Are MAS’ ideas for consumer suitability tests to regulate crypto investment feasible or foolish?

Disclaimer: Opinions expressed below belong solely to the author.

Earlier this week, the Monetary Authority of Singapore (MAS) held a seminar on Singapore’s policy on cryptocurrencies and digital assets.

Among the speakers was Ravi Menon, managing director of MAS. His comments have been widely covered, among them is the possible upcoming crypto regulations for Singapore.

Ideas for these new regulations include targeting consumers for consumer suitability tests before allowing them to invest in cryptocurrencies. 

There are significant parts of his comments that I wholeheartedly agree with. Consumers are currently irrationally oblivious to how risky cryptocurrency investments actually are, and they do not function well enough as a store of value to be truly considered money. 

However, will targeting consumers for new safeguards really work?

Crypto is elusive, companies are less so

Cryptocurrencies are not like fiat currencies — they are borderless in a way that fiat currencies cannot match. Cryptocurrencies are also online, and can be held anonymously.

If MAS implements tests for consumers who wish to invest in cryptocurrencies, how will they be enforced? Is it really feasible to track cryptocurrency flows into and out of Singapore, and try and determine whether unsuitable users are investing in cryptocurrency?

On top of this, the cryptocurrency space has no shortage of anti-tracking measures such as coin mixers and mixing platforms. After all, much of crypto evolved with the explicit purpose of evading regulations.

To try and police crypto investment through consumers is therefore not likely to be an easy task, even if it proves possible. Consumers are too wide a group to police effectively — instead, companies offer a far more feasible target. 

MAS is already working with companies in order to ensure that they are compliant with anti-money laundering measures and due diligence. 

While Singapore certainly has its fair share of scandals, with unregulated companies running into financial difficulties, the solution for this is relatively straightforward: greater regulation and more frequent enforcement.

For the remaining companies, cooperation is likely not going to be a challenge — these companies already have to work with MAS, so channels of communication are already open. 

If MAS hopes to control crypto investment, working with and through these companies is likely going to have a far better chance of working than if MAS attempts to regulate consumer investment by itself.

After all, consumers do need these companies to provide a platform for cryptocurrency investments in order to get into the cryptocurrency space in the first place.

As for consumers, it may be a better option to provide them with educational resources. Letting them fully appreciate the risks that come with cryptocurrencies, and understand the reason why MAS suggests that these cryptocurrencies are unsuitable for retail investment. 

Since banning retail investment into cryptocurrency is not likely to work, we should at least be providing these investors with some resources to better protect themselves — listing common red flags in cryptocurrencies, courses on how to properly do research into the cryptocurrencies that they plan to invest in, or other similar initiatives.

Is regulating consumers for suitability even worth it?

It’s one thing to have educated consumers capable of critical thinking, but it’s another thing to have these consumers retain that level of critical thinking and healthy scepticism in the face of the cult mentality, blind faith, and wilful ignorance that exists within some cryptocurrency communities. 

As the saying goes, a person is smart, but people are dumb. 

Yet, the crypto world is characterised by exactly that — herd mentality, information bubbles, and cognitive dissonance. If even those of high intelligence and keen eyes can be suckered in by the promise of easy money and catchy slogans, what’s to say of the rest of us?

MAS may have good intentions in protecting consumers and I have argued that such protections are necessary for Singapore, but consumer suitability tests are not the right solution.

How would one go about designing a test that would ensure that only those who will not succumb to groupthink can invest in cryptocurrency? Is it possible for the government to ensure that Singaporeans who want to invest in cryptocurrencies do not simply find ways to skirt the consumer suitability tests designed to protect them?

In order to protect consumers, regulating companies is far easier. Controlling which companies come into Singapore, controlling which coins regulated exchanges can offer, and similar measures are already working, so why change a winning formula?

Why reputation matters

Of course, there is the issue that even with continued regulation of companies and stricter enforcement of rules, consumers who really want to can still invest in cryptocurrencies.

Simply going to a cryptocurrency exchange that is not in Singapore is one such solution. These companies are not regulated by MAS, and therefore, may not necessarily have the same safeguards that regulated companies do. 

This is where Singapore’s reputation must come into play. If exchanges that operate in Singapore are regulated, operate ethically, and seldom fail, anyone who wants to invest in cryptocurrencies will naturally think of an MAS-regulated exchange when it comes to picking a company to invest with.

With time, this will be an invaluable asset for Singapore. As the popularity of cryptocurrency exchanges increases, Singapore’s exchanges remain stable and safe, allowing new investors to safely enter the world of crypto. Eventually, this will also bring in more investment and companies who hope to gain MAS’ approval. 

Scam coins, and other less-than-stellar projects, will be excluded from such a system.

Consumers who do not believe in the necessity of Singapore’s regulations can take their business elsewhere, but they will not enjoy the same benefits of security that local exchanges offer.

All this begins from a very simple premise — that MAS continues to strengthen regulation, but in the right direction.

That said, regulating consumers is not the way forward. It is likely going to prove a difficult, frustrating endeavour that is devoid of glory. And even if it can be done, one should still ask if it should be done.

In Sun Tzu’s Art of War, he advises generals that they should ‘use a direct attack to engage and an indirect attack to win’. The same principle should apply here.

To regulate consumers, MAS should not look to control them directly, but to limit their options and to convince them that the best options for crypto investment are the ones that follow MAS’ principles.

MAS has been on the right path so far in warning the public on the risks of cryptocurrencies. It has been right to try and ensure that proper consumer safeguards are put in place, but to protect consumers does not necessarily mean having to regulate them directly.

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