Q&A: Nizam Ismail, Founder and CEO, Singapore-based Ethikom Consultancy

By Staff Writer

Q1: Recent research from LinkedIn shows that the blockchain is the fastest-growing job market in Singapore. And there are now nearly 400 fintech firms in the city, which means things are really heating up for the city as a blockchain hub. What are you hearing from your clients?

  • If the record attendance of 46k visitors attendance at the SFF 2019 is any indicator, there has never been a stronger surge of support for FinTech in Singapore.
  • While we are still working with conventional financial services firms, the proportion of consultancy work with FinTech firms is increasing still.  We have seen quite a few of the bigger and more established FinTech firms come to Singapore as a launchpad into Asia, rather than the predominantly start-up play a few years ago.
  • In terms of trends, we are still seeing robust interest in the area of payment services, digital assets (digital securities, digital commodities, or cryptocurrencies) tokens and intermediaries.
  • Regulatory developments in Singapore, Singapore’s position as an international financial centre, infrastructure and a conducive ecosystem have driven FinTech growth.
  • For instance, MAS has adopted a more nuanced approach for the Recognised Market Operator regime (including introducing a “sandbox express” regime for RMOs) – which has facilitated the setup of RMOs.  This will invariably drive securities token adoption in Singapore.  This will, however, not be a retail play, but attract accredited and institutional investors (including funds and family offices). Singapore is setting itself up as a securities token hub in Asia – disrupting conventional capital markets.
  • Blockchain adoption is more circumscribed and probably more sustainable – the term “blockchain” is no longer used to hype up investor interest in a pitch deck)
  • Another key trend is digital banking – we are seeing the big tech companies getting into financial services.
  • Inter-marriages between conventional financial services and fintech firms will continue.  Some banks are already thinking their conventional approach towards banking.

Q2: Some of the latest regulatory initiatives by the Singaporean authorities are aimed to continuing to promote fintech and blockchain. I heard that the MAS is now looking to allow Singapore-based exchange to trade crypto derivatives. What does this mean for the crypto market in Singapore?

  • The MAS Consultation Paper essentially proposes the regulation of crypto derivatives, but only for approved exchanges (of which there are 4 in SG).  Approved exchanges are deemed to be systemically significant, and are regulated under the Securities and Futures Act.
  • However, crypto derivatives will remain unregulated for other intermediaries (including crypto exchanges).
  • The rationale for this is that the other parts of the industry are not ready to meet MAS” regulatory expectation for now.
  • Reaction is mixed – some like the idea that the space is not regulated, and this could facilitate innovation.  However, a contrary view is that the lack of a “level playing field” between approved exchanges and other intermediaries is troubling.  Waiting for the industry to get their game up before regulations step in could, in a perverse manner, encourages a race to the bottom. This is especially since crypto exchanges, which are the entities likely to introduce crypto derivatives, will be regulated under the Payment Services Act come 28 Jan 2020 for crypto transactions, but NOT for crypto derivatives.  This will be a regulatory anomaly.
  • There will not be a mad rush to introduce this for retail investors, though.  MAS has made it clear that they do not think that crypto derivatives are suited for the retail market.  In some other jurisdictions (e.g. the UK), crypto derivatives are banned for retail investors.

Q3: 2019 has been an interesting year for blockchain and crypto. While there has been some headway in terms of mainstream adoption but regulators have also finally caught up. Would this regulatory backlash (partly in response to the entry of big techs like FB into finance) throttle innovation in blockchain? 

  • By definition, regulators will never fully catch up as there will always be a lag between technological advancements / innovation and regulations.  The lag is a necessary one – as regulators will typically want to observe and understand the risks brought about by a new activity before putting in place a regulatory framework.
  • There are still gaps in regulation worldwide – e.g. lack of supranational body setting industry standards worldwide. It is still quite perplexing to see how different jurisdictions take diametrically-opposed regulatory positions for regulating cryptos – outright bans in some, imposition of securities regulation, or treatement as a separate regulatory bucket as digital payment tokens.
  • In the medium term, we can anticipate regulators to come up with clarity on the regulation of crypto derivatives, provide regulatory clarity on stable coins, and address business conduct issues for crypto exchanges (e.g. crypto wallet security, addressing conflicts of interest, curtailing market abuse)

Q4: AML/CFT continues to be on the top of the agenda of the global watchdogs, with the announcement of the FATF’s “travel rule” for VASPs (deadline of Sept 2020). How are the VASPs coping and what are you hearing from them?

  • The AML/CFT risks tend to be underscored by regulators and rightly so – due to the pseudonymous nature of transactions, speed, cross-border nature.
  • However, I wished that regulators also acknowledge the fact that the Blockchain itself presents a strong risk mitigating measure – due to the fact that it is an immutable record of transactions.  It is not difficult for law enforcement agencies to recreate trail of funds where cryptocurrencies are involved.
  • The AML/CFT for VASPs imposed by FATF is not unexpected.
  • The major crypto exchanges have put in place AML/CFT KYC processes. As crypto exchanges get regulated, it is inevitable that AML/CFT requirements become de rigueur.
  • Exchanges are already looking into strengthening the KYC process – taking into account this is likely to take place on a non-face-to-face basis.
  • We already have seen RegTech solutions being devised to take into account the specific risks of crypto exchanges (e.g. blacklisting crypto wallets associated with illicit activity or terrorist financing, anti-fraud or mitigating against market abuse).
  • The FATF recommendation will have trickle down effect on local regulations.  For instance, the MAS has prescribed a specific set of AML/CFT requirements for digital payment token activities – containing more prescriptive requirements compared with other payment services providers.
  • As regulators tighten AML/CFT regulation globally, it is important to calibrate regulations such that they do not impose undue compliance expectations – as this may have the effect of driving crypto activities “underground”, which will be detrimental.

Q5: Finally, what are some of the key regulatory risks that crypto/blockchain startups and traders should watch out for and what is your advice?

  • As you intersect with financial services (and there are plenty of use case for the blockchain in financial services), don’t forget the “fin” in fintech – financial services is the most heavily regulated industry in the world.
  • So get  sound regulatory advice as to whether you are engaging in a regulated activity and whether you would need a licence
  • Keep your eyes open on regulatory development – this will happen at a fast pace going forward.

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