New regulations targeted at stablecoin issuance
Under the current Payment Services Act 2019 (PS Act) framework, stablecoins are treated as digital payment tokens (DPTs). DPT service providers are regulated primarily to counter money-laundering, terrorism-financing and technology risks.
Stablecoin issuers are presently not, however, regulated to ensure the stability of the stablecoins’ value. Accordingly, the MAS is proposing to regulate certain stablecoin activities under a new SCS framework.
In line with the MAS’ heightened focus on consumer protection, issuers and their intermediaries will be required to use the term “MAS-regulated stablecoins” to help consumers distinguish SCS, which will be regulated differently from other DPTs.
To ensure that SCS can enjoy a strong reserve backing with high-quality liquid assets, only SCS pegged to the Singapore dollar or G10 currencies that are issued in Singapore will come under the scope of the Framework. Other types of stablecoins (including algorithmic stablecoins) will continue to be subject to the existing DPT regime.
“Stablecoin issuance service” will be a new regulated payment service under the PS Act. This additional payment service will encapsulate the necessary activities that a stablecoin issuer undertakes, including custody of SCS issued by the issuer and management of the reserve assets backing the SCS.
An issuer whose SCS in circulation exceeds or is anticipated to exceed S$5 million in value will have to obtain a major payment institution (MPI) licence to be recognised as an issuer of MAS-regulated SCS. By contrast, SCS issuers that do not exceed the value threshold for an MPI will need to obtain a standard payment institution licence to provide DPT services. Only SCS issuers that obtain an MPI licence for a stablecoin issuance service under the Framework will be recognised as an issuer of MAS-regulated SCS.
MAS-regulated SCS issuers will not be required to apply for a licence for other DPT services, but will also be restricted in respect of the activities they can conduct (see further “Prudential requirements – Business restrictions” below).
Reserve asset requirements
The MAS intends to maintain a simple framework for reserve assets and will thus require SCS issuers to maintain a portfolio of reserve assets with very low risk. Such SCS issuers will be required to maintain a robust and resilient risk management policy for reserve assets, covering aspects such as credit, liquidity and concentration risk. Where necessary, SCS issuers must be able to demonstrate to the MAS how they review and determine the appropriate buffers in order to ensure that the valuation of their reserve assets is maintained at a level that is at least 100% of the outstanding SCS in circulation at all times.
MAS-regulated SCS issuers will be required to hold the reserve assets in segregated accounts, separate from their own assets which are not reserves. Custody of assets by overseas-based custodians may be allowed, provided that such custodians have a minimum credit rating of “A-”, and have a branch in Singapore regulated by the MAS to provide custodial services. One concession provided by the MAS is that providers will be allowed to commingle an individual customer’s MAS-regulated SCS and/or other DPT with those of other customers on an omnibus basis.
Reserve assets will be subject to external audit, and will have to be independently attested to on a monthly basis. Attestations will have to be published on the issuer’s website and submitted to the MAS no later than the end of the following month.
Prudential requirements
The following prudential requirements will be applied to MAS-regulated SCS issuers:
a) Base capital – Higher of S$1 million or 50% of annual operating expenses of the SCS issuer.
b) Solvency – SCS issuers are to hold, at all times, liquid assets which are valued at the higher of 50% of annual operating expenses or an amount assessed by the SCS issuer as being needed to achieve recovery or an orderly wind-down (such amount to be subject to independent audits on an at least annual basis).
c) Business restrictions – SCS issuers will be allowed to carry out necessary activities such as custody of issued SCS or facilitating issued SCS to buyers. They will not, however, be allowed to undertake other activities that introduce additional risks, such as investing in and extending loans to other companies, lending or staking of SCS and other DPTs, and trading of DPTs. This is intended to achieve ringfencing and mitigation of risks to the SCS issuer in lieu of a comprehensive risk-based capital regime. Such activities can still be conducted from other related entities (e.g., a sister company in which the SCS issuer does not have a stake).
Timely redemption of stablecoin to fiat
SCS issuers will be required to return the par value of MAS-regulated SCS to holders within five business days. This applies only to redemption by parties that redeem directly with the SCS issuer. The redemption timeline is intended to strike a balance between responsiveness to users’ requests and ensuring there is enough time for the SCS issuer to effect redemption in an orderly manner under various stress situations. In exceptional circumstances (e.g., during times of market stress), the MAS may direct SCS issuers to carry out liquidation of the reserve assets within a specified period to meet redemption needs. In normal business conditions, redemption should be expedient and not delayed unnecessarily, and any conditions must be reasonable and disclosed.
SCS intermediaries
SCS will be treated as DPTs for the purpose of non-issuance activities, and intermediaries offering SCS-related services will therefore be regulated under the PS Act if the services fall within the scope of regulated DPT services (e.g., facilitating the exchange of MAS-regulated SCS). DPT service providers who transmit MAS-regulated SCS from a payer to a payee will be required to complete the transfer in three business days.
Other requirements
Disclosure
An SCS issuer must publish a white paper on its corporate website disclosing information such as the description of the SCS, rights and obligations of the SCS issuer and SCS holders, risks that can affect the stability of the SCS value, and ability of the SCS issuer to fulfil its obligations, and must update such information as needed. As a matter of good practice, a factsheet summarising the key information that is relevant to SCS holders should also be published.
Multi-jurisdictional issuance
The MAS initially considered recognising SCS with multi-jurisdictional issuance, but in its response confirmed that it will not allow multi-jurisdictional issuance at the outset and will require SCS issuers to issue solely out of Singapore insofar as they wish for their SCS to be recognised as an “MAS-regulated stablecoin” under the Framework.
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 intends to designate systematic stablecoin arrangements as 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.
At this point, the MAS has indicated that no stablecoin arrangement in Singapore is likely to qualify as systemic.
Issuers that are banks
SCS issuers that are banks in Singapore will remain exempt from the requirement to obtain a licence under the PS Act for SCS issuance. In light of industry feedback highlighting the differences in the value-stabilising mechanisms used for fully reserve asset-backed stablecoins and tokenised bank liabilities, the MAS will exclude tokenised bank liabilities from the scope of the SCS framework. The MAS will, however, continue to monitor banks’ initiatives in this space as well as international regulatory developments, to determine whether the Framework requires further adjustment to cater for stablecoin issuance activities of banks.
Commentary
The proposed Framework positions Singapore as a forerunner jurisdiction in stablecoin regulation, and the industry will welcome the clarity which the Framework introduces. In addition to addressing specific risks that may arise in connection with stablecoin issuance activities, the Framework may have the effect of spurring innovation in the stablecoin realm. Use cases to be explored by the industry may range from using SCS for on- and off-ramping activities between the traditional payments and Web3 domains to using SCS to build more efficient cross-border remittance rails.
In its currently announced form, the Framework is measured by and aligned with the MAS’ perception of risks and regulatory objectives as they exist today. Once the Framework is implemented, we may see the MAS make further regulatory adjustments for calibration purposes (e.g., to further align the Framework with the policy of international standard-setting bodies like the IOSCO and BIS), to bring stablecoins backed by non-G10 currencies into the scope of the Framework, or to recognise SCS issued outside of Singapore as MAS-regulated stablecoins.
As a next step, the MAS proposes to publish details on the regulatory requirements, legislative amendments and transitional arrangements in this area, at a date to be confirmed.
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.
Client Alert 2023-189
