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Under Ravi Menon’s leadership, the Monetary Authority of Singapore has been praised for nurturing innovation without sacrificing security, and helping the city state become one of the world’s most advanced financial centres and an attractive hub for fintech start-ups.
Now the managing director — whose eight-year stint was extended for another two years in May — is setting his sights on regulating technology such as blockchain and supporting the next phase of growth in the financial sector by issuing Singapore’s first digital bank licences.
The combined central bank and financial regulator has steered new legislation that will regulate entities that provide digital payment tokens, merchant acquisition and domestic money transfer services for the first time. The payments services act — which took two years to craft and comes into force in January next year — brings about 200 additional payments entities under the MAS’s regulatory ambit to ensure consumer protection.
The authority studied payments regulation in the UK, Canada, Hong Kong and Australia in an effort to craft an all-encompassing piece of legislation. “Our payments services act is quite cutting edge in terms of the breadth of its coverage,” says Mr Menon.
Mr Menon says the legislation aims to promote innovation by regulating according to each activity and the risk it carries, rather than by each provider. While regional rivals such as South Korea have cracked down on cryptocurrencies, for example, Singapore has taken a more granular approach.
Blockchain-powered cryptocurrencies have “taken on a life of [their] own”, he says, with speculation around the assets presenting risks, but the MAS refuses to write off blockchain wholesale. “There is no purpose in trying to ban cryptocurrencies,” he says.
Mr Menon believes blockchain technology could be well-suited to services that involve cross-border payments and verification of trade finance invoicing, and for running customer checks digitally. “We don’t regulate the technology, we regulate the use-cases,” he says.
Although greater regulation can mean “more work and more cost” for some businesses, having to adhere to anti-money-laundering requirements, for instance, can signal a company’s legitimacy, says Adrian Ang, partner and co-head of fintech practice at law firm Allen & Gledhill. “If you are a licensed entity, you are more credible to the market.”
In the longer term, Singapore faces competition from regional rival financial centres such as Bangkok and Jakarta. Beh Swan Gin, chairman at Singapore’s Economic Development Board, has previously tipped these cities as “natural candidates” to become significant financial centres.
Mr Menon views their successes as beneficial for the whole region, however. “This will add [to], not subtract from, Singapore’s position as a leading fintech hub,” he says, dismissing concerns that the country’s relatively high costs of living and doing business could see companies shift towards competitors.
“Talent will gravitate to where opportunities for innovation are abundant, where the regulatory environment is conducive, and where living conditions are pleasant. On all these factors, Singapore scores well. Cost is not everything.”
Singapore’s fintech ecosystem is about to expand further, with the MAS set to issue up to five digital bank licences. Companies have until the end of the year to apply and successful applicants will be announced in mid-2020.
Critics argue that the city’s banking sector is already very advanced and does not need digital banks. Mr Menon admits that the usual reasons to launch digital banks — to spur competition and innovation — do not apply to Singapore, whose incumbent lenders have invested heavily in digital services in the past few years.
But the decision will help to ensure the city is not left behind as a financial centre. If digital banks are going to take off, Mr Menon says, “we want to make sure Singapore has some of those players . . . We want to make sure we are part of that”. They could also cater to underserved segments of the market such as small and medium enterprises, he adds.
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Mr Menon is quick to address what some critics view as unfair competition for incumbent banks as tech players tend to benefit from less stringent profit targets and capital requirements.
Licence applicants must provide a five-year financial projection showing a path towards profitability, one “that doesn’t depend on burning cash and being subsidised by other parts of [their] entity”, Mr Menon says. Yet some incumbents argue that a genuinely level playing field would involve those digital banks actually achieving profitability within two to three years.
A report earlier this month by Fitch, the rating agency, should offer some salve. It said the five new digital licences pose a minimal threat to the dominance of Singapore’s big banks “because of their strong franchises and growing digital capabilities, and the regulator’s commitment to prevent value-destructive competition”.
Newcomers will be met with a high bar, Mr Menon says. As digital banks’ balance sheets and deposit bases grow, “we expect them to meet all the requirements that we place on our banks, Basel III, everything”, he says. “It’s a graduated pathway but the end point is full regulatory compliance.”
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