SINGAPORE. Vulnerabilities in the crypto ecosystem could pose a significant risk to financial stability around the world, including in Singapore if its ties to the traditional financial system increase over time, Singapore’s central bank said on Friday.
As such, cryptocurrencies, digital assets and the underlying technologies require increased surveillance, the Monetary Authority of Singapore (MAS) report in the Financial Stability Review (FSR) 2022 says.
This is not the first time MAS has raised a red flag regarding crypto. He raised his concerns at FSR 2021 and has since taken several steps to avoid any potential financial shock and protect local investors.
Some of those fears were confirmed this year as the global crypto market crashed.
By October 2022, the market capitalization of crypto firms had fallen to around $900 billion ($1.24 trillion) from a peak of $2.8 trillion in November 2021.
The downturn began in April of this year when the US Securities and Exchange Commission announced that they would begin imposing regulations on crypto firms, setting the stage for a massive sell-off.
Cryptocurrency hedge fund Three Arrows Capital filed for bankruptcy in July, followed by a string of similar bankruptcies, with FTX being the most recent.
“Recent events, including the collapse of crypto exchanges, have also shown how the failure of a key crypto entity can lead to the infection of the crypto asset ecosystem,” the latest FSR MAS said.
While these events did not have a significant impact on the global financial system as a whole due to its limited ties to crypto assets, they did demonstrate some of the vulnerabilities in the crypto asset ecosystem.
“Given the potential for rapid growth of the cryptoasset ecosystem, the vulnerabilities associated with it and their implications for financial stability require constant close monitoring and proportionate regulation,” the central bank emphasized.
MAS has long held the view that financial innovation can improve the financial intermediation process and the functioning of the financial system as a whole.
“Digital assets and the technologies behind them, including crypto assets and DeFi (decentralized finance), can improve the efficiency of the financial system, which will benefit market participants and other actors in the real economy,” the message says.
For example, MAS said that the tokenization of assets and their placement in blockchain networks can reduce settlement time and costs for cross-border payments, trade finance and capital markets.
However, crypto assets and DeFi present many vulnerabilities, some of which are inherent in the crypto asset ecosystem.