Digital financial assets and fund management in Singapore―what more could be done?

Distributed ledger technology (DLT) and cryptocurrencies have continued to develop and mature in Singapore and around the world over the past 12 months. Prominently, the market value of Bitcoin recently surged past its previous all-time high to a new high of USD 41,940, and other prominent coins and tokens like Ether have also seen significant price growth over past weeks. Such developments cast an increasingly bright spotlight on cryptocurrencies and the technology upon which they are based, and other recent developments also help demonstrate what many stakeholders describe as DLT and cryptocurrencies 'going mainstream'.

Globally, regulatory scrutiny of cryptocurrencies and tokens has increased, as such instruments have become more prominent and commonplace. The Financial Action Task Force’s publication of anti-money laundering and know-your-customer related guidance has provided national regulators with a framework to help develop and deploy national standards, and the US Security and Exchange Commission's recently-commenced enforcement action against Ripple is evidence of regulators' increased scrutiny of whether digital assets comprise securities.

Outside of the regulatory context, in October 2020 the Organisation for Economic Co-operation and Development published a comparative summary of national approaches to blockchain and cryptocurrency taxation that provides a good overview of prevailing tax approaches and industry challenges; and there have also been many recent reports of central banks' increasing interest in, and work regarding blockchain and Central Bank Digital Currencies—including the Monetary Authority of Singapore's (MAS) Project Ubin.

Increased commercial adoption of DLT- and cryptocurrency-related business models is also apparent from within advisory practice, as end-user and investor enquiries have increased significantly. Developments like DBS' recent announcement of its intention to launch DBS Digital Exchange to offer security tokens, digital currency exchange and custody of digital assets alongside its more traditional products further shows a growing interest in digital assets, and their use and growing importance as an alternative asset class.

Agile fintechs and techfins have been making significant contributions to such financial services developments, and that trend will undoubtedly continue. In recognition of such stakeholders' contributions to the growth of the wider financial service sector, institutions including the MAS, Enterprise Singapore and Startup SG have been offering grants to defray project costs. In addition, the Singapore Fintech Association and AMTD Foundation have collaborated with the MAS to create the Fintech Solidity Grant that provides a lifeline to promising stakeholders affected by the COVID-19 pandemic.

With the momentum brought about by such advancements, and the clear support offered to relevant stakeholders, what further financial sector developments might there be in 2021 in this space, and how might Singapore continue to position itself as a leader and strong contender in this emerging sector?

One prominent opportunity Singapore presently has, which is empirically supported by the growing interest of international and institutional stakeholders to invest in digital assets, is the ability to extend its funds exemptions to attract digital asset managers. These funds exemptions exempt qualifying income of investment funds from income tax, subject to the funds being managed by a Singapore fund manager and other economic commitments being satisfied. The exemptions arguably already apply to certain types of digital assets, such as tokenised equity and tokenised debt securities (either de facto or as derivatives), but guidance is currently lacking on this issue. Furthermore, many types of tokens and cryptocurrencies cannot be characterised in such a manner in any case and, as a result, income and gains derived from such tokens and cryptocurrencies cannot qualify for tax exemption.

The prevalence of digital asset funds has grown significantly and, presently, there is no particular onshore jurisdiction from which to manage these funds in a cost efficient manner. Moreover, the introduction of economic substance laws in offshore jurisdictions with limited talent pools amplifies this issue as a practical and operational matter.

Singapore is well poised to benefit as a first mover in the digital assets fund management space, given its strong financial services sector, its strength in the blockchain and fintech spaces, its talent pools in those areas, and the respect that the international community has for its robust but practical regulatory approach. Singapore's funds exemptions and its Financial Sector Incentive Scheme—which could also be updated and extended to incorporate and incentivise digital assets activities—also provide an established statutory framework that may be relatively easily leveraged to attract digital asset managers.

Steps like these could encourage and accelerate the growth of digital asset expertise and investment in Singapore, incrementally adding to the country's strength as a global financial centre.

Now is an excellent time for such steps to be taken. The market’s recognition of digital assets as a new and alternative asset class has been increasing, as has the establishment of new digital asset funds. Singapore has a strong starting position with its hard-won capability and credibility in the digital assets space, and it is our recommendation that the Singapore Budget 2021 includes measures in this space that provide a platform for the country to exploit a first-mover advantage that is consistent with the government's financial services strategy, which would also strongly support the financial services sector in its efforts to adapt to technological change.