By Aikana Williams

Following Beijing’s announcement in May 2021 that the Chinese government will enforce a crackdown on cryptocurrency transactions, Singapore has experienced an unprecedented rise in firms relocating their operational headquarters to the city-state. The new Chinese regulations have already come into effect, with the People’s Bank of China having made all cryptocurrency-related transactions and services illegal within the nation. These latest restrictions have severed China’s ties with overseas crypto exchanges, and prohibited financial institutions, payment companies and internet firms from partaking in cryptocurrency trading nationally. The People’s Bank of China has cited their desire to suppress currency speculation as a primary reason for their drastic measures. Indeed, the recent volatility of cryptocurrency prices is reflective of a rise in speculative trading of cryptocurrency, which has compromised the safety of people’s property and has “disrupted the normal economic and financial order.” The Bank also emphasised the risks of cryptocurrency trading, which they contend “are not supported by real value” and are easily manipulated due to its ability to circumvent government regulations when facilitating transactions between buyer and seller. As a result of the measures taken, the percentage of bitcoin mining occurring within China had “effectively dropped to zero,” by August 2021, a stark contrast to the situation in September 2019, when it was believed that roughly 76% of global bitcoin mining operations were occurring in China.

Nevertheless, whilst we witness the demise of the cryptocurrency industry in one nation, we see the simultaneous ascent of another. Its relaxed regulatory conditions and embracement of financial innovation has positioned Singapore as a dominant cryptocurrency player in Asia. With major cryptocurrency trading platforms such as Huobi, BitMart, and Biki announcing the closure of their accounts in China by the end of the year, several other Chinese-based companies such as Binance, ByBit, and OKCoin have relocated their operations to Singapore, which has led to an anomalous influx of cryptocurrencies exchanged from China, coupled with significant growth in Singapore’s cryptocurrency market. Singapore’s embracing attitude towards the Fintech industry has attracted this inundation of cryptocurrency, with the Monetary Authority of Singapore’s imposition of crypto-related legislation under the Payment Services Act being a notable measure that has been taken to accompany their steady movement towards owning and trading crypto. This legislation provides users and the government with protection from money laundering as well as terrorist-financing risks. In addition to this, the Monetary Authority of Singapore has “issued licenses to big investors” such as DBS Vickers and Independent Reserve, which illustrates the measures that are being taken by the Singaporean government to clearly define regulatory measures surrounding cryptocurrency, which, in the view of Lily Z King, a chief operating officer of a Singapore-based crypto asset management company, will further entice Chinese traders to relocate to Singapore and assist in preparing them for their new market.

As traders and cryptocurrency exchange companies pour out of the Chinese economy and relocate to nations with more relaxed regulations such as Singapore, we can identify an evident tension between China’s recent measures regarding cryptocurrency transactions and their goals surrounding advancements in financial technology; whether the nation will be able to implement these tight regulations on cryptocurrency and simultaneously attain their ambition of becoming a leader in blockchain technology, as President Xi Jinping stated in October 2019, is an idea that remains contested. Nevertheless, China has undoubtedly taken measures to ensure this goal is realised, most notably through its preparation to generate its autonomous central bank digital currency.

Further, whilst Singapore may currently be thriving from the inflow of cryptocurrency traders and companies, this will not come without certain costs. The IMF has issued a stark warning to the nation, asserting that the adoption of cryptocurrencies is not mutually exclusive to the possibility of tax evasion, given the non-regulatory nature of the form of payment. Growing cryptocurrency adoption could be a detriment to Singapore’s fiscal policy as government revenues may fall, and the further risks it poses to the economy are embedded within the use of leverage that is offered in cryptocurrency exchanges, which the IMF has previously found to have been as high as 125 times the initial investment. As a result, the IMF has encouraged the implementation of standards for cryptocurrency assets, not just in Singapore, but globally. There has been a strong emphasis on this regarding taxes, and that national regulators should “coordinate for effective enforcement to prevent regulatory arbitrage,” whilst minimising the systemic risks to the global financial system. Additionally, Singapore’s banking sector could be placed under immense pressure should the cryptocurrency system become an alternative to bank deposits or loans, in which case banks will be forced to seek more expensive funding sources to maintain their levels of growth.

It is vital that Singapore takes some form of precautionary measure to minimise these risks, as the influx of cryptocurrency platforms extends beyond just China. Recently, an Estonia-based cryptocurrency trading platform for retail investors called ‘Change’ made its first major expansion overseas by debuting a new office in Singapore. The company’s founder and CEO, Kristjan Kangro made a statement declaring that Singapore was the “natural next step” given the country’s “surging cryptocurrency community”, which will enable Change to utilise their presence in Singapore as a means of expanding to other global markets.

Singapore’s new position as the dominant powerhouse of cryptocurrency in Asia following China’s cryptocurrency ban is undeniably compelling – and will see the nation taking a more prominent role in Asia’s digital assets space. However, looking forward, the extent to which this phenomenon will benefit Singapore’s economy in the long-run is dependent upon the nation’s willingness to foresee the potential costs of the surge in cryptocurrency trading, and the extent to which it will adopt the necessary measures to protect its banks, businesses, and people.

The views expressed in this article are the author’s own, and may not reflect the opinions of The St Andrews Economist.