The task of structuring and managing wealth involves the offering of a comprehensive suite of products and services, providing a myriad of solutions relating to the sale, purchase, exchange, transfer and custody of different asset types. Depending on the characterisation of such assets, and the risks arising out of providing such services, these activities may be regulated by the competent authorities in a given jurisdiction.
This article will focus on regulatory developments in Singapore specific to cryptocurrencies, and how wealth structuring and management services provided in relation thereto would be regulated, both currently and in the near future. In sum, anticipated regulatory developments are likely to increase viability of wealth structuring and management techniques through cryptocurrencies in Singapore, and contribute to a robust market.
The Monetary Authority of Singapore (MAS) regulates the provision of “payment services”—including “digital payment token” (DPT) services—under the Payment Services Act 2019 (PS Act). The PS Act came into force on 28 January 2020, prior to which DPT services were not regulated by MAS.
Under the PS Act, the distinguishing characteristics of DPT are: (a) DPT is not denominated in or pegged by its issuer to any fiat currency; and (b) DPT is, or is intended to be, a medium of exchange accepted by the public or a section thereof as payment for goods or services or for the discharge of a debt (e.g. Bitcoin, Ether, and certain single-currency-stablecoins such as USDT and USDC).
Under the current scope of the PS Act, a person must obtain a licence and comply with ongoing compliance obligations where they carry on a business in the following two activities —
Under amendments to the PS Act
In June 2019, the Financial Action Task Force (FATF) adopted the enhanced Recommendation 15 in the FATF Standards[i]. Following this, MAS issued a consultation paper stating its express intention to introduce amendments to the PS Act to align with the enhanced FATF Standards applicable to DPT service providers (i.e. virtual asset service providers, or VASPs)[ii].
In light of broad support from respondents[iii], the Payment Services (Amendment) Act (PS(A)A) was passed on 4 January 2021, but has not yet come into force. Its commencement is expected in the near future, after MAS has consulted and responded to feedback on corresponding subsidiary legislation.
There are three new key activities falling under the expanded scope of “DPT services”.
Under the PS(A)A, a person will require a licence under the PS Act if, inter alia, it provides “any service of arranging (whether as principal or agent) for the transmission of [DPT] from one [DPT] account (whether in Singapore or elsewhere) to another [DPT] account (whether in Singapore or elsewhere)”.
Where, as part of managing the wealth of a client, a service provider facilitates the transfer of DPT, this would likely be regulated once the PS(A)A comes into force. Such businesses (if not regulated) “could be used by bad actors to move or layer the proceeds of illicit assets by transferring value in the form of DPTs from one person to another”[iv].
Under the PS(A)A, a person will require a licence under the PS Act if, inter alia —
Where, as part of managing the wealth of a client, a service provider provides a service custodising DPT as described above, this would likely be regulated once the PS(A)A comes into force. The custody of DPT (if not regulated) “could be used to safekeep illicit assets or assets for illicit actors, and in some cases, act as an additional layer or front”[v].
“Active facilitation” services
Under the PS(A)A, a person will require a licence under the PS Act if, inter alia, it provides “any service of inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling any [DPT] in exchange for any money or any other [DPT] (whether of the same or a different type)”.
Where, as part of managing the wealth of a client, a service provider assists its client in buying and selling DPT (e.g. brokerage activities), this would likely be regulated once the PS(A)A comes into force, even if the service provider does not come into possession of moneys or DPTs. The “active facilitation” of the buying and selling of DPT could (if not regulated) facilitate money-laundering and terrorism-financing (ML/TF) activities.
The initially envisioned risks arising out of providing DPT services were primarily those relating to ML/TF and technology risk. Having said that, the PS(A)A addresses the possibility of an expansion of the risks arising out of providing DPT services. Such risks are not only limited to ML/TF and technology risk, but also the risk of inadequate user protection and the need for safeguarding. While “risks to consumer [sic] are not significant currently, because of the relatively low usage of DPTs in Singapore today […] user adoption of DPTs could gain traction quickly as the industry comes out with products to attract customers”[vi]. In other words, the increased traction of DPTs, both as a specific wealth structuring technique and more broadly, could justify the imposition of new regulatory measures. To be clear, MAS’ new statutory powers enable future implementation of such measures, but have not been exercised to-date.
Under the Financial Services and Markets Bill 2022 (the FSM Bill), which was moved for First Reading in Parliament on 14 February 2022 but has not yet come into force, a person would be regulated for providing a “digital token” or “DT” service in Singapore where such person (a) is an individual or partnership, has a place of business in Singapore and carries on a business providing DT services outside of Singapore; or (b) is a Singapore-incorporated corporation and carries on a business, whether from Singapore or elsewhere, of providing DT services outside of Singapore.
A DT is defined in the FSM Bill to include (a) DPTs; and (b) digital representations of “capital markets products” (e.g. shares, debentures, securities-based derivatives contracts, units in funds)[vii].
The scope of “DT services” under the FSM Bill comprises services similar to those comprising “DPT services” under the PS Act once the PS(A)A comes into force; namely — (a) dealing in DTs; (b) facilitating the exchange of DTs; (c) transmission of DTs; (d) providing DT custody services; and (e) inducing or attempting to induce the buying and selling of DTs.
Where a person has a place of business in Singapore or is a Singapore-incorporated corporation, and as part of managing the wealth of a client provides “DT services” outside of Singapore, this would be regulated if the FSM Bill as-drafted is passed and comes into force.
The amendments to the PS Act, as well as the expected developments in relation to the FSM Bill, increase the viability of wealth structuring and management through the use of DPTs in Singapore.
First, bringing previously unregulated service providers into the fold of regulation means that such service providers will be required take steps to mitigate against ML/TF risks arising out of DPT; for instance, by implementing the value transfer or “travel” rule, conducting customer due diligence and ongoing transaction monitoring. This would assist in providing greater assurance to end-clients of wealth structuring and management solutions that their returns are not linked to the proceeds of, used to facilitate, or otherwise related to, ML/TF activities.
Second, subjecting service providers to the licensing regime under the PS Act means that such service providers need to comply with general ongoing compliance obligations applicable to licensees (e.g. base capital, expertise, track record of key personnel). These obligations are geared toward ensuring that service providers are duly equipped to provide DPT services to their customers.
Finally, further developments are to be expected in relation to the roll-out of ongoing compliance obligations specific to the expanded scope of “DPT services”. These may potentially include requirements to safeguard DPT with prescribed, trusted financial institutions, in order to protect users in the event of the service provider’s insolvency.
[i] Recommendation 15 provides, inter alia, that “countries should apply a risk-based approach to ensure that measures to prevent or mitigate money laundering and terrorist financing are commensurate with the risks identified”. In addition, it was also provided that countries and financial institutions should identify and assess such ML/TF risks in relation to “(a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products”; see paragraph 2 of the Interpretative Note to Recommendation 15, found in FATF, Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers, Annex A, p 55.
[ii] MAS, Consultation Paper on the Payment Services Act 2019: Proposed Amendments to the Act, 23 December 2019, paragraph 2.1.
[iii] MAS, Response to Feedback Received on Proposed Amendments to the Payment Services Act 2019, 4 November 2020.
[iv] MAS, Consultation Paper on the Payment Services Act 2019: Proposed Amendments to the Act, 23 December 2019, paragraph 2.4.
[v] MAS, Consultation Paper on the Payment Services Act 2019: Proposed Amendments to the Act, 23 December 2019, paragraph 2.6.
[vi] Ong Ye Kung (Minister for Transport), Second Reading of the Payment Services (Amendment) Bill.
[vii] Such digital representations of capital markets products are commonly referred to in the market as “security tokens”.
Adrian is a Partner in the Financial Services Department and is Co-Head of both the Firm’s FinTech Practice as well as its ESG & Public Policy Practice. Adrian’s practice encompasses advising clients on regulatory matters affecting the financial services industry including, licensing matters, the setting up of payment services, the distribution of financial products, outsourcing arrangements and conduct of business requirements. Adrian has been active in the FinTech sphere, being involved in contributing to policy formation and the enactment of FinTech related legislation. Adrian has advised on a variety of FinTech models including payment systems, equity and debt crowdfunding platforms, P2P lending platforms, online lending intermediary based platforms, online money transfer systems, robo-advisors, virtual stored value facility providers, initial coin offering structures, security token exchanges, digital payment token exchanges and the sale of non-fungible tokens (NFTs). He was also appointed as an EXCO member of the Singapore FinTech Association (SFA), and is the only lawyer in private practice on the SFA EXCO. In the sphere of public policy, Adrian has assisted with the consideration and roll-out of new policies affecting the financial industry and is frequently involved in the coordination and provision of industry views on policy and regulatory matters in relation to both private and public consultations.
Alexander is an Associate in the FinTech Practice and Financial Regulatory Practice at Allen & Gledhill. Alexander’s areas of practice encompass advising clients on financial regulatory matters, including regulatory considerations arising out of the distribution of financial products, undertaking of fund management activities, as well as outsourcing arrangements and conduct of business requirements applicable to regulated entities. He also has experience in advising on a variety of FinTech business models, including the provision of payment services, the offering of digital tokens, as well as the establishment of digital token exchanges.