Managing the risk of cryptocurrencies like bitcoin while not stifling innovation continues to test central banks, said Monetary Authority of Singapore (MAS) managing director Ravi Menon yesterday.
Mr Menon told a conference that MAS has been watching the crypto space with great interest.
A second generation of what he termed "crypto tokens" rather than "crypto currencies" is emerging to address some of the challenges related to network congestion, energy costs, money laundering risks and, importantly, price stability.
"Some of the best minds in the field are applying their creative energies to make crypto tokens mainstream," Mr Menon added.
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."
Bitcoin - the most well-known cryptocurrency - hit a high of nearly US$20,000 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 how to harness the potentially transformative benefits of blockchain technology and crypto tokens while containing some of their risks, Mr Menon said.
Blockchain is basically a way to maintain a database without a central authority and is the process which creates bitcoins.
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.
MR RAVI MENON, managing director of MAS.
MAS has chosen not to regulate crypto tokens directly, said Mr Menon. Instead it is focusing on related activities, evaluating the different kinds of risks these pose and considering the appropriate regulatory responses while seeking to ensure innovation is not stifled.
"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 said.
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," he added.
"MAS is also watching with interest developments in the US, where futures contracts based on crypto tokens have been introduced on regulated exchanges."
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 noted as well that regulation cannot address all the concerns around 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."