Singapore’s largest bank DBS Group Holdings Ltd will for the first time custody stablecoin reserves and offer related cash management services in a tie-up with the local unit of cryptocurrency issuer Paxos Trust Co.

The lender said the development deepens its wide-ranging involvement in the digital-asset ecosystem, making the announcement after Paxos’ operation in the city-state received a license from the Monetary Authority of Singapore.

“We look forward to partnering leading stablecoin issuers for their cash management and reserve custody needs if they meet the regulatory requirements,” Evy Theunis, head of digital assets at the institutional banking group at DBS, said in e-mailed responses to questions on Tuesday.

Singapore is seeking to foster productive uses of crypto’s underlying blockchain technology to augment its status as a global financial hub. Advocates of stablecoins argue they will make inroads into traditional finance because they make payments easier, faster and cheaper - a claim yet to be proven at scale.

Stablecoins are typically pegged 1-1 to major currencies and backed by reserves like cash and bonds. For now, they are predominantly used to park funds to deploy in crypto trading and can also be lent out to earn interest.

There are some US$162 billion worth of stablecoins in issue, dominated by Tether Holdings Ltd’s USDT token with a 70% market share, according to DefiLlama data. Circle Internet Financial Ltd’s USDC is in second place with 20%. Paxos, a smaller player, issues USDP as well as PayPal Holdings Inc’s PYUSD.

Some stablecoins in the past veered from their pegs or collapsed altogether - most notably the US$40 billion wipeout of Do Kwon’s TerraUSD project, an implosion that buffeted Singapore, where Kwon had a base.

The city-state, Dubai, Hong Kong, Japan and Europe are among the jurisdictions that subsequently developed digital-asset regulations to protect investors and spur innovation in case blockchain technology gains mainstream traction.

Both the local operations of Paxos and Circle Internet Financial now have Singapore permits. Under the island’s stablecoin rules, issuers must meet capital, reserve and disclosure requirements.

A spokesperson for Paxos said last year that the company plans to issue US dollar-based tokens in Singapore.

Cantor Fitzgerald LP acts as a custodian for Tether. In the US, Bank of New York Mellon has that role for Circle, while BMO Harris Bank NA, State Street Bank & Trust Co and Customers Bank are among the institutions Paxos may use.

Many crypto companies struggled to access banking services because of the digital-asset industry’s history of volatility and scandal. The outlook has improved due to evolving regulations. Higher global interest rates also highlighted the commercial opportunities stemming from reserve management.

By working with stablecoin firms, “banks are not only diversifying their offerings but also effectively managing the inherent risks associated with cryptocurrencies,” said Grace Chong, head of the financial regulatory practice at Drew and Napier LLC in Singapore.

  - Bloomberg