New S’pore guidelines are baby steps in tackling digital asset entities’ banking woes: Market players

SINGAPORE - New guidelines that lay out how banks should handle clients linked to digital assets are small steps in building up the Singapore Web3 ecosystem, said market players and observers.

They welcomed the

best practices released last week

that financial institutions can consider when managing cryptocurrency-related money-laundering, terrorism financing and sanctions risks, saying Singapore is one of the leading jurisdictions in putting forward practical ideas to resolve the banking dilemma.

But many are doubtful about how much the guidance will move the needle for the digital asset sector, which has found it tough to be banked, not just in Singapore but also overseas.

Market sources said the rule of thumb for banks is to avoid taking in digital asset firms as clients, due to money-laundering, terrorism financing and sanctions risks. This makes it hard for the firms to gain access to fully integrated banking services, which in turn affects their operations.

They noted that even if these companies are considered by the banks, it would take between nine and 12 months to clear due diligence checks.

Banks have said there is no set timeframe for a new customer to be onboarded. They noted that the process factors in the ability of the prospective customer to fulfil information requirements, the complexity of the business model, the nature of products and services required, and the risk profile of the specific customer.

Mr Shadab Taiyabi, president of the Singapore Fintech Association, said the guidelines are important in providing transparency on key issues and solutions, but “they are not in themselves a silver bullet”.

He said the issue of banking crypto-linked clients is multi-faceted – it includes the commercial case for banks to service the sector, the costs of managing banks’ risks, and requires more overall awareness and interactions between financial institutions, regulators and Web3 companies.

Banking access is vital for Singapore to continue to be a global financial technology and financial services hub, so a more nuanced and educated approach by banks is needed to resolve the issue, Mr Taiyabi said.

The Monetary Authority of Singapore (MAS) last week shared the best practices for banks’ consideration when they deal with clients that have links to digital assets, such as exchanges and individuals whose wealth comes from cryptocurrencies.

Among them is a suggestion for banks to request information that documents the nature of a customer’s crypto exposure and the intended usage of the account. They should also establish the source of the client’s wealth.

The guidelines also propose the use of blockchain screening tools to review the on-chain activity of digital-token payment service providers.

Mr Daniel Lee, head of Web3 at European payments bank Banking Circle, said the new guidance could persuade banks to be more open to firms in the digital asset space.

He added that while it is expensive for financial institutions to build a team with the relevant tools to carry out on-chain screening, there are firms – such as Elliptic and Chainalysis – that can investigate wallets.

Mr Gerald Goh, chief executive of digital assets firm Sygnum Singapore, noted that a clear and well-defined framework in assessing digital assets with the risks in mind will help the industry and give banks the confidence to raise exposure to this growing asset class.

The global chief commercial officer at cryptocurrency exchange OKX, Mr Lennix Lai, said it is helpful for banks and digital asset firms to interact to smoothen out the banking process – an approach that he said has yielded “encouraging results in Hong Kong”.

In the past few months, Singapore, Hong Kong and Australia have taken steps to bridge the gap between banks and digital asset players, said Ms Ong Chengyi, Chainalysis’ head of policy for the Asia-Pacific region.

In each case, the approach has been to clarify expectations for both financial institutions and their customers, and outline good practices that can balance risk management and financial access considerations.

“What is particularly helpful about the latest industry guidance is the collection of detailed case studies that set out in practical terms the measures and tools that banks can adopt to engage safely with the digital asset ecosystem,” noted Ms Ong.

Mr Adrian Chng, founder and chief executive of digital asset and fintech fund manager Fintonia Group, said Singapore could consider adopting practices such as those proposed in Australia.

“These practices recognise that banks are regulated essential services that should provide more transparency to the community, requiring them to document reasons for rejection or de-banking, share those reasons with clients, and establish a mandatory bank dispute-resolution process, rather than the current situation of unilateral rejection or de-banking.”

Ms Veronica Wong, chief executive officer and co-founder of non-custodial crypto-wallet firm SafePal, said the transparency and immutability of blockchain technology can help to prevent money laundering as on-chain transactions cannot be altered or forged.

What prevented this from being widely and effectively applied, she said, is the complexity of the technology.

“This is steadily changing with the maturing of the digital asset space and development of tools which make the underlying infrastructure easier to use and understand. The inclusion of blockchain analytics as part of best practices for due diligence and risk assessment processes will thus play an increasingly important role,” Ms Wong said.