Why is there no crypto ETF yet in Singapore?
The answer is a short one: 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.
“There’s a number of ETF that track companies that are active in the crypto space. But non of these ETF are currently holding crypto currencies.”
Can we move out of this status quo and what is the view of the Monetary Authority of Singapore?
Discussions have been ongoing since at least 2019, but the Monetary Authority of Singapore (“MAS”) has relatively little regulations for crypto in place and does not (fully) recognise cryptocurrencies as legal tender. Regulations such as the payment services act are forward looking but still mainly focussed on KYC/AML.
“There’s a clear opportunity for Singapore to be the first, but MAS seems to follow a wait-and-see approach.”
However, this seems 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 be able to 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 trading of crypto into the mainstream with a trusted institution.
The above is an interesting 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 simply hold the 5–10 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 really 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.
Cryptocurrencies are traded through various platforms, each having its owns risks and challenges. An ETF could (partly) mitigate these risks.
Passively managed: low fees
Investors could already work with licensed fund management companies (typically only available for accredited investors) to maintain a portfolio of cryptocurrencies but they would be exposed to high management fees as the manager will ‘actively’ manage the portfolio, and sometimes charge as high as 5% per year.
As an ETF is passively management, a manager typically charges only 0.2%–08% per year.
So what’s stopping the MAS really?
In short: clarity of regulations on three topics:
Custody or not?
A traditional company licensed as 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 and 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. With that the question rises 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 as may be prescribed
It is not clear how and if this exception has been used in the past.
SEC in the United States
The SEC in the US seems to claim that cryptocurrencies are supposed to be classified as securities and not as a commodity such as gold. Given the status of the SEC in the world; whatever they end up deciding will likely have an impact on 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’ due to the fact that the value of these coins is stable. With that MAS also seems to be of the opinion that ‘other’ non-stable crypto currencies are not to be recognised as a ‘new’ form of money and it even classifies stablecoins as a ‘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 on the US (and most other countries for that matter). Where the SEC in the US seems to be claiming that crypto are to be treated as securities (with all sorts of complicated implications) Singapore has the forward looking Payment Services Act which allows for a smooth entry into society of cryptocurrencies.
It seems clear to me 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 both under the Payment Services as Securities and Futures act. It seems that MAS favours to view 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 give a huge boost to the SGX and ‘crypto-friendly’ ecosystem in Singapore.
It seems that the advantages clearly outweigh the risks.