By Nizam Ismail
Ravi Menon, the managing director of the Monetary Authority of Singapore, in a recent speech, declared that “to get innovation right, we must get regulation right”. This was in the context of Singapore’s fintech growth agenda.
The MAS has, to its credit, put in a lot of thought and effort in redesigning its regulatory framework to facilitate innovation, leading to the growth of FinTech (including blockchain-based platforms) in Singapore.
Menon’s speech is interesting as it sets out the thinking of the MAS’ chief on regulations and innovation:
This is a creative tension in managing risk while facilitating innovation. MAS takes a pragmatic and flexible approach; there is no one-size-fits-all approach.
Regulators sometimes do not rush to regulate so that they do not front-run innovation. MAS cited the example of Blockchain or DLT where the technology is still evolving.
MAS does update regulation to take account of new technologies and new risks (e.g. cloud computing and robo-advisers, where we specific guidelines were issued.
MAS sometimes specifically describes the risks they want to address and take a targeted approach to regulation (e.g. for crypto assets, the focus is on the crypto intermediaries for anti-money laundering purposes rather than the crypto assets.)
MAS sometimes take an activity-based approach to regulation, setting rules for specific activities rather than the entity as a whole (e.g. in the case of the proposed Payment Services Bill, where licensees will be regulated according to the activities they conduct).
Cryptocurrency Regulations — is it Really All About AML?
In the context of regulating crypto-assets (which includes crypto currencies and also ICOs), MAS’ statement above does not come as a surprise, as the regulator has on several occasions highlighted AML/CFT as its key area of focus.
However, the regulator’s eager pronouncement of crypto-assets as being particularly risky for introducing money laundering risks needs to be moderated.
There are inherent features in the immutability of blockchain / DLT protocols which mitigates against money laundering risks.
A criminal choosing to launder his monies over crypto assets must be rather foolish — he runs the risk creating a permanent audit trail of his crime for investigators. Rather like committing a murder and leaving your bloodied fingerprints all over the crime scene.
For instance, the prosecution of defendants related to the infamous Silk Road was largely facilitated by audit trails on the Blockchain.
But more fundamentally, as crypto-assets become more prevalent, there will be significant regulatory issues (other than AML/CFT) that parallel conventional financial products that must be addressed by regulators (e.g. disclosures of material risks, suitability of products, regulation of advice on crypto-assets, custody, licensing, supervision, technology risk management etc).
The fixation on AML/CFT risks must therefore be moderated with these other key regulatory risks.
Regulatory Sandboxes — Time to Loosen the Reins
I wrote in March 2017 about how regulatory sandboxes were great in concept, but poor in execution.
In his speech, the MAS Chief mentioned that MAS has streamlined their internal processes and made the sandbox application form more straightforward, reducing the processing time for sandbox applications.
It has since been more than a year since MAS announced their intention to review their sandbox regime.
MAS has now mentioned that it is still exploring the idea of “pre-defined sandboxes” where firms can start their experiments more quickly without going through the rigorous review process.
MAS must quickly review its regulatory sandbox approach. The Sandbox regime has been put in place in July 2016. From the MAS releases, only a handful of startups have been placed in the regulatory sandbox over the last two years.
We need to encourage more FinTech startups in the sandbox to allow innovation to flourish quickly.
There must be a stronger commitment for Regulators to take risks. The regulatory sandbox provides a good compromise (between regulation and innovation) for controlled experiments to take place.
Nizam Ismail is Partner and Head of Financial Services of RHTLaw Taylor Wessing, and co-Founder of RHT Compliance Solutions. He draws upon his experience as a former regulator, former prosecutor and former head of compliance of international investment banks, to advise blockchain companies on regulatory and legal issues. He is a Fellow in the Singapore University of Social Sciences, Head of the Regulatory Sub-Committee of ACCESS (Blockchain Association in Singapore) and a founding member of the Global ICO Transparency Alliance.