Commentary: Will Bitcoin become mainstream currency in Singapore one day?
Despite its increased use and popularity in Singapore, Bitcoin has several characteristics that make it unsuitable for use as a transactional currency, say Hannah Yee-Fen Lim and Boh Wai Fong from NTU.
SINGAPORE: We see increasing interest in Bitcoin and other cryptocurrencies as the price of Bitcoin rallied and crashed, showing an almost ten-fold increase in price over a one-year period.
Bitcoin is to date the highest valued or most expensive cryptocurrency in the world having grown by 276 per cent in the last year alone, well ahead of others such as Ether used on the Ethereum network.
It peaked in April this year before crashing to almost half its value in June. Singapore investors, too, are keeping a sharp eye on Bitcoin and cryptocurrencies, with traditional institutions such as banks starting blockchain funds to give their high-net-worth investors the opportunity to invest in cryptocurrencies.
We even see traditional businesses like Kopitiam in Funan announcing that they will be accepting cryptocurrencies like Bitcoin and Ethereum. As of January, there were eight Bitcoin ATMs in Singapore, and about 51 businesses listed as accepting cryptocurrencies for payment, according to Statista.
BITCOIN AS A TRANSACTIONAL CURRENCY
Bitcoin, however, has several characteristics that make it unsuitable for use as a transactional currency.
The volatility of Bitcoin suggests that both consumers and merchants bear exchange-rate risk, which arises from the need to change fiat currency to Bitcoin.
For instance, in 2010 we saw the first ever commercial transaction using Bitcoin to purchase a pair of pizzas for 10,000 Bitcoins – what is said to equate to about US$40 then would cost almost US$400 million today.
The inefficiency of blockchain with transactions taking hours, even days, to be confirmed, and the use of proof of work in Bitcoin mining also results in excessive electricity use, leading to sustainability issues.
So, it is unlikely that Bitcoin will see widespread adoption locally as a currency for transactions, although other forms of virtual currencies or stable coins with values pegged to certain fiat currencies may see wider adoption as a currency for transactions.
Further, there are limited regulatory protections for the customers of cryptocurrencies, which mean that unlike e-money stored in an EZ-Link card or in a bank account, should the company become insolvent, the customers of cryptocurrencies may well lose the entire amount.
In this regard, the Monetary Authority of Singapore (MAS) has required cryptocurrency firms to make clear and appropriate disclosures to their customers, including merchants, so that all customers are aware of the risks.
Cryptocurrencies are not legal tender, nor are they securities. Instead, they are considered goods, just like collectors’ cards which people can buy from vending machines or shops. And as a good, they can be used as a medium of exchange.
BITCOIN AS AN INVESTMENT INSTRUMENT
But with high-net-worth investors increasingly interested in incorporating cryptocurrencies into their investment portfolio and mainstream banks such as DBS offering investment opportunities to clients featuring cryptocurrencies as part of the portfolio, we are likely to see increasing interest amongst local investors in cryptocurrencies given its increased availability from banks.
It should be noted however that the size of the cryptocurrency market in Singapore remains extremely small, according to the MAS. Over the years, the MAS has repeatedly issued consumer advisories to warn the public of the risks of trading or investing in cryptocurrencies.
The prices of cryptocurrencies can be highly volatile and are often speculative in nature. This is not surprising given that factually and scientifically, cryptocurrencies are nothing more than bytes of data sitting on computers in networks.
They are not pegged to any nation’s economy or economic fundamentals and their value cannot be objectively measured or ascertained. Their values are simply what people think they are worth, very much like collectible cards, and even fluctuating according to the tweets of billionaires like Elon Musk.
The massive quick increases in value are attractive to those hoping to make fast profits – investors are always hopeful that they can buy at the trough and sell at the peak, especially since the rise and fall cycles occur frequently and rapidly.
RULES AGAINST MISUSE
In addition to warning consumers of the speculative nature of many of these virtual assets, the MAS has imposed rules to combat the misuse of cryptocurrencies to finance terrorism and weapons proliferation, and money laundering such as laundering proceeds from drug trafficking and the use of cryptocurrencies to receive ransom or other illicit payments.
The ability of cryptocurrencies to be moved or used quickly, relatively anonymously and the cross-border nature of such transactions means that they are ideal mechanisms for money laundering.
Further, cryptocurrency assets stolen from cryptocurrency firms with poor governance or cybersecurity measures can be laundered unnoticed either through other firms with equally poor governance or cybersecurity measures or through DeFi - decentralised finance systems - which has no intermediaries for transactions.
REGULATION FOR PROVIDERS
In Singapore, entities offering the trading of cryptocurrencies are regulated as digital payment token service providers under the Payment Services Act and need to be licensed.
Similarly, entities that deal in cryptocurrencies or facilitate the transmission of cryptocurrencies or provide custodian wallet services also need to be licensed and comply with all the requirements.
Although the regulatory intent is to address money laundering and terrorism financing risks, the requirements on the entities are fairly substantial, which may in turn disincentivise firms from offering the services widely.
For example, prior to any transaction, rigorous customer due diligence is required, coupled with constant and continuous monitoring.
Further, the MAS has now been equipped with the powers to impose additional measures on cryptocurrency firms as needed in a swift manner. All of these will be dampeners for providers and investors of cryptocurrency.
Overall, we believe that Bitcoin is unlikely to become mainstream as a transactional currency. Cryptocurrencies that can become a currency supporting transactions should be stable and efficient – attributes that are not associated with Bitcoin.
Bitcoin may gain increasing interest of investors, who will have to deal with the inherent volatility as the Bitcoin is not tied to any underlying asset, but its value is highly dependent on investors’ expectations – which is why a tweet from Elon Musk is all it takes to cause wild fluctuations in its value.
Hannah Yee-Fen Lim is an Associate Professor of Business Law at Nanyang Business School, NTU and one of 15 international legal experts appointed by the International Institute for the Unification of Private Law to draft new international model laws on cryptocurrencies and other digital assets. Boh Wai Fong is Deputy Dean and Professor of Information Systems at Nanyang Business School, NTU.
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