MAS publishes updated guidelines for stablecoin issuers

Earlier this week, the Monetary Authority of Singapore (MAS) published updated guidelines for some stablecoin issuers in Singapore.

According to the MAS’ media release, the new regulations would seek to ensure a ‘high degree of value stability for stablecoins regulated in Singapore’. These new regulations follow the publication of two consultation papers published last October, and incorporates feedback obtained from the two papers.

The new regulations will apply to single-currency stablecoins pegged to the Singapore Dollar or any G10 currency. These include the US Dollar, Euro, British Pound, Japanese Yen, Australian Dollar, New Zealand Dollar, Canadian Dollar, Swiss Franc, Norwegian Krone, and Swedish Krona.

New requirements for stablecoin issuers

First off, global stablecoin issuers will be allowed to continue operating in Singapore, but multi-jurisdiction issuance is not covered by the new framework. As such, MAS-regulated stablecoins must be issued only in Singapore.

All issuers must also meet prudential requirements, including a base capital minimum of S$1 million or 50 per cent of annual operating expenses of the stablecoin issuer.

Stablecoin issuers are also not allowed to undertake other activities that may introduce additional risks to itself, such as lending, investing, staking, or trading. However, sister companies in which the stablecoin issuer does not have a stake in may conduct such activities.

In addition, MAS-regulated stablecoins must be fully backed by a basket of low-risk reserve assets, which are segregated from the issuer’s corporate assets. These reserve assets must also be marked to market daily, and subjected to an independent valuation on a monthly basis.

Commenting on whether or not these new regulations would potentially harm the stablecoin industry, Kenny Chan, Head of StraitsX, suggested that “while some adaptation will be required, we see such a framework contributing to the growth of the digital assets industry as a whole; with low-risk, asset-backed stablecoins playing a key role in supporting the development of additional value-added payment use cases.”

StraitsX is a company that issues stablecoins denominated in Singapore Dollars, and primarily focuses on the Southeast Asia.

Redemption of stablecoins must also be at par and completed within five business days, and redemption conditions must be disclosed upfront.

Other tokens that do not fulfil these requirements or fall outside of this framework will continue to be regulated as digital payment tokens.

While MAS has previously proposed that stablecoin issuers must engage an independent custodian to hold customer assets, the new regulation also allows for overseas custodians, provided that these custodians have a licensed branch in Singapore.

Angela Ang, Senior Policy Advisor for blockchain intelligence firm TRM Labs, suggested that “MAS’ decision to hold back on certain proposals… shows that it is listening to the industry and is sensitive to practical considerations”.

Existing anti-money laundering and counter-terrorism financing measures that are applied to Digital Payment Token service providers and banks will also be applicable to stablecoin issuers.

Chan also expressed support for the new regulation, pointing out that “the regulatory landscape in Singapore has typically been practical and progressive for ecosystem players. Singapore’s position as a trusted hub for global business provides a strong foundation for other countries to at least take reference from such a framework, and adjust based on the best interests of local market conditions.”

Delicate balance

The new regulations, as expected, are designed to protect consumers. MAS’ consultation report even says as much, stating that the business restrictions are supposed to ‘ringfence and mitigate risks to the stablecoin issuer in lieu of a comprehensive risk-based capital regime’.

Requiring that stablecoin issuers maintain a 100 per cent reserve ratio would certainly ensure that if stablecoin issuers need to wind down their business, customers will at least be able to redeem their outstanding tokens.

Additionally, prohibiting stablecoin issuers from engaging in other forms of financial activity like trading, investing, and lending would also ensure that they do not take undue risks.

These two conditions together, however, might be slightly restrictive.

Stablecoin issuers like Circle do hold collateral in the form of treasury bonds, which could be considered a low-risk investment. However, it might also mean that any excess capital that a stablecoin issuer holds, such as profits, may not be utilised to its full potential, since they cannot engage in trading, lending, or investing.

Of course, stablecoin issuers also have to consider expenses such as operational costs, of which their profits will be used to cover, but beyond these costs, restricting what stablecoin issuers can do with their profits would seem excessively cautious.

Investing in future projects through research and development, for example, hardly seems to be something that should be discouraged.

Additionally, the 100 per cent reserve requirement also means that developers have less options to choose from when designing stablecoins.

The stablecoin trilemma suggests that there are three different objectives for stablecoins, which cannot be achieved simultaneously. As such, developers must choose two of the three to focus on. These are price stability, capital efficiency, and decentralisation.

Mandating a 100 per cent reserve ratio would mean that stablecoins will maintain price stability. This is arguably the most important objective, the raison d’etre of a stablecoin, and is often achieved via collateralisation.

Developers will then have to choose between capital efficiency or decentralisation.

Stablecoins like BUSD and USDC have chosen capital efficiency, and therefore forego decentralisation. Binance and Circle instead take on the responsibility of issuing, collateralising, and managing the stablecoin.

There is also the possibility of combining decentralisation and price stability, which is the choice that stablecoins like DAI have chosen. Because of this, these coins are overcollateralised, and therefore capital inefficient.

Finally, there is also the choice of algorithmic stablecoins, which do not rely on collateral to back their value. The most prominent example of this was UST, which was collateralised by its sister token Luna, until the pair crashed spectacularly last year.

A 100 per cent reserve ratio would almost certainly defeat the purpose of an algorithmic stablecoin, which might still hold some promise.

After all, traditional financial institutions do not always keep a 100 per cent reserve ratio since it is unlikely that all depositors will demand withdrawals at the same time.

Then again, cryptocurrency is not the same as traditional finance, where centralisation is the norm. Without centralised institutions like lenders of last resort, it can be difficult to argue that cryptocurrencies should be granted the same privileges that traditional finance enjoys.

Yet, the potential remains there- and it might prove a great pity not to explore it further. Given the cautious nature of MAS’ policies, however, it might prove a while before such exploration can take place, barring some ingenious proposal that would allay their concerns.