Stablecoin regulatory storm! Singapore warns of systemic risk, fears of a repeat of the 2008 crisis.

The Monetary Authority of Singapore (MAS) Managing Director Ravi Menon warned at the Singapore FinTech Festival on Thursday that unregulated stablecoins have a mixed record in maintaining their pegs and are not suitable as safe settlement assets for large wholesale transactions. He likened the de-pegging risks to the 2008 money market fund bank run, stating that Singapore is preparing legislation for its stablecoin framework finalized in August this year.

The risk of stablecoin decoupling is compared to the 2008 financial crisis

(Source: Monetary Authority of Singapore)

The central bank of Singapore has signaled that it will soon regulate unregulated stablecoins to protect the integrity of assets within the country's financial ecosystem. Ravi Menon, Managing Director of the Monetary Authority of Singapore, issued the sternest warning to date during his keynote speech at the Singapore FinTech Festival, stating: “Stablecoins are a cause for concern. They serve as open platforms that can be applied to various applications and use cases. While flexibility is an advantage, stability still needs to be strengthened.”

Xie Dejun likened the decoupling of stablecoins to the bank run of money market funds in 2008, which is a significant historical analogy. After the collapse of Lehman Brothers in 2008, the Reserve Primary Fund became the first money market fund to “break the buck,” with its net asset value falling below $1 per share, triggering a panic redemption wave across the entire money market fund industry. This crisis forced the U.S. Treasury and the Federal Reserve to intervene urgently, providing hundreds of billions of dollars in guarantees to stabilize the market.

This metaphor indicates that the concerns of Singapore's regulatory authorities regarding the systemic risks of stablecoins have risen to the highest level. She Dejun clearly stated that unregulated stablecoins “are not suitable as safe settlement assets for bulk wholesale transactions.” This suggests that Singapore intends to clearly distinguish between fully regulated tokens and all other stablecoins, the latter of which will be excluded from institutional-grade financial infrastructure.

Historically, the decoupling of stablecoins is not a theoretical risk. In May 2022, the collapse of TerraUSD (UST) led to over $40 billion in market value evaporating to zero within days, triggering a chain reaction in the cryptocurrency market. In March 2023, USDC briefly decoupled to $0.88 due to some of its reserve assets being held at the bankrupt Silicon Valley Bank. These events demonstrate that even stablecoins that claim to have sufficient reserve backing can lose their peg under extreme market pressure.

Xie Dejun emphasized that without a solid foundation, confidence will quickly collapse, especially when issuers with weak regulation trigger a broader loss of trust in the entire industry. This systemic contagion risk is the core issue that Singapore hopes to prevent through legislation.

Core Requirements and Impacts of the New Regulatory Framework

Xie Dejun stated that the Monetary Authority of Singapore is preparing legislation for its stablecoin framework finalized on August 15 this year. The regulatory framework aims to ensure the stability of single-currency stablecoins and imposes strict requirements on issuers. The mechanism considers reserve backing and redemption reliability as key qualifications, meaning that only capitalized and comprehensively regulated issuers can be recognized as settlement-grade assets.

Core Requirements of Singapore's Stablecoin Regulatory Framework

Complete Reserve Support: Stablecoins must have an equivalent amount of high-quality liquid assets as reserves, such as cash, government bonds, or bank deposits.

Instant Redemption Capability: Users must be able to redeem fiat currency at the pegged price at any time, without restrictions or delays.

Capital Adequacy: Issuers need to maintain minimum capital requirements to absorb potential losses and ensure ongoing operations.

Transparency and Audit: Regularly publish reserve proofs and third-party audit reports, and accept inspections by regulatory authorities.

Issuer Qualification: Only entities registered in Singapore and licensed by MAS can issue regulated stablecoins.

These strict regulatory standards will have a profound impact on the current stablecoin market. The global stablecoin market is currently valued at approximately 200 billion USD, dominated by USDT (Tether) and USDC (Circle). Although USDT has the highest market share, it has long been criticized for its lack of reserve transparency. USDC performs better in terms of transparency, regularly publishing audit reports, but there are still issues with its reserve asset composition and custody security.

Singapore's position is clear: only stablecoins that meet these strict standards can be used as settlement assets within its financial ecosystem. This may lead to market differentiation, forming two tiers of “regulated first-tier stablecoins” and “unregulated second-tier stablecoins.” The former can access core financial infrastructures such as the banking system, securities settlement, and cross-border payments, while the latter is restricted to speculative trading and informal application scenarios.

Xie Dejun added that as stablecoins become more integrated into the financial sector, these rules may be further strengthened. He stated: “Over time, if some regulated stablecoins become systemically important assets, then the regulatory framework will need to be further enhanced, cross-border regulatory cooperation needs to be strengthened, and considerations for obtaining central bank facilitation will be necessary.” This suggests that regulated stablecoins in the future may receive central bank liquidity support similar to that of commercial banks, but will also bear a heavier regulatory burden.

BLOOM Project and the Future Vision of Central Bank Digital Currency

In addition to stablecoin regulation, Hsieh Te-Chun also discussed the vision of the Monetary Authority of Singapore regarding other settlement assets, including wholesale Central Bank Digital Currency (CBDC) and tokenized bank liabilities. MAS's “Borderless, Liquidity, Open, Online, Multi-Currency” (BLOOM) initiative is testing how these tools operate within a broader tokenized financial system.

Xie Dejun stated: “The Monetary Authority of Singapore is working with industry partners to explore the use of these three settlement assets.” He encourages financial institutions and clearing settlement networks to conduct pilot projects under this initiative. The BLOOM project represents Singapore's comprehensive vision for the future monetary system, which includes three tiers of digital currency:

The first layer is Central Bank Digital Currency (CBDC), specifically wholesale CBDC, used for large-scale settlements between banks and financial institutions. Wholesale CBDC is different from retail CBDC, which is aimed at the public, similar to digital cash; the former serves as the infrastructure of the financial system, providing a blockchain version of real-time gross settlement (RTGS). Singapore has already collaborated with multiple central banks to test cross-border wholesale CBDC, including joint experiments with the People's Bank of China, the Hong Kong Monetary Authority, and the Bank of Thailand.

The second layer is tokenized bank liabilities, which are tokenized deposits issued by commercial banks. These digital deposits have programmable characteristics, allowing for automatic execution of payments, settlements, and conditional transfers within smart contracts. Compared to traditional bank transfers that require multiple intermediaries and batch processing, tokenized deposits enable real-time peer-to-peer settlement, significantly enhancing efficiency.

The third layer is regulated stablecoins, serving as a complement to the first two, providing cross-border circulation and wider composability. This three-layer structure forms the foundation of Singapore's future tokenized financial system, with each layer having a clear purpose and regulatory framework.

The pilot of the BLOOM project has attracted participation from several international financial institutions, including JPMorgan Chase, Citibank, and HSBC. These pilot tests include scenarios such as cross-border securities Settlement, foreign exchange trading with real-time delivery (PvP), and supply chain finance. If the pilot is successful, Singapore may become the world's first financial center for large-scale commercialized tokenized financial infrastructure.