This article will focus on regulatory developments in Singapore specific to “cryptocurrencies”, and how related services would be regulated, both currently and in the near future. Finally, we will look at Singapore’s current strategy to develop a digital asset ecosystem and how it may translate into future regulations.

The Current State Of Play

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 —

• “Dealing in” DPTs (i.e. buying or selling DPTs); or
• “Facilitating the exchange of” DPTs (i.e. operating a platform allowing persons to buy or sell DPT on a centralised basis).

Expanded Regulation – The Near Future

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”.

Transfer 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)”.

A service provider facilitating the transfer of DPT, 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]

Custody services

Under the PS(A)A, a person will require a licence under the PS Act if, inter alia —

• it has control over DPT and provides the service of safeguarding that DPT;
• it has control over DPT and provides the service of carrying out customer instructions relating to that DPT;
• it has control over one or more DPTs associated with a DPT instrument and provides the service of safeguarding that DPT instrument; or
• it has control over a DPT instrument and provides the service of carrying out customer instructions relating to one or more DPTs associated with that DPT instrument.

A service provider providing a service custodising DPT as described above, 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)”.

A service provider assisting its client in buying and selling DPT (e.g. brokerage activities), 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.

Ongoing compliance obligations

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, 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 Act 2022

Under the Financial Services and Markets Act 2022 (the FSMA), which has not yet come into force fully, 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 FSMA 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 FSMA 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 when the FSMA comes into full force.

Further Developments

On 29 August 2022, Managing Director of MAS, Ravi Menon, gave a keynote speech titled “Yes to Digital Asset Innovation, No to Cryptocurrency Speculation” at the Green Shoots Seminar. In his speech, Mr Menon outlined Singapore’s strategy to develop a digital asset ecosystem. He also outlined Singapore’s regulatory approach to manage digital asset risks.

MAS is taking a four-pronged approach to building the digital asset ecosystem:

• first, explore the potential of distributed ledger technology in promising use cases;
• second, support the tokenisation of financial and real economy assets;
• third, enable digital currency connectivity; and
• fourth, anchor players with strong value propositions and risk management.

There are five areas of risk in digital assets that MAS’ regulatory approach is focused on:

• first, combat money laundering and terrorist financing risks;
• second, manage technology and cyber related risks;
• third, safeguard against harm to retail investors;
• fourth, uphold the promise of stability in stablecoins; and
• fifth, mitigate potential financial stability risks.

MD Menon said that “A digital asset ecosystem needs a medium of exchange to facilitate transactions – three popular candidates are cryptocurrencies, stablecoins, and central bank digital currencies (“CBDCs”)”. 

MAS regards cryptocurrencies as unsuitable for use as money and as highly hazardous for retail investors. According to MAS, cryptocurrencies lack the three fundamental qualities of money: medium of exchange, store of value, and unit of account. Having said that, cryptocurrencies serve a useful function within a blockchain network – to reward the participants who help to validate and maintain the record of transactions on the distributed ledger. But outside a blockchain network, cryptocurrencies serve no useful function except as a vehicle for speculation. Since 2017, MAS has been issuing warnings about the substantial risks of investing in cryptocurrencies.

MAS has said that they see good potential in stablecoins provided they are securely backed by high quality reserves and well regulated. Stablecoins are tokens whose value is tied to another asset, usually fiat currencies such as the US dollar. They seek to combine the credibility that comes from their supposed stability, with the benefits of tokenisation, that allow them to be used as payment instruments on distributed ledgers. Stablecoins are beginning to find acceptance outside of the crypto ecosystem. But to reap the benefits of stablecoins, MAS has said that regulators must ensure that they are indeed stable.

MAS has also said that it sees good potential for wholesale CBDCs, especially for cross-border payments and settlements. Wholesale CBDCs on a distributed ledger have the potential to achieve atomic settlement, or the exchange of two linked assets in real-time. They have the potential to radically transform cross-border payments, which today are slow, expensive, and opaque. Notwithstanding the above, MAS does not see a compelling case for retail CBDCs in Singapore for now, given well-functioning payment systems and broad financial inclusion. Nevertheless, MAS is building the technology infrastructure that would permit issuance of retail CBDCs should conditions change.

In terms of DPT service providers that wish to provide regulated DPT services in Singapore, MAS has said that it “seeks to anchor in Singapore crypto players who can value add to Singapore’s digital asset ecosystem and have strong risk management capabilities”. It may well be the case that DPT regulation in the future will be shaped by MAS’ outlook on digital assets (as set out above). Indeed, on 26 October 2022, MAS issued the (i) Consultation Paper on Proposed Regulatory Measures for Digital Payment Token Services and (ii) Consultation Paper on Proposed Regulatory Approach for Stablecoin-Related Activities. Both consultations close on 21 December 2022. The Consultation paper on Proposed Regulatory Measures for Digital Payment Token Services sets out proposed regulatory measures for licensees and exempt payment service providers that carry on a business of providing a DPT service under the PS Act. Alongside this consultation paper, MAS also published a consultation paper on the proposed regulatory approach for stablecoin-related activities. MAS published a consultation paper relating to the scope of e-money and DPTs on 23 December 2019. The paper was an early attempt to explore how MAS might need to review its regulatory approach to accommodate stablecoins with the potential to become more widely used as payment instruments. The feedback received was mixed, with no conclusive recommendations, reflecting the nascent stage of the industry back then. Since then, there have been various industry and international regulatory developments which have gone beyond the original issues discussed in the previous consultation paper. MAS sets out in this latest consultation paper a proposed framework to regulate stablecoin issuers and intermediaries.

Footnotes:

[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 Ang
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 Fong
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.