How do cryptocurrency regulations in Singapore benefit financial institutions?

2021 was heralded as the year of institutional cryptocurrency adoption — it became a portfolio mainstay amongst a growing number of investors. Cryptocurrency funds’ cumulative assets under management (AUM) culminated in $59.6 billion in the last quarter of the year

Across the globe, countries have adopted different approaches to regulating cryptocurrency: complete prohibitions, different types and degrees of control, and some elements that have yet to be regulated. Moving forward, a coordinated framework for risk management within the cryptocurrency ecosystem is largely imminent. 

Sparrow explores how cryptocurrency regulations in Singapore can benefit institutional investors looking to gain an edge in the market.

Also read: Singapore stands tall among the world’s most crypto-forward countries

1. Reduce cybersecurity risks

Blockchain technology continues to evolve and present a seismic shift in how businesses are conducted. However, there’s no denying that targeted cybersecurity attacks still do happen. To illustrate; hackers stole $625 million from the underlying Ronin blockchain of Axie Infinity — the play-to-earn crypto game. Similarly, Wormhole — a communication bridge between Solana and other decentralized finance blockchains — was hacked of cryptocurrency worth over $320 million just recently.

From phishing attacks to malware and ransomware to website defacement, the underlying technology of cryptocurrency — under various circumstances — can still be quite vulnerable although it is acclaimed for its enhanced security features. This remains a significant challenge for cryptocurrency organizations to overcome as they continue to drive institutional adoption, considering the far-reaching impacts of cyber attacks on businesses. They can be classified into four categories: financial, reputational, legal, and operational.

Financial Reputational Legal Operational
Theft of financial information (eg. balance sheet and income statement) Loss of clients’ confidence and their businesses Compensation claims Disruption to trading activities
Theft of assets under management Revocation/suspension of license  Loss of legal rights IT infrastructure compromised
Loss of profitability Loss of valuation Penalties  

To address cybersecurity risks prevalent within the ecosystem, cryptocurrency companies in Singapore must implement adequate cybersecurity measures in areas such as multi-factor authentication, malware protection, network perimeter defense, and more as mandated by the Monetary Authority of Singapore (MAS) under the Payment Service (PS) Act 2019. These measures are designed to combat external and internal cyber threats against all organizational assets. 

Establishing a foundation of trust between customers and financial institutions is often the foremost priority. Cybersecurity threats present financial and legal risks that are only further exacerbated by reputational and operational liabilities. Engaging digital partners with the appropriate know-how to create an anticipatory security posture is crucial in responding to the vulnerabilities that cyber threats pose in today’s evolving market.

2. Mitigate money laundering and financing of terrorism 

According to blockchain data company Chainalysis, criminals laundered $8.6 billion in cryptocurrency in 2021. This is an increase of 30% from the previous year. 

Taking advantage of one or more of cryptocurrency’s distinctive qualities including pseudonymity, ease of cross-border transactions, and decentralized peer-to-peer payments, criminals frequently use cryptocurrencies to launder money. They employ an identical three-stage process to cash-based money laundering: placement, layering, and integration. 

To prevent the cryptocurrency market from becoming a breeding ground for money laundering and terrorism financing, MAS requires Digital Payment Token (DPT) service providers to implement a robust Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework under Notice PSN02. It has various requirements including:

  • Conduct risk assessments and develop policies to mitigate risks 
  • Enhanced customer due diligence for Politically Exposed Persons (PEPs) and higher-risk clients
  • Ongoing monitoring of business relations and transactions 
  • Record keeping
  • Reporting of Suspicious Transactions Report (STR)

Information extracted from: Strengthening AML/CFT Controls of Digital Payment Token Service Providers

With effective AML/CFT controls at the heart of the cryptocurrency ecosystem, it can: 

  1. Maintain the integrity of the financial market
  2. Prevent economic distortion and instability
  3. Reduce revenue loss
  4. Avert reputational risk
  5. Stop the erosion of economic policy control

How do such AML/CFT measures then benefit financial institutions that are working with a digital assets partner? They can adhere to regulatory compliance and avoid any entanglement in financial crimes which will not only impact the institution’s overall profitability but also incur risks to their license and a heavy penalty for violation of regulations. Such situations inevitably draw investigations from local authorities which disrupt operations and bring negative publicity that can damage the brand and reputation of the firm. 

Conversely, robust controls make it harder for illegally obtained funds to pass off as legitimate. They lay the foundation of a secure ecosystem for institutional investors as it raises the barriers to entry for criminals. 

3. Bring focus and clarity to business 

Singapore, with its clear regulatory framework, can encourage better involvement from good actors. Digital assets partners seeking to expand their cryptocurrency footprint need not remain on the sidelines for fear of inadvertently breaching regulations.

The cryptocurrency framework aims to: prosecute cases of market misconduct; award licenses to DPT service providers; treat clients fairly and honestly; handle complaints; implement risk controls to resolve industry-related conflicts; and create a fair, efficient, and orderly market.

Financial institutions looking to align themselves with these regulations outlined in Singapore can reap the benefits of a strategic vision that taps on the expertise of these specialists. Digital assets partners present a definitive business strategy that is set for the long-term — reducing uncertainties in the cryptocurrency environment that impair performance while simultaneously enabling institutions to plan ahead to pursue an organized growth strategy with confidence.

4. Ensure high standards of integrity

In previous months, cryptocurrency-related advertisements have been disseminated to retail investors across mainstream media and public spaces. Often focusing on the highs of owning digital assets, these advertisements tend to trivialize the risks involved. Novice investors without due technological or financial literacy are at risk of being dangerously misled.

Recently, MAS has set forth guidelines on the provision of digital payment token services to the public. This ensures DPT service providers educate consumers about the risks of trading in DPTs so investors can proceed with informed decisions. Under these guidelines, DPT service providers should not misrepresent the risks of DPT trading by trivializing them. 

The promotion of responsible advertising helps foster high standards of ethics amongst industry players through self-regulation, encourages consumer protection, and creates a level playing field among competitors. 

Financial institutions engaging digital assets partners that adhere to local regulations can be affirmed by their accountability and integrity. Every action taken will be in the best interest of the stakeholders involved — especially when dealing with clients whose reputation is paramount. 

A robust code of ethics helps to reassure financial institutions about the concerns of forming a business association with any deceptive entity.

Also read: How to evaluate a digital asset partner

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Make the most of Sparrow’s customized digital asset solutions designed to suit various investment needs targeted at financial institutions, family offices, and wealth managers. Fully committed to delivering financial returns in a complied and secure manner, Sparrow takes pride in working closely with regulatory bodies and remains current in our compliance policies and processes. Reach out to us to get started on your cryptocurrency journey today!

 
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