Singapore: Rebuilding Trust in Institutional Digital Assets

Blockchains are known as ‘trustless’ systems. In theory, the nature of such peer-to-peer financial transactions means that users should be able to trust in the underlying technology alone since no third-party involvement or central authority is required in interacting with digital assets.

Yet on the ground, and especially for regulated financial institutions, the need for trust in intermediaries such as digital asset custodians, exchanges, and wallet providers is paramount.

Over the past few years, Asian investors from both the retail and institutional side have been at the epicentre of some major scandals and collapses in the cryptocurrency markets. These include the implosion of the fraudulent cryptocurrency exchange FTX in 2022 and the collapse of the Luna network that same year, which wiped out an estimated $60 billion from the global cryptocurrency market.

As a venture by Standard Chartered Plc, which has a 166-year history in Singapore, Zodia Custody is a key player in the region. Our pedigree, as well as our financial backing from a host of other major financial institutions, is a critical factor for Singaporean institutional investors still looking to rebuild that trust.

The Evolution of a More Mature Market

Singapore consistently ranks highly on global indices like the Henley Crypto Adoption Index, reflecting its risk adjusted approach to crypto regulation and digital innovation. Indeed, the city state was one of the first jurisdictions to regulate the digital asset sector proactively and has become a key financial and digital assets hub for the wider Asia-Pacific region.

Globally, the total market size of cryptocurrencies alone is now over $3 trillion, surpassing the GDP of Italy. This represents a major turnaround from the 2022 downturn. Last year was a particularly significant tipping point with the launch of numerous Bitcoin ETFs in the US. Even though such crypto-based ETF products are not available in Singapore, there is a growing demand from asset managers who want access to safe digital assets and better capital efficiency, so they can provide risk-adjusted products to their underlying clients.

Ahead of global trends, Singapore has steadily evolved its digital asset regulatory landscape, paving the way for regulatory compliant digital asset service providers that can support safer institutional access to digital assets. As early as 2021, it became one of the first countries to introduce crypto asset-specific frameworks, setting clear standards for licensing, operational resilience, and consumer protection. Since then, key initiatives from the Monetary Authority of Singapore (MAS) – including the Technology Risk Management (TRM) Guidelines and the recently implemented crypto licensing provisions under the Financial Services and Markets Act (FSMA) – have reinforced the city-state’s commitment to robust oversight, cybersecurity, and financial stability in the digital asset space.

More sophisticated risk management practices have also entered the ring since the earlier days of digital assets. Counterparty risks and concentration risks are now taken as seriously as yield and profit. Enhanced due diligence on counterparties is now standard amongst mature crypto native firms that offer institutional-grade products. However, post-FTX, liquidity is still challenging unless firms are institutionally backed and have passed bank-grade checks. Only then do more solid institutional relationships tend to begin. Nevertheless, acquisitions and consolidations in the market have begun to crystallise the key partners who plan on staying in the digital asset market for the long term.

Despite this progress, the hurdles involved in entering institutional digital assets are still a burden which slows down wider adoption. Technical barriers to entry remain central. Whereas in traditional finance, a private banker might step in to guide the client or a corporate entity would have a specialised advisor, such hand-holding and white-glove service rarely exists in the digital asset space. Fears still abound about lost passwords and passphrases or the risk of incorrectly sending funds to the wrong address due to manual errors.

Moving Forward with Mainstream Adoption

Despite the understandable misperceptions that remain, it is clear that much has changed in digital asset custody since the early days of the industry. The past six years have witnessed a transition from financial institutions’ lack of awareness (or outright scepticism) towards cryptocurrency and digital assets into a broader adoption phase.

Major banks and financial institutions are now actively entering the space. DBS launched its own digital asset exchange, Citi is piloting tokenised cash solutions, and institutions including HSBC, Schroders, Standard Chartered and UOB are all involved in MAS’ Project Guardian. At the same time, global crypto firms like Coinbase, Ripple, and Crypto.com have chosen Singapore for their APAC and sometimes global headquarters, further signalling institutional confidence in the market.

Not only have digital assets found a more mainstream audience but traditional financial institutions in Singapore now have a far more advanced level of interest and knowledge. They are now actively seeking ways to enter the market safely and securely in a way not always seen in other jurisdictions.

Both large financial institutions and smaller family offices are keen to engage with digital assets – the question is how best to get started and who can guide them through the process. This is where the digital asset custodian’s role is now shifting.  As trusted intermediaries, custodians can help clients reduce counterparty risk while still being able to leverage yield opportunities, for example, through the use of staking or other institutional-grade products.

What does the future hold?

As institutions build greater understanding and start to develop awareness of how to manage the risks of digital assets effectively, a wealth of opportunities opens up. For organisations that may still sometimes have manual and paper-based backend processes, this transition takes time to work through so that counterparty risks – as well as the benefits – are more clearly understood.

Gradually, financial institutions are seeing the utility in stablecoins, which don’t have the volatility of other cryptoassets and can ease cross-border access to capital, as well as allowing for 24/7 trading. Likewise, as support for crypto ETFs grows, holding shares in multi-currency ETFs could provide a safe way for regulated firms to gain exposure to the upside of digital assets without holding the underlying asset directly. Interest is growing in real-world asset tokenisation as well as more complex financial products such as liquid staking. Liquid staking allows users to stake their assets on a Proof-of-Stake network while still maintaining liquidity. They receive a tokenised representation of their staked assets so they earn staking rewards while still being able to trade, lend or use their assets in other decentralized finance (DeFi) applications.

For many institutional players, this realisation unlocks the key which brings them enthusiastically into the industry. Digital assets can be held safely and securely while still providing the financial returns they are looking for. If market participants can continue to foster this new era of trusted collaboration, then the future for institutional digital assets in Singapore looks bright.