stablecoins have emerged as a new class of cryptocurrencies intended to be relatively stable in value to address concerns over excessive price volatility of the first generation of cryptocurrencies.
And then on the definition of money, MAS states:
“People also need to trust that the value of the money they hold will remain broadly stable over time, so that they are able to use it as a store of value and as a medium of exchange in the future.”
With the Payment Services Act, Singapore is light-years ahead of the US (and most other countries, for that matter). SEC in the US treats crypto as securities (even with all sorts of complicated implications). Singapore has the forward-looking Payment Services Act which allows for cryptocurrencies’ entry into society.
Conclusion
It seems clear that the approval and launch of a crypto ETF in Singapore is a matter of time given the discussed advantages such as diversification and ease of investing for investors.
MAS seems to have a lot of room to provide approvals within existing regulations under the Payment Services as Securities and Futures act. It appears that MAS favours viewing cryptocurrencies as a form of payment for now rather than a security.
Should MAS decide to move forward and give approval for an ETF, this will likely provide a massive boost to the SGX and ‘crypto-friendly’ ecosystem in Singapore.
It seems that the advantages outweigh the risks.
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