At a glance...
Digital assets such as cryptocurrencies and non-fungible tokens (NFTs) have been receiving a lot of media attention. But while the prices of Bitcoin and other cryptocurrencies have soared, investors have reportedly lost millions by using local-run crypto exchange Torque. What exactly is going on? Are the benefits of these investments really worth the risk?
Cryptocurrencies in Brief
Cryptocurrencies are digital tokens (“coins”). They aren’t issued or backed by any government, authority or institution. Instead, they are created and secured using complex cryptographic algorithms, making them impossible to forge.
The security system is based on blockchain technology. An online digital ledger logs all cryptocurrency transactions publicly across a network of computers. Each transaction is verified by a “miner”, who solves a complex mathematical puzzle to add the “block” of data to the end of the “chain”. The update is then broadcasted to all computers in the network. This process does not require a central authority to verify the transaction.
As a reward for their work, miners are given digital tokens. This is how new tokens are created and added to the circulating supply.
Using Cryptocurrency for Payment
As long as a merchant accepts cryptocurrency as a payment method, you can use cryptocurrency to buy its products. As cryptocurrency continues to gain prominence, more and more businesses in Singapore are doing so. However, it’s not yet clear exactly how many have jumped onboard this train. Ms Zann Kwan, a board member of the Association of Cryptocurrency Enterprises and Start-ups (Access), Singapore, said that professional services companies like accounting firms, architectural firms and even online companies that sell baby products are on the list.
Cryptocurrency can be transferred directly and anonymously between a buyer and seller. Without a third party, transactions are faster and cheaper as fees (e.g. credit card fees) are cut out.
Cryptocurrency tokens can also be bought as investments for users hoping its value will increase with time.
The biggest cryptocurrency in terms of market capitalisation is Bitcoin, at about 60% of the market as of March 2021. Created in 2009, Bitcoin is also the oldest cryptocurrency. It is designed to have a limited supply of 21 million bitcoins. It is estimated that the cap will be reached in the year 2140.
Cryptocurrency ATMs in Singapore
Certain ATMs in Singapore permit the buying—and sometimes selling—of cryptocurrencies for cash. However, such ATMs usually impose high fees of 4-6%.
The first Bitcoin ATM in Singapore was established in 2014. There are currently 8 Bitcoin ATMs here, according to Coin ATM Radar. They are located at Lucky Plaza, Plaza, Capitol Piazza, Funan mall, Paya Lebar Quarter mall, the Bitcoin Exchange Singapore Office in Upper Cross Street and The Arcade in Raffles Place (which has two). Some of these ATMs also support other cryptocurrencies, such as Ethereum, Litecoin and Tether.
The ATMs have some security measures, such as identity verification and transaction limit amounts.
What Drives Cryptocurrency Prices?
Bitcoin grew by a whopping 700% from March 2020 to March 2021. It hit a record high of US$63,729.50 (approximately S$85,000) in April 2021.
This was fuelled by interest in investments by individuals and institutions that saw Bitcoin as a way to diversify their portfolios and store value, especially amidst the COVID-19 pandemic. Cryptocurrency investments in Singapore exploded from a total value of US$2.25m in 2017 to US$67.6m in 2020.
Other factors include the adoption of cryptocurrencies by major tech companies such as Tesla.
Cryptocurrency Regulations in Singapore
Cryptocurrencies are not considered legal tender in Singapore. As such, they are not regulated by the Monetary Authority of Singapore (MAS).
Still, MAS is paying attention to cryptocurrencies because their speed and anonymity has created potential for money laundering and terrorism financing activities. In 2020, the Payment Services Act (PSA) was released to regulate cryptocurrency service providers. Platforms that facilitate the trading of digital tokens must identify users, monitor transactions and report suspicious behaviour. This is why exchanges such as Gemini and Coinbase require their users to register with SingPass ID when creating an account.
In August 2020, Access introduced guidelines to help cryptocurrency service providers practise better compliance with regulations. Examples of guidelines include exercising greater due diligence on clients, especially those with high transaction amounts, and monitoring addresses to ensure that any cryptocurrency received is not illicitly sourced.
Cryptocurrency Crimes in Singapore
So far, there has been one convicted case of a cryptocurrency offence under the PSA. A 24-year-old woman provided an unregistered cryptocurrency exchange service by receiving at least 13 cash transfers amounting to S$3,350, trading them for Bitcoin, and then transferring the Bitcoin to multiple digital wallets. She was found guilty on 28th January 2021 and sentenced to a four-week jail term.
The police also issued warnings to be wary of job advertisements that promise unrealistically high salaries for relatively simple job duties and convenient work-from-home arrangements. Legitimate businesses would not require employees to receive funds on behalf of the company. This is a common scam tactic to have unsuspecting individuals make illegal transactions on behalf of the scammers.
Some Dangers of Cryptocurrency
Some finance experts predict that widespread adoption of Bitcoin and other cryptocurrencies will be slow in coming due to the high volatility of their prices. Without stability, large gains could swing to huge losses overnight.
Security concerns have also been raised over the storage of cryptocurrency tokens. While cryptocurrency cannot be forged, online digital wallets (“hot wallets”) can be hacked into or stolen. Some have turned to offline storage on computers or secure hard drives (“cold wallets”), but these are vulnerable to a different set of issues, like losing passwords. Since cryptocurrencies are not centrally backed, any losses are irretrievably gone.
In addition, digital tokens have a negative impact on the environment because of the high energy consumption involved in the mining process.
And of course, the shelter that cryptocurrency’s anonymity offers to illegal activities always poses a threat.
Staying Safe While Investing
Although the PSA regulates cryptocurrency service providers, it does not protect traders if cryptocurrency is lost. Instead, MAS has released public advisories to caution against the risks of cryptocurrency trading. Interested individuals should be careful to do their research about How Does Cryptocurrency Trading Work? Service providers licensed under the PSA are also required to warn users of the risks.
Potential investors should therefore understand that cryptocurrency prices could fluctuate quickly and substantially, and consider if this method of investment matches their investment goals and appetite for risk.
Meanwhile, any suspicious cryptocurrency activities should be reported to the police.
Non-Fungible Tokens (NFTs)
An NFT is a unique digital certificate of authenticity for a virtual (or less commonly, physical) item. Although virtual products such as digital art and music can often be easily reproduced, the product usually has only one NFT. The owner of the NFT is therefore the official owner of the item. One exception is when the creator of the NFT allows several NFTs to exist for the same item, just as how a limited-edition collectible toy could be released to the first 100 customers, instead of just one.
NFTs can be purchased with cash or Ethereum (the second-biggest cryptocurrency). The public ledger where all cryptocurrency transactions are logged ensures that the NFTs and ownership records cannot be forged. Buying an NFT for digital art, for example, might involve receiving the token in the form of computer code that contains the link to view or save the digital art file.
Although NFTs have been around since 2017, NFT trading has boomed in 2021. According to Reuters, monthly sales on OpenSea, an NFT market, skyrocketed from US$8m in January to US$95.2m in February.
Still, NFTs are not without their own concerns, such as whether the creator of the NFT is actually the creator of the item, or just profiting off someone else’s work.