Reed Smith In-depth

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.