MAS finalises its policy position on the regulation of stablecoin-related activities

Under the Payment Services Act 2019 (PS Act), stablecoins are currently treated as digital payment tokens (DPTs). Entities that currently provide the service of dealing in and/or facilitating the exchange of stablecoins would fall within the scope of regulated DPT services. The Monetary Authority of Singapore (MAS) has now announced the future introduction of “Stablecoin Issuance Service” as a new regulated activity under the PS Act. Under this expanded regime, an entity that is based in Singapore and which performs the function of controlling the total supply of, and minting and burning of certain single-currency pegged stablecoins, and where the value in circulation exceeds S$5 million, will need to be licensed for the regulated activity of “Stablecoin Issuance Service”. The single-currency pegged stablecoins that such an entity issues will also be labelled as “MAS-regulated stablecoins”.

The MAS’s policy position is particularly noteworthy as it takes an interesting policy position: that of encouraging the development of an “MAS-regulated stablecoin” issued solely in Singapore that would be attractive precisely because it is regulated. The regulatory framework does include or introduce new requirements for issuers of stablecoins that fall outside of this framework, but the focus is on the creation of a new regulated class of digital token subject to higher levels of regulation which can perform the role of a credible digital medium of exchange.

Licensing framework for issuers of stablecoins 

With the introduction of the new regulatory framework, stablecoins would fall into one of the following buckets:

• Stablecoins that are pegged to a single currency where the currency is the Singapore dollar or one of the G10 currencies (i.e. Australian Dollar, British Pound Sterling, Canadian Dollar, Euro, Japanese Yen, New Zealand Dollar, Norwegian Krone, Swedish Krona, Swiss Franc and the United States Dollar) (SGD/G10-Pegged Stablecoin);
• Stablecoins that are pegged to a single currency where the currency is not Singapore dollar or a G10 currency such as the Chinese Yuan (Non-SGD/G10 Pegged Stablecoin); and
• Stablecoins that are not pegged to a single currency but to a basket of currencies or are otherwise not SGD/G10-Pegged Stablecoins or non-SGD/G10 Pegged Stablecoins. 

The licensing framework that applies will be as follows:

• An issuer of SGD/G10-Pegged Stablecoins in Singapore where the total amount in issuance is above S$5 million must be licensed as a Major Payment Institution for the existing activity of providing a DPT service and the new activity of “Stablecoin Issuance Service”.
• An issuer of SGD/G10-Pegged Stablecoins where the total amount in issuance is equal to or below S$5 million must be licensed for the existing activity of providing a DPT service. It may voluntarily choose to be licensed and regulated as a Major Payment Institution for the activity of “Stablecoin Issuance Service” and to comply with the additional regulatory and compliance requirements applicable to an issuer of “MAS-regulated stablecoins”.
• An issuer of stablecoins that are neither SGD/G10-Pegged Stablecoin nor Non-SGD/G10 Pegged Stablecoin must be licensed and regulated for the activity of providing a DPT service.

SGD/G10-Pegged Stablecoins that are issued by entities licensed for the activity of “Stablecoin Issuance Service” will be known as “MAS-regulated stablecoins”. “MAS-regulated stablecoins” must be issued only in Singapore and in no other jurisdiction, and may be issued by a non-bank entity or a bank.

Compliance Requirements for issuers of MAS-regulated stablecoins

As with any activity regulated under the PS Act, an entity undertaking the regulated activity of “Stablecoin Issuance Service” must comply with various requirements as to its operations as set out below. However, a bank that issues “MAS-regulated stablecoins” backed by reserve assets segregated from the bank’s assets will not have to comply with the prudential related requirements set out below (although the rest of the requirements apply).

Requirement to hold reserve assets

An issuer of “MAS-regulated stablecoins” must maintain a portfolio of reserve assets with very low risk. The level of reserve assets must be maintained at a level that is at least 100% of the par value of its “MAS-regulated stablecoins” outstanding and in circulation at all times.

In addition, the issuer must maintain a robust and resilient risk management policy for its reserve assets, covering aspects such as credit, liquidity and concentration risk. Where necessary, the issuer should demonstrate to the MAS how it reviews and determines the appropriate buffers in order to ensure that the valuation of their reserve assets is maintained at the required level.

The reserve assets must be held in segregated accounts, separate from the assets of the issuer which are not reserves. The issuer may use overseas-based custodians to hold these assets 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.

Finally, the reserve assets must be independently attested to on a monthly basis. The attestations must be published on the issuer’s website and submitted to the MAS no later than the end of the following month.

Requirement to allow redemption at par

An issuer of “MAS-regulated stablecoins” must return the par value of the “MAS-regulated stablecoins” to holders within five business days upon receiving a redemption request.

In exceptional circumstances, for example, during times of market stress, the MAS may direct the issuer 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.

Requirements as to consumer awareness

An issuer of “MAS-regulated stablecoins” must publish a white paper on its corporate website that discloses the following information (which would need to be updated from time to time):

• general information of the issuer;
• the operations of the “MAS-regulated stablecoins” (including value-stabilising mechanism, technology adopted);
• the rights and obligations of the issuer and “MAS-regulated stablecoins” holders (e.g. redemption rights); and 
• the risks arising from the use of the “MAS-regulated stablecoins” and the ability of the issuer to fulfil its obligations, etc.

As a matter of good practice, a factsheet summarising the key information that is relevant to the holders of the “MAS-regulated stablecoins” should also be published.

Prudential related requirements

In respect of base capital requirements, an issuer of “MAS-regulated stablecoins” must have a base capital which is the higher of S$1 million or 50% of its annual operating expenses.

In addition, it must hold at all times, liquid assets which are valued at the higher of:

• 50% of annual operating expenses; or
• an amount assessed by it to be needed to achieve recovery or an orderly wind-down.

Where the issuer holds liquid assets at an amount assessed by it to be needed to achieve recovery or an orderly wind-down, this amount must be subject to independent audits on at least an annual basis. The MAS proposed that liquid assets may include cash and cash equivalents, debentures of government, negotiable certificates of deposit, and money market funds.

As expected, an issuer must not undertake other activities that introduce additional risks to itself. This includes:

• investing in and extending loans to other companies,
• lending or staking of “MAS-regulated stablecoins” and other digital payment tokens, and
• trading of digital payment tokens.

MAS noted that there may be necessary activities which issuers carry out as part of their business operations, such as custody of issued “MAS-regulated stablecoins”, or facilitating the transfer of issued “MAS-regulated stablecoins” to buyers. However, MAS does not intend for an issuer under the “MAS-regulated stablecoins” framework to take on other business offerings such as lending services, dealing or fund management services, which carry significant risks. 

Tokenised bank liabilities

It should also be noted that the regulatory framework set out above will not apply to tokenised bank liabilities. However, MAS may impose additional requirements on tokenised bank liabilities in the future as necessary, taking into consideration the design of such tokenised bank liabilities.

Additional compliance obligations for intermediaries dealing with “MAS-regulated stablecoins”

Apart from imposing requirements on issuers of stablecoins, the new regulatory framework also imposes additional requirements on intermediaries dealing with “MAS-regulated stablecoins”, which as noted above, would also need to be regulated for providing a DPT service:

• “MAS-regulated stablecoins” must be transmitted by the intermediaries within three business days.
• There will need to be a segregation of customers’ “MAS-regulated stablecoins” from the intermediaries’ own assets. The upcoming measures set out in the Consultation Paper on Proposed Amendments to the Payment Services Regulations issued on 3 July 2023 relating to segregation and custody of customers’ assets for digital payment token service providers will apply equally to “MAS-regulated stablecoins” intermediaries, given that they will also be subject to regulations for DPT service providers.
• Commingling of an individual customer’s “MAS-regulated stablecoins” and/or DPTs with that of other customers in an aggregated pool is allowed, although this pool must be separate from the intermediary’s own assets. The risks of such arrangements, as well as steps taken by the intermediary to mitigate them, will have to be clearly disclosed to its customers.