With the rise of cryptocurrency globally, there have been the creation of different types of cryptocurrencies, namely single-currency stablecoins, Crypto-collaterised stablecoins, as well as algorithmic stable coins. All these have different characteristics to it, and are regulated to different extents within Singapore, while all having their pros and cons.
Single-currency stablecoins
Single-currency stablecoins are generally backed one-to-one by high quality, liquid assets like fiat currency or short-term government securities held in reserves. In this regard, each coin issued is supported by an underlying asset, which helps stabilise its price.
Pros: The key distinguisher between single-currency stablecoins and other types of coins would be its stability. As it is normally tagged to a major fiat currency, its price stability is strong, and thus would be more resistant to market shocks and recovering from operational risks.
Cons: The main concern that lies with single-currency stablecoins is the risk of the company issuing the stable coin not managing its reserves honestly and securely.
Crypto-collaterised stablecoins
Crypto-collaterised stablecoins are backed by other cryptocurrencies, and are often over-collaterised, where the value of cryptocurrency held in reserves exceeds the value of the stablecoins issued.
Pros: Crypto-collaterised stablecoins are relatively more censorship resistant than single-currency stablecoins, as they are less susceptible to government freezes or blacklisting, thus having a lower chance of getting targeted or shut down.
Cons: Similar to algorithmic stablecoins, a major issue with Crypto-collaterised stablecoins is the inherent volatility present. When collateral value drops below critical thresholds, smart contracts would execute forced sales, and with the multiple liquidations happening, a market-wide pressure will be triggered.
Algorithmic stablecoins
The main difference between algorithmic stablecoins and other coins is the strategy of keeping the stablecoin’s value stable. Contrary to other coins, which rely on a reserve asset, algorithmic stablecoins control its supply through an algorithm, responding to supply and demand imbalances by minting or burning tokens.
Pros: Regardless of the cons of algorithmic stablecoins, many users are interested in it, due to its decentralised nature. While single-currency stablecoins and crypto-collaterised stablecoins rely on a central issuer, algorithmic stablecoins operate on smart contracts and protocols, reducing the need for trust in a central party. This makes them more censorship resistant, as there’s no single entity that regulators can easily target or shut down.
Cons: A grave concern with algorithmic stablecoins would be that once they fail to achieve their function of maintaining price stability, they no longer serve the needs of users, and will lose value without a safety net.
Stablecoin regulatory framework
Currently, the Monetary Authority of Singapore (MAS) has finalised a stablecoin regulatory framework, which is entirely focused on single-currency stablecoins that are pegged to a single fiat currency issued in Singapore. Issuers of these single-currency stable coins who meet the requirement will be marketed as MAS-regulated stablecoins, which will be a mark of quality among the cryptocurrency market.
While this framework has its merits, it is limited to single-currency stablecoins, and excludes crypto-collaterised and algorithmic stablecoins.Stablecoins outside the SCS scope (e.g., crypto-collateralised or algorithmic) are treated as Digital Payment Tokens under the PSA and are not subject to MAS’ value-stability requirements (they remain subject to AML/CFT and technology-risk controls).
Conclusion
Singapore’s current stance is a “wait and see” approach, where they are pending further study and international consensus on handling the unique risks brought about by Crypto-collaterised stablecoins, as well as algorithmic stablecoins. As cryptocurrencies continuously develop, policies regarding it will also update rapidly. To navigate this complex crypto scene, it is useful to have a lawyer to advise you based on your specific situation. If you require professional guidance in this regard, do contact the Advomi team, where we have a team of qualified lawyers to assist you in your operations.
Disclaimer: This article provides general information and does not constitute legal advice. Please seek professional advice for your specific situation.
