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MAS consultations on the regulation of digital payment tokens

The Monetary Authority of Singapore (MAS) has issued three new consultations each dealing with different aspects of the regulation of digital payment tokens (DPTs) under the Payment Services Act (PSA). It has also recently clarified that where a DPT may be characterized as either a debenture or as e-money, its policy approach will be to regulate it as e-money. Note that the PSA will come into force on 28 January 2020.

Consultation on the Payment Services Act 2019: Proposed Amendments to the Act

The MAS issued a Consultation on the Payment Services Act 2019: Proposed Amendments to the Act on 23 December 2019. The last day for feedback is 28 January 2020.

Currently, DPT service providers that provide the following services are regulated under the PSA:

  • Buying or selling DPTs;
  • Establishing or operating a DPT exchange; and
  • Participating in and providing financial services related to an issuer’s offer and/or sale of a DPT.

The MAS intends to regulate the following further activities provided by DPT service providers:

  • Transferring or transmitting DPTs from one DPT address or account to another;
  • Providing custodian DPT wallets for or on behalf of customers; and
  • Inducing or attempting to induce any person to buy or sell DPTs (without the service provider itself coming into possession of money or DPTs).

The MAS intends to also regulate DPT service providers that are incorporated in Singapore but whose activities are targeted outside Singapore. Currently, the jurisdictional scope of MAS’s regulatory control of the DPT service providers focuses on whether the activity is targeted at Singapore or Singaporeans.

DPT service providers engaging in such activities will need to be licensed under the PSA and will be required to implement anti-money laundering / countering the financing of terrorism measures.

The MAS also intends to extend the regulation of the provision of cross-border money transfer services to also include providers who do not accept or receive money in Singapore. The PSA currently excludes such service providers from its regulatory ambit.

These amendments are to align the PSA with the recommendations of the Financial Action Task Force as set out in the Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers.

Other proposed amendments include the following:

  • Given the rapid pace of change and developments in DPTs worldwide, the MAS proposes to enhance its regulatory powers to allow it by way of regulations to impose user protection measures and restrictions on certain DPT service providers.
  • The definition of domestic money transfer service will be amended to cover the situation where either the payer or the payee is a financial institution. Currently, the definition only covers the situation where neither are financial institutions.
  • The offence of providing false information to the MAS will be expanded to make it an offence for body corporates to provide false information. Currently, it only covers individuals.

Consultation on the Payment Services Act 2019: Scope of e-money and digital payment tokens

The MAS issued another consultation paper on 23 December 2019 on the PSA. This was the Consultation on the Payment Services Act 2019: Scope of e-money and digital payment tokens.

In this consultation, the MAS is seeking views on how (and whether) it should regulate the emerging asset class of “stablecoins”. Unlike DPTs such as Bitcoin, “stablecoins” comprise digital tokens that are backed by a reserve of real assets, with the intent that this will reduce their price volatility. Facebook’s Libra is but one of the most well-known examples.

The PSA regulates “e-money” and “digital payment tokens”. “Stablecoins” do not fall into either category:

  • The definition of “e-money” provides that it is an electronically stored monetary value that is, among other things, denominated or pegged to a particular fiat currency. A “stablecoin” would not amount to e-money as defined as it is backed by a basket of assets or currencies, and not a single currency.
  • The definition of “digital payment tokens” states that it is a digital representation of value that, among other things, is not denominated or pegged to any currency. As “stablecoins” are backed by a basket of currencies and other assets, they would not amount to “digital payment tokens” as defined.

The MAS is also seeking views on how “stablecoins” should be regulated and whether its holders should be protected. Existing fiat currencies are essentially backed by the governments of the countries that issue these currencies. It remains unclear what actual legal protection would be accorded to “stablecoins” by their issuer and whether regulation should be implemented to deal with this.

The last day for feedback is also 28 January 2020.

Derivative contracts on payment tokens

On 20 November 2019, the MAS issued a Consultation Paper on Proposed Regulatory Approach for Derivatives Contracts on Payment Tokens. The consultation closed on 20 December 2019. It sought views on the regulation of payment token derivatives.

The MAS explained that it intends to allow payment token derivatives to be offered on an Approved Exchange. Under the current regulatory framework for derivative contracts, it is the Approved Exchange that decides whether a derivative is suitable for listing on the Approved Exchange in accordance with its requirements. The trading and clearing of trades will be subject to the rules of the Approved Exchange.

This does not mean that payment token derivatives may not be traded on other exchanges. The Consultation Paper notes that they may continue to be offered on exchanges other than Approved Exchanges (i.e. Recognized Market Operators or unregulated trading platforms). They may also be traded over-the-counter on a bilateral basis. Such trades will however not be regulated in the sense that such exchanges themselves are not subject to the level of regulation that the MAS subjects Approved Exchanges to. To the extent that such exchanges have their own rules and regulation for the trading of derivatives, such trades will be subject to these rules and regulations on a contractual basis.

The MAS also proposed introducing measures that will apply to the offer of payment token derivatives to retail investors. These measures will apply to all regulated financial institutions offering payment token derivatives. The proposals are:

  • MAS regulated financial institutions will have to collect from retail investors margin amounting to either 1.5 times the standard amount of margin required for contracts offered by Approved Exchanges or 50% of the contract size whichever is the higher. 
  • They will also have to provide tailored risk warnings.
  • There will also be restrictions on advertising.

The details of these measures have not been set out and it is likely that the MAS will conduct another consultation on these. Debentures that are based on payment tokens will also be subject to the same requirements. The MAS intends to roll out these measures by 30 June 2020.

Digital tokens that are both debentures and e-money

The MAS issued an amended Guide to Digital Token Offerings on 23 December 2019. The amended Guide clarified the case study of an offer of digital tokens where the issuer is under an obligation to buy-back the digital token from the holders in the circumstances set out in the case study. In the amended analysis of the case study, the MAS stated that its policy position is to consider whether the digital token would amount to e-money. It further clarified that where the digital token could be characterized as either e-money or a debenture, it would not regulate the token as a debenture.