SINGAPORE - A framework that lays out how regulators around the world can supervise the often haphazard cryptocurrency sector has been released.

The framework drawn up by the Financial Stability Board (FSB) outlines how tougher controls on crypto assets such as Bitcoin can be applied.

“The recommendations establish a global regulatory baseline, and some jurisdictions may also decide to take more restrictive regulatory measures,” said the report by FSB, which is funded by the Bank for International Settlements and includes members from the Group of 20 economies.

The recommendations come as regulators around the world try to supervise the sector.

What does the FSB framework mean for regulators in Singapore and elsewhere?

Ms Angela Ang, senior policy adviser for blockchain intelligence firm TRM Labs in Singapore, said the FSB guidelines are flexible, so there will be differences in regional and national implementation that reflect varying attitudes towards crypto.

Ms Lena Ng, partner at law firm Clifford Chance, noted that different jurisdictions have varying rules even in the existing traditional financial services sector.

She said the FSB framework will be implemented “slightly differently because each legal framework in each jurisdiction is different and the regulatory policy thinking in each jurisdiction may be different”.

It will be very much business as usual in Singapore, as the Monetary Authority of Singapore (MAS) is already ahead of the game in many areas, added Ms Ang.

She said many measures that align with the FSB recommendations are already in force or being introduced here.

For example, Singapore was one of the first jurisdictions to mandate full compliance with the Financial Action Task Force (FATF) Travel Rule, a key global standard the FSB has asked members to align towards. The travel rule is a set of guidelines designed to prevent money laundering and terrorist financing.

Ms Ang said recently finalised risk management controls drawn up by the MAS also dovetail well with the FSB recommendations.

What does having a global framework mean for the crypto sector?

Ms Ng noted that more international bodies are working together to devise standards, which in turn will deliver a more consistent framework “so that you don’t have regulatory arbitrage”.

Regulatory arbitrage involves using more favourable laws in one jurisdiction to circumvent less favourable ones elsewhere.

“A lot of the transactions are done on a cross-border basis, so it doesn’t help that certain jurisdictions have certain rules and others don’t because that may mean because of regulatory arbitrage, activity just moves to a less regulated jurisdiction,” Ms Ng said.

What rules are there for digital asset firms in Singapore?

The MAS has just released part of its response to a public consultation held last October on proposed measures for the crypto sector.

The finalised measures on customer protection, asset segregation and custody are expected to kick in later in 2023.

They include having digital asset firms keep customer assets on a separate set of blockchain addresses from those containing the firm’s own assets, allowing a company to deposit a customer’s assets in a trust account and having the firm ensure that the custody function is operationally independent of other business units.

How similar to other jurisdictions are Singapore measures on crypto customer protection, asset segregation and custody?

Ms Ong Chengyi, head of policy for the Asia-Pacific region at blockchain analysis firm Chainalysis, said consumer protection frameworks across emerging markets have common elements.

They include assessing customer suitability, safeguarding customer assets, conducting token due diligence and managing conflicts of interest. These are on top of universal consumer protection measures such as risk disclosures and complaints handling.

A typical requirement is the segregation of customer assets from those of the service provider, both to prevent misuse and to shield customers if the service provider becomes insolvent.

“This typically involves requiring that customers’ digital assets be held on separate ledger addresses... this is a feature in Singapore, Hong Kong, Japan, Dubai and the European Union,” said Ms Ong.

Another example is for trading platform operators to assess the suitability of tokens prior to admission for trading and on an ongoing basis.

Hong Kong and Dubai have established criteria that should be considered as part of this due diligence process, Ms Ong said, adding that Singapore is looking into such obligations.

What are the key differences in consumer protection safeguards across markets?

There are evident differences in economies around the world.

In Asia, for instance, it is common to see stipulated minimum thresholds for the proportion of customer assets to be held in cold wallets. Cold wallets are disconnected from the Internet and so less susceptible to cybertheft.

This threshold is set at 98 per cent of customer assets in Hong Kong, 95 per cent in Japan and 90 per cent in Singapore. This threshold is not legislated in Dubai or in the EU.

In another example, segregation of customer assets is a basic requirement. However, virtual assets service providers in Dubai providing custody services need to segregate the digital assets of each client in separate wallets.

The MAS permits an omnibus approach given the potential costs of individual segregation that may be passed on to consumers, while Hong Kong requires that all private keys be held onshore to facilitate oversight and asset recovery – a measure not imposed here or in Dubai.

What about trading activities? How do they differ?

Activity restrictions are not uncommon, but they do vary across markets.

Dubai has restrictions on margin trading for retail investors, but digital asset players can conduct virtual assets lending and borrowing activities, subject to licensing.

Singapore does not allow digital token payment service providers to offer lending and staking services for retail investors, but they can do so for accredited and institutional investors.

Hong Kong generally bars margin trading of virtual assets. Facilitating staking and services beyond order matching are out as well.

What can we expect as we move along?

The MAS issued a consultation paper earlier in July that proposed requirements for digital asset firms to address unfair trading practices following a public consultation in 2022.

The EU is still devising technical standards, even though its Markets in Crypto-Assets Regulation sets out an overarching regulatory framework.

Ms Ong said: “Looking across countries, the elephant in the room here is perhaps the United States, where there is not yet a federal-level regulatory framework for digital assets.

“This is unfortunate for two reasons. First, because the lack of clear guardrails leaves consumers less protected, and second, because a lack of regulatory clarity can nudge digital asset players offshore, outside the supervisory ambit of US regulators, which is negative for the consumer protection agenda.”

But Ms Ong said there will likely be greater policy convergence across jurisdictions, although there will continue to be differences based on the individual circumstances of each market.