Blockchain in Singapore 2023: where are we now? 

At the start of 2022, there was much optimism internationally for the future of blockchain, although financial authorities in Singapore were taking a cautious approach to the technology and its potential and development. Ravi Menon, the managing director of the Monetary Authority Of Singapore (MAS), in a speech given earlier in 2019, had defined blockchain as a technology that enables consensus-making through a distributed ledger and allows for diverse entities to work together and make transactions without trusted intermediaries. Innovators across diverse sectors – ranging from healthcare to logistics to fintech – have found myriad applications already for blockchain technology. Most prominently, blockchain forms the basis for cryptocurrency and decentralised finance (DeFi).

A year on, the crypto and DeFi industry has plunged into a "crypto winter" after the successive collapses of the Terra stablecoin and Three Arrows Capital (3AC), a hedge fund focusing on crypto assets. It is estimated that the US$60 billion was wiped out when Luna fell in May 2022. 3AC, which had invested US$200 million in Luna tokens, was unable to repay lenders as cryptocurrency prices fell across the board. The subsequent fallout has left many major industry players in the lurch.

Cryptocurrency once again met with scandal as FTX, a major cryptocurrency exchange, collapsed and filed for bankruptcy in November 2022 amid allegations of fraudulent activity and mismanagement of funds. In response later in the month, the Singaporean state holding company Temasek Holdings wrote off its $275 million investment in the exchange, although it stated that it “continue[s] to recognise the potential of blockchain applications and decentralised technologies to transform sectors and create a more connected world.”

MAS projects

Singapore continues to see potential in blockchain despite these developments. Lawrence Wong, who is both deputy prime minister and finance minister in Singapore, in the immediate wake of FTX’s collapse at a Bloomberg New Economy Forum, reiterated the government’s long-standing position: “Singapore is open to digital asset innovation but is not open to crypto speculation at all”. 

Menon, commenting at the Singapore FinTech Festival 2022 in November last year on the market developments, observed that “in the realm of crypto assets, a harsh winter has set in” and that “it is an overdue cleansing of unsustainable business models, highly risky practices, and unviable use cases. The digital asset industry will emerge leaner and stronger.”

Instead, blockchain’s potential lies outside of crypto and DeFi. At the same fintech festival, Menon unveiled MAS’ five desired outcomes of fintech collaboration in Singapore. Firstly, it is developing a model for instant cross-border remittance. MAS has worked with the Bank for International Settlements (BIS) Innovation Hub on Project Nexus – a multilateral solution to link countries’ real-time payment systems.  It offers immediate cross-border payments through the creation of a unified solution linking different countries’ real-time payment systems.

Singapore has also been working on "atomic settlement" through its Project Ubin Plus to develop immediate cross-border settlement by simultaneously exchanging two linked assets in real-time. Meanwhile, its Project Orchid has focused on programmable money and facilitating and regulating the use of money with embedded rules.

Project Guardian has centred on tokenised assets, and how to facilitate and regulate software programmes to represent the ownership of rights over any item of value as a digital token or asset. Finally, Project Greenprint has looked at trusted sustainability data. It has addressed how to build a trusted data ecosystem through the use of distributed ledger technology that enables access and verification of climate and sustainability data.

Menon underscored the importance of collaboration in these projects: between public and private, the incumbent and emergent, and Singapore and other nations. This collaboration can be seen in the various initiatives and partnerships in which Temasek and MAS have been involved.

Previously, the success of Singapore's Project Ubin, a collaborative project that sought to demonstrate the practical application of blockchain and distributed-ledger technology to cross-border payments and settlement, has spun off various projects, including Partior, Project Dunbar and Project Ubin Plus. 

Under Project Dunbar, MAS collaborated with various central banks and the BIS to show that central banks could directly transact on a shared platform with each other using central bank digital currencies.

Partior is a blockchain-based interbank clearing and settlement network jointly established by DBS Bank, JP Morgan and Temasek, which aims to enable the real-time settlement of cross-border payments in different currencies. Standard Chartered has recently joined as a fourth partner, leading to a Series A funding round with the participation from existing partners. Partior currently offers two settlement currencies and aims to increase its offerings to eight.

Project Guardian “is a collaborative initiative with the financial industry that seeks to explore the feasibility of real-world asset tokenization and applications in DeFi while managing risks to financial stability and integrity”. Under this project, MAS has set out to work with industry partners to “explore the economic potential and value-adding use cases of asset tokenization”. Recently, MAS joined JP Morgan and Japan’s SBI Digital Asset Holdings to conduct trades in tokenised versions of Singapore's government securities bonds, Japan's government bonds, the Japanese yen and the Singapore dollar. The test was carried out using the Polygon and Aave protocols.

Regulatory caution

Amid all this collaborative activity, Singapore has maintained a cautious approach to cryptocurrency and has sought to encourage innovation in the blockchain space while keeping watch over four areas of risk in the "crypto ecosystem": money laundering and terrorism financing risks, technology and cyber risks, consumer protection, and financial stability. This year, MAS has continued its efforts to regulate this nascent industry.

In April last year, the Financial Services and Markets (FSM) Bill was passed in the Singapore Parliament. The FSM Act aims to fortify and consolidate MAS’ regulatory powers in the financial sector. These powers will address core risk areas that include money laundering and terrorism, regulation of digital token service providers. Notably, the FSM will widen MAS’ ability to issue prohibition orders and regulate virtual asset service providers. 

MAS has published two consultation papers proposing measures, firstly, to regulate cryptocurrency trading and the risk of consumer harm, and also to support the development of stablecoins by enhancing standards. These measures will form a part of the Payment Services Act 2019.

Protecting retail traders

As cryptocurrencies form a key part of the digital asset ecosystem, MAS does not deem it feasible to ban them. To reduce the harm to retail traders, the proposed measures will cover the following areas:

• Consumer access. Digital payment token (DPT) service providers will have to provide risk disclosures. The use of leverage by retail customers for cryptocurrency trading will be banned.
• Business conduct. DPT service providers will need to segregate customer assets, mitigate potential conflicts of interest and implement complaints handling processes.
• Technology risks. DPT service providers will need to ensure that their critical systems are available and recoverable.

Similarly, stablecoins form an essential part of the digital asset ecosystem by facilitating transactions and acting as a medium of exchange. MAS will stipulate issuer requirements pertaining to:

• Value stability. Single-currency pegged stablecoins (SCS) issuers must hold reserve assets in cash, cash equivalents or short-dated sovereign debt securities that are at least equivalent to 100% of the par value of the outstanding SCS in circulation, and these assets must be denominated in the same currency as the pegged currency. Requirements on audit and segregation of reserves, and timely redemption at par value will also apply.
• Reference currency. All SCS issued in Singapore can be pegged only to the Singapore dollar or any Group of Ten currencies.
• Disclosures. Stablecoin issuers will be required to publish a white paper disclosing details of the SCS, including the redemption rights of stablecoin holders.
• Prudential standards. SCS issuers must, at all times, meet a base capital requirement of the higher of S$1 million or 50% of annual operating expenses of the SCS issuer.  They are also required to hold liquid assets which are valued at higher of 50% of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down.  

However, some prominent members of the crypto community have criticised Singapore’s approach. While appreciative of Singapore’s efforts to regulate the cryptocurrencies, Ethereum co-founder Vitalik Buterin, told The Strait Times in November 2022 that cryptocurrency and blockchain have a “tight connection” and without cryptocurrency, the blockchains that come up will be “fake and nobody’s going to care about them”. 

In a similar vein, Coinbase co-founder and CEO Brian Armstrong, also speaking at the Singapore FinTech Festival 2022 in November, found it “incompatible” in his mind that “Singapore wants to be a Web3 hub, and then simultaneously say: ‘Oh, we’re not really going to allow retail trading or self-hosted wallets to be available'”.

Private sector developments

A number of blockchain companies – Coinhako, Yojee, Electrify and Bluezelle – have drawn attention in recent years Coinhako, the cryptocurrency trading platform, was recently granted an MAS licence to provide services related to digital payment tokens. Coinhako said it recorded a 50% increase in the average trade amount from institutional investors between January 2022 and June 2022, despite volatility in financial and crypto markets.

However, there have not been any substantial updates for the remaining companies we noted.

The metaverse and non-fungible tokens 

Accompanying the crypto crash was the sharp fall of non-fungible tokens (NFTs) – blockchain-based tokens that represent a unique asset, such as digital content or even physical objects such as art. According to Reuters, global NFT sales have plunged to US$3.4 billion in the third quarter of 2022, down from the peak of US$12.5 billion in the first quarter of the year. Despite this trend, there continues to be interest in NFTs. 

Some believe that NFTs will be a key part of the metaverse. In Singapore, DBS has announced a partnership with The Sandbox to create a metaverse experience, acquiring a unit of virtual real estate represented by the LAND NFT. A Singaporean couple even held the first metaverse wedding on The Sandbox, with guests using NFTs to gain access to certain amenities such as VIP access areas. 

Ethereum sign-in

One of the new ways to identify oneself online under development in 2023 is the Ethereum sign-in. Part and parcel of using the internet is creating accounts to access websites or applications. Many websites and applications make use of third-party identity services to make this process more convenient. For example, a service providers account can be used to sign into the Financial Times website. 

At first glance, sign-in with Ethereum (SIWE) appears to provide a similar service to other major identity service providers have to offer. The key difference is that SIWE allows the verification of users without the need for a centralised identity provider. This means that SIWE users have self-custody – users have sole possession over their digital assets and control their private key.

In contrast, centralised identity providers control what type of information (such as your name or email address) is associated with one’s digital identity. SIWE allows users to use their Ethereum wallet as an identifier. The wallet is verified in a secure and decentralised manner through the Ethereum blockchain. SIWE therefore seeks to provide users with greater autonomy over their digital identities. 

Zero knowledge proof identification

Another development is zero knowledge proof (ZKP), which is a way for one party to prove to another party that they possess certain information without revealing the actual information itself. For example, a party proving its identity will want to show it possesses a certain password without providing the password itself. To do so, this party will be challenged with a number of queries or tasks that only it can answer or complete.

An advantage of ZKP technology is that it allows for secure authentication without revealing sensitive information. This can strengthen banking transactions, where ZKP can be used to authenticate a customer’s identity at various stages, including customer onboarding, loan processing and account creation. ZKP could also allow a payee to show that they have sufficient monies in their bank account without disclosing the actual amount.