Singapore's efforts to regulate cryptocurrency operators are moving crypto closer to the mainstrean and could encourage institutional investors to hold the asset class in the near future, experts believe.

The Monetary Authority of Singapore (MAS) last week announced that it was ready to grant operating licences to several cryptocurrency firms, part of government moves to turn Singapore into a leading cryptocurrency hub for the region.

In 2019, the regulator announced exchanges and other cryptocurrency businesses would require a licence to operate under the new Payment Services Act (PSA). However, it granted temporary exemptions to some cryptocurrency platforms including Binance and Coinbase.

In contrast, other global jurisdictions have taken a much harsher stance against these firms.

A growing number of regulators, including those in the UK, Hong Kong and Japan, have cracked down on Binance, a move that prompted CEO Changpeng Zhao to move to Singapore.

In response to queries on its cryptocurrency investments, a spokesperson for Temasek told AsianInvestor: “We believe that cryptocurrencies have matured sufficiently to fit into some company’s investment portfolios, though we do not directly own any cryptocurrencies at the moment.”

The spokesperson added there was potential for the further development of cryptocurrency technology.

“The applications of programmable money in many forms have great potential to transform how money can work on a national and global scale.”

While not holding cryptocurrencies, Singapore’s state-linked investors have made several direct investments in cryptocurrency and blockchain service providers.

Temasek first backed blockchain operator R3 in May 2017 and has since invested in Binance through its venture capital arm Vertex Ventures. GIC backed digital currency exchange Coinbase in 2018, Anchorage Digital in March this year and OSL in June.

Diego Lopez, Global SWF

“GIC and Temasek are two of the world’s most sophisticated investors and are miles ahead of other sovereign wealth funds when it comes to all-things technology – so it is only natural they are making incursions into cryptocurrencies and blockchains,” said Diego Lopez, managing director of Global SWF.

“I believe a clearer and stronger regulation will help GIC and Temasek consolidate their position in the space and possibly start considering crypto as a separate asset class,” he added.

The volatility of cryptocurrencies is one reason institutional investors often cite for being wary of cryptocurrencies.

At the Qatar Economic Forum in June, Qatar Investment Authority’s chief executive Mansoor Bin Ebrahim Al Mahmoud said cryptocurrencies “need a bit of maturity before we make our view about investing in that space.”

The price of Bitcoin rose to an all-time high of nearly $65,000 in April, fell more than 50% to below $30,000 in June, and rebounded to a nearly three-month high of $46,245 on Monday (August 9).

Besides volatility, a barrier to sovereign wealth and pension funds is a lack of internal capabilities, said Jeremy Ng, head of Asia Pacific at crypto exchange Gemini. “These investors need time to build up their expertise, and the number of crypto specialists in the market remains small.”

Jeremy Ng, Gemini

US-grown Gemini is one of the service providers currently operating in Singapore under MAS’s licence exemption.

The firm chose Singapore as its Asia headquarters because of its more mature cryptocurrency ecosystem. Its obvious rival, Hong Kong, is “still trying to get there,” Ng said.

He acknowledges the bulk of institutional investor capital currently comes from family offices and hedge funds which are more flexible in their decision-making, but expects institutional investors to start holding crypto “in the next 6-12 months” as they seek new sources of alpha.

“Albeit with much greater volatility, the 10-year average returns on cryptocurrencies are like 200%, compared with 9% equities and 4% fixed income,” he said.

He added regulation and approval will likely be good for mass adoption,  providing “a first layer” of due diligence for investors.

Managing partner at Singapore-based 1982 Ventures Herston Powers agreed: “Greater regulation and clarity will allow traditional players and new entrants to begin offering custody, prime brokerage, settlements and clearing for institutional investors that may not be able to participate in the crypto markets in a meaningful way today,” he said.

He told AsianInvestor he “absolutely” expects this to help Singaporean institutional investors enter the crypto space, both in terms of investing in crypto firms and in terms of holding crypto as an asset class.

Herston Powers, 1982

He added that it’s no surprise Singapore is taking the lead in regulating the crypto market and believes the fact that MAS is preparing to grant crypto licences is a huge step in institutionalising crypto markets.

“It will just become the norm [for institutional investors] to hold a percentage of their portfolio in crypto within the next few years,” said Markus Bruderer, associate partner at venture capital firm Antler.

He believes another reason why institutional investors are not yet holding crypto – besides volatility, lack of regulation, and lack of internal capabilities – is the lack of frameworks to evaluate investments into digital assets.

“Those will differ from frameworks used to evaluate equity investments into crypto firms, which are currently being evaluated on a similar basis as other fintech firms,” he said.

While valuation is currently driven by speculation and hype, over time - and with more real-world adoption - the valuation process will become more formalised, he added.