Singapore: Digital Assets Regulation State Of Play

While the Monetary Authority of Singapore ((MAS) has acknowledged the transformative economic potential offered by the tokenisation of assets (for example, through enhancing transaction efficiency and financial inclusion), it remains vigilant against the ever-evolving regulatory risks that could arise from digital asset activities. Consequently, we have seen the MAS’ regulatory approach toward digital assets regulation shift from an initial focus on anti-money laundering and terrorist financing (ML/TF)) risks, to additional risk areas such as technology and cyber-related risks, consumer protection risks, and financial stability risks.[1]

The MAS’ effort to balance innovation against the need for regulation is evidenced from the launch of various industry collaboration projects to grow the digital asset ecosystem, coupled with consistent communication with industry players to obtain industry feedback on the feasibility of various proposed regulatory measures. This is with a clear goal of anchoring market players with strong risk management capabilities and innovative use cases, thereby ensuring that the digital assets ecosystem in Singapore develops responsibly.

In this article, we illustrate how the MAS has sought to strike this balance, by providing an overview of key regulatory developments relating to specific digital asset activities, as well as its collaboration efforts with industry players to develop innovative use cases for digital assets.

Regulatory Developments In The Digital Assets Space

As a starting point, there is no overarching regulatory regime in Singapore that specifically governs digital assets. In line with the MAS’ technology neutral stance, digital assets are primarily regulated according to (1) their regulatory characterisation under the various MAS administered laws, and (2) the activities conducted in relation to these digital assets.

Cryptocurrencies

As part of the digital asset ecosystem, cryptocurrencies (eg Bitcoin) are regulated under the Payment Services Act 2019 (PS Act). The PS Act currently regulates dealer-broker and exchange type activities for digital assets that fall under the definition of a ‘digital payment token’ (DPT).

On the licencing front, in line with revised standards set out by the Financial Action Task Force, the PS Act will soon regulate additional activities in relation to DPTs, such as the custody and transfer of DPTs (among others). These regulatory changes are expected to come into force soon.

In the DPT space, the MAS’ regulatory focus has shifted from merely ML/TF risks to additional risk areas. In particular:

• Heavy cryptocurrency speculation from retail investors, which culminated in the ‘crypto winter’ that saw the market capitalisation of cryptocurrencies fall by more than two-thirds from November 2021 to July 2022, together with the collapse of multiple cryptocurrency firms.[2]
• Instances of theft of customers’ cryptocurrencies due to security breaches, scams and fraud, have resulted in the proposed introduction of various regulatory measures predominantly focused on consumer protection and cyber security risks.

Through a series of public consultations, the MAS has sought to introduce (among others)[3]:

• Additional retail consumer access measures – for example, by requiring retail customers to undergo risk awareness assessments, and introducing a restriction against the offer of incentives and debt-financed / leveraged transactions. Notably, while the MAS noted that majority of the respondents disagreed with the restriction on incentives, it has decided to take a more prudent approach by proceeding with the proposed restriction after careful consideration. These measures are to be implemented in the form of new guidelines likely in 2024.
• Additional business conduct requirements: these measures were introduced in response to misconduct cases reported by the international media, such as instances where legal proceedings were commenced against entities that did not have sufficiently robust business conduct practices in place. On top of existing conduct requirements applicable to other types of payment service providers under the PS Act, the MAS has sought to introduce (1) requirements around the segregation and custody of customer assets; (2) a ban on providing lending and staking services for retail customers; (3) requirements to identify, address and disclose conflicts of interests; (4) disclosure obligations regarding DPT listing and governance policies; and (5) requirements on complaints handling. The industry feedback to these series of proposals was mixed: while the industry supported the majority of the additional business conduct requirements, the restriction on providing lending and staking services for retail customers did not receive general support. Nonetheless, after careful consideration, the MAS decided to implement these new requirements, noting the collapses of crypto-asset lending and staking programmes involving retail customers globally. MAS will be implementing these changes through amendments and guidelines to the Payment Services Regulations 2019 (PSR), with an appropriate transitional period for implementation.
• Technology and cyber risks requirements: acknowledging that DPT service providers operate in a complex IT environment, with their ability to provide services being materially dependent on the underlying distributed ledger technology and other service providers on the network, the MAS recently amended the Notice on Technology Risk Management issued under the PS Act to extend these requirements to DPT service providers. This ensures that DPT service providers are held to a similar standard as other types of financial institutions (eg banks), where IT resilience plays an important role in maintaining trust and confidence in the services provided.
• Market integrity requirements: noting that DPT markets have been susceptible to unfair trading practices of market manipulation, misleading conduct and insider trading, the MAS plans to introduce regulatory measures for DPT service providers to address market integrity risks and prohibitions against unfair trading practices.[4] Such measures would broadly require DPT service providers to (1) maintain adequate systems and processes to handle and execute customers’ orders in a fair, orderly, and timely manner, and prevent and detect unfair trading practices, and (2) have resilient systems and clear business rules to support the operation of a fair, orderly and transparent trading platform. As of the date of this article, the MAS is still in the process of finalising the market integrity requirements and has yet to provide their responses to the consultation.

Stablecoins

As part of the broader digital asset ecosystem, the MAS has acknowledged the potential that stablecoins can play as a medium of exchange to facilitate transactions. With the aim of developing stablecoins that are well-regulated and backed by arrangements which provide a high degree of assurance of value stability, the MAS has introduced a new regulatory framework for stablecoin-related activities.[5]

Under the framework:

• The PS Act will be amended to include a new stablecoin issuance service in respect of ‘MAS-regulated stablecoins’. Under the stablecoin regime, a single currency stablecoin (SCS) will be regulated as a MAS-regulated stablecoin if certain requirements are met. As the classification of a MAS-regulated stablecoin provides credibility to such stablecoins by virtue of their strict regulation by MAS, issuers who are regulated under this regime will be subject to, among others, high liquidity reserve assets, direct and timely redemption at par value, prudential, audit, disclosure, and additional conduct of business requirements.
• Non-issuance activities in respect of SCS will continue to be regulated as providing a DPT service, for example, secondary trading activities, lending or dealing services relating to the SCS.

While the legislative amendments for the stablecoin regulatory framework have not yet taken effect, the MAS has in the interim period granted in-principle approval to three entities (StraitsX SGD Issuance, StraitsX USD Issuance and Paxos Digital Singapore), who would issue stablecoins that substantively comply with this framework. [6]

Industry Collaboration And Pilot Projects Relating To Digital Assets

Apart from developing enhanced regulatory standards for certain players in the digital asset ecosystem, the MAS has also sought to develop use cases for the process (tokenisation) and underlying technology (distributed ledger technology) that drive the digital assets ecosystem. The broad range of projects involving tokenisation affirms MAS’ support for innovation in this field.

For instance, MAS has launched Project Guardian, a collaborative project between policymakers and leading industry players, to test the feasibility of applications in asset tokenisation and decentralised finance.[7] Current pilots under Project Guardian include projects on tokenising money market funds through a variable capital company structure, institutional mechanisms on bilateral digital asset trades, and cross-border FX payment solutions.

To complement Project Guardian, MAS is also working with international policymakers and financial institutions to explore the design of an open, digital infrastructure to host tokenised financial assets and applications under Global Layer One.[8] This new initiative aims to promote the establishment of foundational digital infrastructure in line with international standards to facilitate seamless cross-border transactions of tokenised assets.

Aside from asset tokenisation, MAS is also exploring the use of tokenisation as digital money, particularly via the launch of Project Orchid to test the applicability of digital money in Singapore.[9] To complement the digital money trials under Project Orchid, MAS will commence the development of central bank digital currencies for wholesale interbank settlement in 2024.

Looking Forward

The digital asset industry is developing rapidly in Singapore, driven by various governmental initiatives and experimentation by industry players. MAS has also shown its willingness to engage with industry to develop sustainable and viable regulatory infrastructure to support the expansion of the digital asset space, and to position Singapore as a global hub for FinTech. As the regulatory infrastructure continues to evolve and respond to industry’s needs, players should continue to be adaptive and open to collaboration and experimentation, while operating within the regulatory perimeters. In this way, Singapore’s digital asset ecosystem will develop responsibly and benefit the wider financial services industry.

 

[1]               Please see the Speech by Mr Ravi Menon, Managing Director, Monetary Authority of Singapore, at Green Shoots Seminar on 29 August 2022.

[2]               Please see Consultation Paper on Proposed Regulatory Measures for Digital Payment Token Services

[3]               Please see paragraph 4 of the Consultation Paper on Proposed Regulatory Measures for Digital Payment Token Services.

[4]               Please see the Consultation Paper on Proposed Measures on Market Integrity in Digital Payment Token Services.

[5]               Please see the Consultation Paper on Proposed Regulatory Approach for Stablecoin-Related Activities and the Response. 

[6]               Please see the Speech by Mr Ravi Menon, Managing Director, Monetary Authority of Singapore, at the Singapore FinTech Festival 2023 on 16 November 2023

[7]               Please see Project Guardian for more details.

[8]               Please see MAS Partners Financial Industry to Expand Asset Tokenisation Initiatives.

[9]               Please see Project Orchid for more details.