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As part of its efforts to develop an innovative and responsible digital asset ecosystem in Singapore, on 26 October 2022, the Monetary Authority of Singapore (MAS) released two consultation papers on proposed regulatory measures relating to:
a) digital payment token service providers (DPTSPs);
b) certain types of stablecoin issuers.
The proposed measures will expand the regulatory framework for DPTSPs under the Payment Services Act 2019 (PS Act), currently the principal Singapore regulatory framework governing cryptocurrency services. The proposals address perceived risks associated with such activities, including risks arising from speculative trading by retail investors who are vulnerable to volatility in markets they do not fully understand, the presence of fraudulent actors in the ecosystem and cybersecurity weaknesses. The proposals also aim to clarify and enhance the regulatory framework for stablecoin issuers.
The deadline for consultation feedback is 21 December 2022.
New regulations targeted at DPTSPs
The “targeted regulatory measures” in the first consultation paper focus to a large degree on retail access to digital payment tokens (DPTs) due to concerns about “cryptocurrency speculation” and in response to high-profile collapses of several DPTSPs in 2022. The proposals follow the introduction, earlier in 2022, of guidelines that restrict DPTSPs from promoting cryptocurrency services in public spaces. However, the consultation paper also sets out business conduct measures that will apply to DPTSPs irrespective of the classification of their customers.
Following consultation on these measures, in the first instance, the MAS intends to publish new guidelines that DPTSPs will be required to implement within six to nine months from publication. As a subsequent step, the MAS proposes to separately publish proposed subsidiary legislation for consultation.
Protections for retail investors
The MAS proposes to introduce new access measures targeting retail investors who are resident, formed or incorporated in Singapore. The MAS is considering whether these measures should be applied to investors outside Singapore as well (noting that DPTSPs should, in any event, comply with consumer access measures and other requirements of foreign jurisdictions in which they operate).
The retail category captures any investor who is neither an accredited investor (AI) nor an institutional investor as defined in the Securities and Futures Act 2001. In this context, the MAS is reviewing the criteria for determining whether a customer should qualify as an AI where the customer’s net assets include DPT holdings, given the volatile nature of DPTs. Options being considered include capping the value of DPT holdings that can be counted towards the AI net-asset threshold, for example, applying a cap of S$200,000 for individuals (which would be 10 per cent of the S$2 million net-asset threshold which an individual must meet to qualify as an AI) or fully excluding the value of DPT holdings from the value of net personal assets. However, MAS-regulated single-currency pegged stablecoins (as further discussed below) may be permitted to count towards the AI determination without any cap.
As a key retail protection measure, a risk awareness assessment for retail investors has been proposed before any DPT services can be offered. The assessment would focus on investor knowledge of the risk of losing their DPTs due to factors like market fluctuation and fraud. For retail investors who do not pass the assessment, the MAS proposes that DPTSPs would take additional measures to improve their knowledge of these risks, such as providing educational materials, cool-off periods between assessments and a diverse question bank for assessments. The MAS is supportive of the industry developing a uniform template form for assessing a retail customer’s knowledge of the risks of trading in DPTs.
Other retail-facing measures include restrictions on offering any incentives to retail investors to participate in a DPT service or for referrals of a DPT service to retail investors and prohibitions on credit facilities or leverage and on accepting payments by credit card or charge card in relation to a DPT service.
New business conduct measures
The MAS is also proposing to introduce new business conduct standards for DPTSPs, which include requiring DPTSPs to:
a) Ensure customers’ assets are segregated from the DPTSP’s own assets and held for the benefit of the customer (the MAS is further considering whether there is merit in requiring DPTSPs to appoint an independent custodian to hold customer assets).
b) Provide written disclosures to customers on the arrangements and risks involved in having their assets held by DPTSPs.
c) Put in place a process to conduct daily reconciliations of all customers’ assets that are held on behalf of customers by DPTSPs.
d) Provide customers with a statement of account on their assets and transactions on a monthly basis.
e) Apply measures to safeguard the private keys and storage of customers’ DPTs, including, for example, processes to restrict any one staff member from being able to effect DPT transactions and other measures to control the movement and transfer of DPTs and a compensation process to handle the loss of customer DPTs.
f) Refrain from on-lending, that is, mortgaging, charging, pledging or hypothecating, a retail customer’s DPTs and provide non-retail customers with a risk disclosure and obtain their explicit consent in respect of such use of their DPTs.
g) Establish and implement effective conflicts of interest policies and procedures and provide sufficiently clear and precise disclosures of conflicts (as well as the steps taken to mitigate them) to customers, for example, where a DPTSP has a financial interest in DPTs listed on a trading platform it operates, or a DPTSP acts as principal on such platform and could use the information available to it to front-run customer orders.
h) Disclose how customer orders are handled and executed, for example, as counterparty to the customer or matcher of trades between customers, and the capacity in which the DPTSP is doing so, for example, as agent or principal.
Other proposed measures include prohibiting DPTSPs from misusing any information relating to customers’ orders, as well as prohibiting DPT trading platforms from buying or selling (or permitting their related corporations to buy and sell) for their own accounts.
DPT trading platforms
The MAS further proposes to require DPT trading platforms to disclose their DPT listing and governance policies and procedures. In respect of new DPT listings, DPT trading platforms are expected to disclose the decision-making process and evaluation criteria they apply prior to listing. DPT trading platforms should also address in their DPT listing and governance policies, among other items:
a) The conditions and processes governing DPT trading and their suspension or removal from trading.
b) Dealing with unfair trading practices on the DPT trading platform.
c) Settlement of DPT transactions.
In addition to disclosure, DPT trading platforms are encouraged to enforce rules governing trading activities on their platforms and monitor trading activities based on the scale of their operations.
Complaints handling
The MAS is also focusing on how DPTSPs handle customer complaints and has proposed to require DPTSPs to put in place adequate policies and procedures to handle such complaints, which may include:
a) Establishing an independent complaints unit to handle complaints
b) Establishing a process, timeframe and criteria for addressing complaints, including escalatory procedures to senior management
c) Publishing information on the DSPTSP’s complaints-handling process
d) Providing written reasons to customers for rejecting their complaints
The MAS clarifies that DPTSPs should not prevent retail investors from bringing complaints to Singapore courts, such as through arbitration clauses.
Technology and cyber-risks
To address the risk of system outages and cyber-attacks, the MAS is also proposing to extend requirements under the Notice of Technology Risk Management to DPTSPs. This includes implementing specific recovery-time objectives, incident reporting of system malfunctions or IT security incidents and IT controls to protect customer information from unauthorised access or disclosure.
Market integrity
The MAS notes that DPT markets have been susceptible to unfair trading practices, such as wash trading, pump and dump, cornering, trade spoofing, and insider trading, and is coordinating with international standard-setting bodies, such as the International Organisation of Securities Commissions (IOSCO), on the development of principles to address such practices. Pending any regulatory proposals in this area, the MAS encourages DPT trading platform operators to follow good industry practices to detect and deter unfair trading in the DPT markets, such as trade-monitoring systems and arrangements to promote fair, orderly and transparent trading.
New regulations targeted at stablecoin issuers
The second consultation paper sets out the MAS’ proposed approach to regulating stablecoin issuers, which the MAS has formulated taking account of principles developed by international standard-setting bodies such as the Financial Stability Board and input obtained from industry participants.
The MAS proposes to separately publish details on the regulatory requirements, legislative amendments and transitional arrangements in this area in due course.
Proposed regulatory framework for SCS issuers
Under the current PS Act framework, stablecoins are treated as DPTs. In accordance with the current scope of the PS Act, entities that deal in and/or facilitate the exchange of stablecoins therefore fall within the scope of regulated DPT services. DPTSPs are regulated primarily to counter money laundering, terrorism financing and technology risks. They are also required to provide risk-warning disclosures to customers.
However, stablecoin issuers are not presently regulated to ensure the value stability of stablecoins. Accordingly, the MAS is proposing to introduce a new regulated activity – a “Stablecoin Issuance Service” – that will regulate entities based in Singapore that perform the function of controlling the total supply, minting and burning of a single-currency pegged stablecoin (SCS). Such an SCS will be labelled using a specific term, such as “regulated stablecoin”, “qualifying stablecoin” or “securely-backed stablecoin”. Activities relating to other types of stablecoin, including algorithmic stablecoins, will continue to be subject to the existing DPT regime under the PS Act.
Under the proposed regulatory framework for SCS issuers and intermediaries, SCS issuers that are regulated under the new Stablecoin Issuance Service will have to comply with new requirements aimed at maintaining a high degree of value stability. These include requirements relating to:
(a) Reserve assets used to back the SCS issued. For example, reserve assets must meet specified criteria and be held in segregated accounts with specified custodians in Singapore and will be subject to monthly independent attestation and annual external audit.
(b) Timely redemption at par. For example, redemptions must be completed no later than five business days from the date of request and any conditions must be reasonable and disclosed.
(c) Disclosure. For example, an SCS issuer must publish a whitepaper setting out specified information on the SCS and SCS issuer.
(d) Prudential and solvency standards. For example, there will be minimum requirements relating to base capital and holding of liquid assets, as well as restrictions on the conduct of non-issuance business (although risk-based capital requirements will not be introduced for the time being).
The MAS proposes a calibrated approach to applying the new requirements to regulated SCS issuers. An SCS issuer will be required to comply with some or all of the new requirements depending on whether it is a bank or non-bank and whether it holds a major payment institution (MPI) licence or standard payment institution (SPI) licence.
Non-bank SCS issuers will be required to obtain an MPI licence where the SCS in circulation exceeds or is anticipated to exceed S$5 million in value. If this threshold is not met, the non-bank SCS issuers will not be subject to the new regulatory regime and will need to obtain an SPI licence only if they provide regulated DPT services. However, they can opt to comply with the new regulatory regime (and be recognised as issuers of MAS-regulated SCS) by applying for an MPI licence.
SCS issuers that are banks in Singapore will remain exempt from the requirement to obtain a licence under the PS Act for SCS issuance. Nonetheless, they will need to comply with some new regulatory requirements:
a) If a bank issues SCSs as tokenised bank liabilities, they will only need to comply with the requirements in relation to timely redemption at par and disclosure
b) If a bank issues SCSs backed by reserve assets that are segregated from the bank’s assets, they will need to comply with all the new requirements, except for prudential requirements.
In the case of SCSs that are issued in multiple jurisdictions, the MAS has indicated that it is only prepared to recognise such SCSs if there is sufficient assurance that the SCS as a whole is subject to sufficient regulatory oversight. The MAS has proposed two avenues to ensure this: (a) to require the SCS issuer in Singapore to submit an annual independent attestation on the equivalence of standards of reserve-backing and prudential requirements met by other significant issuers of the SCS, and (b) establish regulatory cooperation among relevant regulatory bodies of the SCS to exchange information on operations of the SCS.
Intermediaries
MAS-regulated SCS issuers will not be required to apply for a licence for other DPT services, even if the issuance of SCSs may entail the buying or selling of SCSs. However, SCSs will be treated and regulated like DPTs in relation to any services provided by intermediaries (i.e., parties other than the issuer) in respect of the SCS, such as buying or selling the SCS.
Intermediaries will be required to (a) apply labelling to allow users to distinguish between MAS-regulated SCSs and other DPTs, (b) complete transmission of MAS-regulated SCSs within three business days, and (c) segregate MAS-regulated SCSs from other customer assets and their own assets to mitigate misuse of customers’ SCSs.
Systemic stablecoin arrangements
A stablecoin arrangement in Singapore may become systemic if any disruption to the arrangement could cause further disruption to its users, cause systemic disruption to the financial system of Singapore or affect public confidence in the financial system of Singapore. The MAS indicates that if it were to identify any stablecoin arrangement as systemic, the arrangement might become a “designated payment system” under the PS Act, which would lead to more stringent financial and operational requirements, as well as international standards, being applied to the relevant issuer. Systemic stablecoin arrangements will also be designated under the Payment and Settlement Systems (Finality and Netting) Act 2002 to provide finality to transactions effected through such arrangements.
Commentary
The proposals set out in the two consultation papers are consistent with the policy approach outlined by Ravi Menon (managing director of the MAS) in his speech on 29 August 2022 titled “Yes to Digital Asset Innovation, No to Cryptocurrency Speculation”. They signal a move towards a more highly regulated crypto sector in Singapore in which the potential for harm to consumers is reduced and firms must demonstrate strong risk-management capabilities. The message to the industry is clear: Singapore is not positioning itself as the all-embracing domicile for crypto players it was once touted to be; it is instead paring back and right-sizing the scope of permissible activities. While in the shorter term this may create an impression that Singapore is slowing down the pace of innovation, in the longer term this regulatory policy may be vindicated as various jurisdictions around the world likewise enhance their regulation of crypto activities to align it with the regulatory standards applied in traditional capital markets.
Some of the proposals in the first consultation paper may prove disruptive for certain business models. In particular, the prohibition of on-lending customer DPTs appears to put an end to the typical operating model adopted by yield platforms. Many of these platforms went into financial distress during the 2022 market turmoil, and the prohibition of on-lending clearly seeks to curtail the risks that are inherent in that model. Another service offering that could be impacted is non-custodial wallet providers, who may face a threat of being replaced by custodians if the MAS follows through with its suggestion of requiring DPTSPs to appoint an external custodian to hold customer DPTs.
Other aspects of the proposals, however, are unlikely to be viewed as controversial. For example, principles such as managing conflicts of interest, ensuring orderly trading, proper handling of complaints and ensuring prompt recovery of critical systems are well understood in traditional financial sectors, and aligning the crypto sector with these requirements is inevitable in the long term.
The proposals relating to stablecoins in the second consultation paper will introduce tailored regulation and much-needed clarity in an area in which existing regulation has, to date, been mismatched with product features, giving rise to some uncertainty. The introduction of a regulatory framework for SCS will place Singapore at the forefront of stablecoin regulation, as only a few jurisdictions currently have specific rules in this area (a notable example being the European Union, which is due to regulate stablecoin activities under its new Markets in Crypto-Assets Regulation (MiCA)). The new framework may also encourage the issuance of further stablecoins in Singapore, including by banks who may perceive an opportunity to leverage this concept for the purposes of novel payment and settlement solutions.
To date, the industry reaction to the consultation papers has been one of acceptance and positive engagement, and it remains to be seen whether the feedback provided to the MAS will prompt any changes to the measures proposed. However, while some discrete adjustments can be expected, it is highly likely that the proposals will largely be implemented as described.
Reed Smith LLP is licensed to operate as a foreign law practice in Singapore under the name and style, Reed Smith Pte Ltd (hereafter 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.
In-depth 2022-361
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