(Bloomberg) -- During the great pandemic-era Bitcoin boom, Singapore established itself as one of the hubs of the cryptocurrency industry, drawing in entrepreneurs and investors from around the world. 

Then in 2022 the hub began to fray: a $60 billion wipeout of digital coins created by Terraform Labs Pte sparked the unraveling of the Three Arrows Capital hedge fund, both of which had bases in the city-state. A wave of contagion then ripped through crypto, stoking a $2 trillion market crash.

The industry is still sifting through the wreckage. About a month ago, a Three Arrows co-founder, Su Zhu, was arrested and jailed in Singapore for failing to cooperate with efforts by liquidators to locate the fund’s remaining assets. Pictures of a handcuffed Zhu being led away by police became a metaphor for how far crypto has fallen. He and Kyle Davies, another Three Arrows co-founder, had already been banned for nine years from any regulated activity by the Monetary Authority of Singapore, or MAS, the city-state’s central bank. 

The Terraform Labs mastermind Do Kwon fled from Singapore to Europe via Dubai and was jailed in Montenegro over a fake passport. His native South Korea and the US are vying to extradite him on fraud charges that he’s rejected.

Productive Hub

Despite all this, MAS still wants to foster a digital-asset hub by encouraging projects aimed at institutional use of crypto’s underlying blockchain technology. The claimed benefits of such digital ledgers include more efficient payments as well as making illiquid assets easier to buy and sell by tokenizing them. 

Low taxes and a pro-business stance make Singapore attractive to funds, trading firms and wealth managers that want to utilize crypto. The island’s rules are tilted toward accommodating professional uses and high-net-worth investors under appropriate safeguards. The city-state managed S$4.9 trillion ($3.65 trillion) of assets in 2022, the majority from abroad, MAS data show.

But what MAS doesn’t want is the kind of risky speculative trading by retail investors in everything from Bitcoin to meme token Dogecoin for which crypto is notorious. That’s led to a comparatively hawkish line on marketing tokens to regular individual investors among the island’s 5.9 million population.

By next year, Singapore will have one of the “toughest regimes on cryptocurrency when it comes to consumer protection” but also “one of the most facilitative regulatory regimes” for aspects like tokenization, Ravi Menon, MAS’s managing director, said in an interview.

Curtailing Ads

Initial steps by Singapore regulators to tighten up consumer protection started a few months before the crypto rout picked up pace in 2022. Officials curtailed ads related to digital assets in January of that year, at a time when US television sets were still awash with glitzy commercials featuring the likes of actor Matt Damon, who was pitching Singapore-based Crypto.com.

After curbing marketing, Singapore this year stopped the general public from lending out tokens to earn interest. The mass market faces stringent suitability assessments too and a potential ban on buying tokens with borrowed money.

MAS’s approach to financial technology has generally been to start off with a light touch and “then strengthen along the way when risks becomes more material,” said Chia Hock Lai, co-founder of the Global Fintech Institute, a think tank in Singapore.

Crypto risks go beyond speculative tokens. After the 2022 rout, Bahamas-based digital-asset exchange FTX was revealed to have a multi-billion dollar shortfall and couldn’t repay customers. Some FTX executives pleaded guilty to fraud, while co-founder Sam Bankman-Fried was found guilty of fraud and conspiracy after a trial in New York. FTX’s backers included Singapore’s state-owned Temasek Holdings Pte, which wrote down its $275 million investment.

Jeremy Sng was one of the Singaporean retail investors hit by FTX. Just before the bankrupt platform collapsed, he tried frantically to log on to his account using plane WiFi during a long-haul flight, but to no avail. He ended up with thousands of dollars stuck on the exchange. “I got scammed,” he said.

Rival Jurisdictions

Traditional rival Hong Kong is also changing its approach to crypto, aiming to protect investors while fostering a digital-asset center. Further afield, the likes of the European Union and Dubai have developed new rulebooks. In the US, Securities & Exchange Commission Chair Gary Gensler has imposed a clampdown but the wider picture there is muddied by a lack of legislative clarity. 

Blockchain proponents argue that beyond the mess that accompanies wild crypto speculation, the technology offers ways of improving the financial industry. 

MAS is spurring projects in that vein. One pilot saw HSBC Holdings Plc, United Overseas Bank Ltd. and Marketnode issue and distribute structured products via digital ledgers, which MAS said showed the potential for cost, settlement and customization gains. A study by MAS and the Federal Reserve Bank of New York indicated blockchains can enhance cross-border multi-currency payments and settlements — for instance, simulated payment scenarios achieved end-to-end settlement in under thirty seconds, on average.

Singapore’s tailwinds include depth of talent, synergies between various parts of the financial sector and a culture of innovation, according to Angela Ang, senior policy adviser at blockchain intelligence firm TRM Labs. 

Approvals Flurry

In recent months, the Coinbase and Crypto.com exchanges, Sygnum Bank AG’s Singapore arm, stablecoin issuer Circle Internet Financial Ltd. and payments firm Ripple Labs Inc. won licenses in the city state for digital payment token services. 

Gemini Trust Co., the crypto exchange set up by billionaire twins Tyler and Cameron Winklevoss, has said it will expand a team in Singapore. Gemini is one of the companies being sued by the SEC as part of the US crackdown. Yoann Turpin, co-founder of crypto market maker Wintermute Trading Ltd., in July outlined plans to move to Singapore along with some staff.

Such a level of interest suggests Singapore remains in the running to become Asia’s top crypto hub if the industry extends a nascent recovery. Rival Hong Kong has been distracted by the fallout of an alleged fraud at a digital-asset exchange called JPEX.

Menon, the MAS chief, said traditional financial institutions are undertaking “impactful” blockchain experiments “not so much on trading cryptocurrencies, but to use tokenized assets to reduce the cost of back-office operations, to manage risks better in capital-market transactions and make them more seamless.”

--With assistance from Pat Regnier, Chanyaporn Chanjaroen, Low De Wei and Karthikeyan Sundaram.

©2023 Bloomberg L.P.