SINGAPORE - How regulators manage crypto-currencies risks and not stifle innovation continues to be the challenge facing central banks, said Mr Ravi Menon, the Monetary Authority of Singapore's managing director.

MAS has been watching the crypto space with great interest, said Mr Menon on Thursday (March 15) at a payments conference.

Using the term "crypto tokens" rather than "crypto currencies" or "crypto assets", he said that a second generation of crypto tokens is emerging to address some of the current challenges related to network congestion, transaction time, energy costs, money laundering risks, and more importantly, price stability.

"Some of the best minds in the field are applying their creative energies to make crypto tokens mainstream," he said.

Not all developers and programmers in the crypto world are anti-establishment anarchists, he said.

"Many may have been 10 years ago, but a growing number are married and have kids now! They know the value of stability," said Mr Menon.

Bitcoin - the most well-known of the crypto currencies or assets - hit a high of nearly US$20,000 (S$26,400) in December last year and then lost two-thirds of its value in just over a month.

The challenge for central banks and regulators is this: how can we harness the potentially transformative benefits of blockchain technology and crypto tokens while containing some of their risks, he said.

MAS has chosen not to regulate crypto tokens directly. Instead, it is focusing on the activities associated with crypto tokens, evaluating the different kinds of risks that these activities pose, and considering the appropriate regulatory responses, all the while seeking to ensure that innovation is not stifled, said Mr Menon.

"The key risks MAS is monitoring in the crypto world are in the areas of financial stability, money laundering, investor protection and market functioning," he added.

There is market risk from the direct exposure of financial institutions to crypto tokens; credit risk through unsecured lending to crypto token businesses; and leverage when borrowers pledge crypto tokens as collateral to borrow and buy more crypto tokens.

"MAS assesses that the nature and scale of crypto token activities in Singapore do not currently pose a significant risk to financial stability. But this situation could change, and so we are closely watching this space."

MAS is also watching with interest developments in the US, where futures contracts based on crypto tokens have been introduced on regulated exchanges, he said. There may be some advantages here from a market integrity perspective, he said.

These exchanges have clear rules governing trade and post-trade activities, and such products could also potentially have a stabilising influence on crypto token prices as they provide two-way hedging opportunities for investors, said Mr Menon.

He also said that regulation cannot address all the concerns over crypto tokens.

"The industry too has a part to play in strengthening the ecosystem, for instance, by adopting best practices around transparency, cyber security and record-keeping."