The policy drivers behind the changes to the PS Act are explained in an explanatory brief accompanying the bill, as well as in an MAS consultation response that was published shortly after the bill. The changes to the PS Act will, once effective, align the scope of Singapore payment services regulation with the guidance on anti-money laundering and countering the financing of terrorism (AML/CFT) for virtual asset service providers (VASPs) issued by the Financial Action Task Force (FATF) in June 2019. The bill will also widen the scope of regulated cross-border money transfer services under the PS Act, will give the MAS power to impose certain measures (e.g. for user protection purposes) on digital payment token (DPT) service providers, and will introduce a range of other miscellaneous changes.
We summarise below the key proposed changes and their practical implications.
Proposed changes
- Broadening of licensable DPT services: At present, DPT service providers are regulated under the PS Act where they (i) deal in (i.e. buy or sell) DPTs or (ii) operate an exchange for the buying or selling of DPTs, where the operator of the exchange takes possession of money or DPTs. To achieve alignment with the scope of regulation for VASPs envisaged by the FATF, licensable DPT services under the PS Act will be broadened to include:
- The transfer of DPTs. This will capture any service of transferring, or arranging for the transmission of, DPTs from one token address or account to another, whether within Singapore or on a cross-border basis.
- Providing custodial wallet services for DPTs. This will be relevant to entities that conduct safeguarding or administration of (i) a DPT where the entity has control over that DPT, or (ii) a DPT instrument (e.g. private key) where the entity has control over the DPT associated with the DPT instrument.
- Facilitating the exchange of DPTs without possession of money or DPTs by the DPT service provider. Service providers falling within this category will be those which induce or attempt to induce any person to buy or sell any DPT in exchange for any money or any other DPT.
- Regulating additional cross-border money transfer services: Currently, the PS Act regulates cross-border money transfer service providers only where they accept or receive monies in Singapore. To more fully address money-laundering and terrorism-financing risks, the PS Act will be amended to also capture entities that broker cross-border money transfers between entities in two different countries in cases where monies are not necessarily accepted or received in Singapore.
- New MAS powers to regulate DPT service providers: The PS Act currently regulates DPT service providers principally for AML/CFT purposes. However, to address risks arising from rapid user adoption of new DPTs, including stablecoins, the MAS will be provided with powers to require DPT service providers to ensure the safekeeping of customer assets they hold, and to impose other measures on DPT service providers, e.g. where in the MAS’ view this is necessary or expedient in the interest of the public.
- Miscellaneous amendments: Various further amendments are being introduced, including (i) to allow the MAS to prescribe additional payment service providers that must safeguard customer money, (ii) to provide that a domestic money transfer service includes arrangements where either the payer or the payee is a financial institution, and (iii) to provide that the general duty to use reasonable care not to provide false information to the MAS is not limited to individuals.
Timing
The proposed changes to the PS Act must run through the parliamentary process and be passed into law to become effective. The MAS then intends to grant an exemption for six months to entities which will become newly regulated under the PS Act or which are already licensed but need to vary their licence in light of the changes. The MAS proposes to consult on this temporary exemption in Q1 2021, as part of broader industry engagement on related changes to subsidiary legislation and notices. The phase-in to the newly expanded PS Act will therefore only commence in the remaining course of 2021, at the earliest.
These changes will follow close on the heels of the initial introduction of the PS Act, which only took effect on 28 January 2020 and which is still in the process of being phased in via a temporary exemption framework for newly regulated payment service providers. This close succession of legislative initiatives reflects the fact that the PS Act as initially conceived preceded the publication of the FATF AML/CFT guidance for VASPs and therefore needs to be updated to reflect the latter, but is also due to the rapid pace of developments in the digital assets sector and the perceived need to provide the MAS with appropriate regulatory powers to address the attendant risks in this space.
How will you be affected?
The changes to the PS Act will result in a more comprehensive scope of regulation of payment services in Singapore. Given that the changes predominantly focus on expanding the scope of regulation of DPT service providers, the digital assets sector in Singapore will be particularly affected. If you operate in this sector, the following are some examples of how you may be impacted:
- Blockchain miners and software developers: Given that the expanded scope of DPT services under the PS Act will capture activities as broad as arranging for the transmission of DPTs from one token address or account to another, the question arises as to whether you may be carrying on a licensable activity where you engage in blockchain mining or software development, given that these activities can have the effect of supporting such transmission of DPTs. In its recent consultation response, the MAS clarifies that in conducting pure technical activities of this type, you should not be carrying on a licensable payment service under the PS Act, provided this does not involve you carrying on a business of transmitting or arranging for the transmission of DPTs. This is consistent with the current PS Act position under which technical services that support a payment service fall within an exception from licensing.
- DPT custody service providers: If your core service proposition is to safeguard or administer DPTs on behalf of customers, you will likely fall within the newly expanded PS Act and are most likely already proceeding on the understanding that your business will require a licence in due course. In some cases, you may already have applied for a licence to carry on a DPT service under the PS Act, e.g. because your operating model also involves you buying or selling DPTs.
Following the proposed legislative changes, you will be considered to have 'control' of a DPT – and will therefore be providing a licensable DPT custodial service – if you are able to control access to any DPT or to execute transactions involving the DPT, or if you have control over a DPT instrument such as a private cryptographic key. Recognising that many custodial service providers offer multi-signature solutions, the MAS has clarified that control of the DPT or DPT instrument need not be absolute or exclusive, and that you will be subject to licensing as long as you have control over one of the private keys of a multi-signature wallet. To the extent that you provide a wallet or security solution for DPTs, you will need to conduct a careful assessment as to whether you are in fact providing a licensable DPT custodial service or rather whether your offering can be considered a mere technical service supporting the provision of payment services by third parties and therefore falling outside the scope of the PS Act. Separately, where your business falls within the scope of the new licensable DPT custodial service, you will also need to verify whether any of the digital tokens supported by your custody platform qualify as securities or other specified products under the separate licensing framework for custodial services in the Securities and Futures Act (SFA). To the extent that your custody platform supports both DPTs and specified products under the SFA, you will require a licence under both the PS Act and the SFA unless an exemption applies (e.g. unless your DPT custodial activities are solely incidental to or necessary for your SFA-regulated business).
- Marketing and advertising activities, and corporate finance advisers: The expanded PS Act will capture firms which provide services that involve them inducing or attempting to induce other persons to enter into, or to offer to enter into, any agreement for the purchase or sale of DPTs. A range of firms will therefore need to assess whether, as a factual matter, they carry on this type of activity and therefore need to be licensed under the PS Act. This question may arise if, for example, your business involves you marketing or advertising digital token issuances, or your corporate finance advisory firm facilitates digital token issuances and intermediates token subscriptions between issuers and prospective investors. The MAS’ consultation response explains that the answer to this question is fact-dependent. For example, you may not necessarily be carrying on a DPT service if you are involved in general marketing and advertising activities (assuming you are not soliciting customers for payment services in a manner that would contravene the PS Act). The MAS’ response does not address the position of corporate finance advisers, although this is likely to hinge on a detailed assessment of the advisers' activities, and in particular their role (if any) in facilitating sale or purchase transactions in DPTs.
- DeFi developers: A noteworthy aspect of the newly expanded scope of DPT services under the PS Act will be that facilitating the exchange of DPTs will be licensable even if it does not involve the service provider taking possession of money or DPTs. This expansion may facilitate the application of PS Act licensing requirements to DeFi platforms (such as yield-farming protocols and decentralised exchanges), assuming it is possible to identify a developer entity or operating company that effectively plays a role in operating the platform, e.g. by virtue of its predominant involvement in the governance of the platform or its control over digital tokens that are locked in the platform. The MAS’ consultation response confirms that you may fall within the scope of a licensable DPT facilitation service if you provide brokerage or exchange services, or software applications, which enable users to find counterparties and actively match orders for buyers and sellers of DPTs. While many software developers and technology providers are likely to fall outside the scope of the PS Act on the basis that they solely provide technical support to third-party payment service providers, if you are developing a DeFi platform or are involved in its operation, it is advisable to give close consideration to your position under the PS Act.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore, under the name and style Reed Smith Pte Ltd (collectively, "Reed Smith"). Where advice on Singapore law is required, we will refer the matter to and work with Reed Smith's Formal Law Alliance partner in Singapore, Resource Law LLC, where necessary.
Client Alert 2020-589
