Singapore Payment Regulation Update

2022 was a volatile and challenging year for the crypto market, which faced yet another massive industry downturn. Dubbed a “crypto winter”, this was reminiscent of the last major Bitcoin sell-off in 2018.

A new winter
However, both periods are different in nature. 2018’s crypto winter was caused by a number of disparate events such as hard forks, hacks, and regulatory shifts. In contrast, 2022’s crypto winter resulted largely from a chain of specific events, starting from the crash of the Luna and TerraUSD cryptocurrency tokens, with Asia (including Singapore in particular) at the epicenter.

Following the crash, Three Arrows Capital (3AC), a Singapore-based cryptocurrency hedge fund and one of the largest cryptocurrency hedge funds in the world with significant exposure to those tokens, filed for bankruptcy in July 2022. Consequently, a slew of embattled firms who also had exposure to 3AC or the cryptocurrency tokens, such as FTX, BlockFi, and Celsius Network, followed suit.

Aftermath
This has served as a much-needed wake-up call to the industry at large regarding the need for transparency and appropriate investor protection in the markets. Regulators worldwide have sat up, taken notice, and shifted to a more conservative approach. In particular, the U.S Securities and Exchange Commission has recently taken on a number of big-name crypto firms like Gemini and Genesis Global Capital on the grounds of unregistered securities sales, showing an intention to more tightly rein in crypto lending/yield earning arrangements.

Similarly, in the BVI, a popular jurisdiction for crypto service providers, a new Virtual Asset Service Providers Act 2022 was enacted in end 2022. Once the Act comes into force, it will impose a registration/licensing regime on virtual asset service providers like crypto exchanges or e-wallet services.

Locally, Singapore had led the pack in 2019 by being one of the first Asian countries to roll out comprehensive and clear digital asset regulations and a licensing regime. At the time, this was much lauded from a business certainty perspective. However, the stringent and lengthy licensing process and a number of prohibitions against retail access have also put off aspiring businesses who cannot afford the long wait times.

Licensing Not Required for All Token Issuers
Licensing is only required for token issuers who engage in regulated activities under the Payment Services Act 2019 (“PSA”) and/or the Securities and Futures Act 2001 (“SFA”). Under the PSA, regulated activities include digital payment token (“DPT”) services, which refers to the buying or selling of DPTs, or providing a platform to allow persons to exchange DPTs in Singapore. Under the SFA, regulated activities include dealing in capital market products, which is defined as making or offering to make with any person, or inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to acquiring, disposing of, entering into, effecting, arranging, subscribing for, or underwriting any capital markets products.

In March 2023, the Monetary Authority of Singapore (“MAS”) said it is reviewing feedback from respondents on proposed cryptocurrency and stablecoin regulatory measures and is looking to publish its response by mid-2023. In the meantime, potential token issuers often approach law firms in Singapore to provide a legal opinion to determine if licensing is required.

While there might be some dark days ahead, all is not lost for the young crypto industry. Growing pains are expected for all new industries, and the crypto industry is one which we expect to see further bumps and adjustments as the world settles into a more nuanced understanding of what the industry should be. Indeed, a silver lining from the current crypto winter is that it was not brought about by fundamental flaws in the idea of crypto as a permissionless system of value exchange, but rather by bad actors, speculation, fraud, and/or a lack of oversight. As the industry grows, bad actors will be weeded out and those who remain will likely prosper, just like how Amazon, Google, and Facebook emerged as giants from the 2000 dot-com crash.

Locally, the MAS has clarified Singapore’s regulatory approach in a 29 August 2022 speech, succinctly set out in the title of the speech, “Yes to digital asset innovation, No to cryptocurrency speculation.” In this speech, Mr Ravi Menon, managing director of the MAS, clarified that Singapore’s vision was to build an innovative and responsible digital asset ecosystem, including the tokenization of financial and real economy assets and enabling digital currency connectivity. At the same time, Singapore aims to discourage speculative investing in volatile cryptocurrencies with no underlying economic value. This sentiment was echoed by Senior Minister Tharman Shanmugaratnam, who is also chairman of the MAS, at the recent 2023 World Economic Forum annual meeting held in  Davos. Minister Shanmugaratnam talked about having one regulatory system for both crypto and traditional finance, but questioned the need to legitimise something that is inherently speculative. In his view, it may be better to instead provide clarity as to what constituted an unregulated market and the risks associated with entering such market. He detailed  that “…[i]f crypto or blockchain or any of the parts of that ecosystem would like to do things that traditional finance is doing, you apply exactly the same regulations to that – capital, liquidity, reserve backing – exactly the same regulations.” He concluded “So people are very clear. There is one regulatory system for everything. And if you’re outside of the regulatory system, buyer beware”.

Some commentators have felt that Singapore’s approach was well founded given the volatility of crypto prices over the past year. In our view, the approach taken by the MAS is a balanced view that seeks to promote legitimate digital asset development in Singapore while taking protective steps to ensure that the public at large benefits from appropriate safeguards when it comes to speculating on cryptocurrencies.

Singapore’s regulators have been busy in 2022, introducing a slew of initiatives and proposals in line with its regulatory intent to promote innovation while protecting consumer interests. We look back at a few of the notable regulatory developments that Singapore has laid out over the last year.

17 January 2022
The MAS issued guidelines discouraging the promotion of cryptocurrency trading services to the public. Due to the high risks of such product classes, they are not suitable for the general public; hence, cryptocurrency exchanges are not permitted to advertise their exchange services in public areas or through third parties like influencers.

18 October 2022
 The MAS issued a consultation paper outlining its proposal to raise the stock cap in e-wallet accounts from S$5000 to S$20,000, and the flow cap from S$30,000 to S$100,000 for licensed e-money service providers. The caps are intended to mitigate potential significant outflows from bank deposits to non-bank e-wallets, largely with the intention of mitigating the extent of losses due to scams or other losses. The increase of the caps signals an intention to facilitate greater customer convenience and innovation in the e-payments landscape.

For companies who intend to provide white-label account issuance arrangements (i.e. providing the e-money account issuance services to e-money issuers instead of directly to consumers), the MAS also considered removing the requirement to aggregate the e-money in e-wallets to the same payment service user as part of the calculation of the stock and flow caps, when it provides account issuance services to two or more e-money issuers. This will be a much-needed clarification to the scope of regulation and allow a secondary services industry to develop.

26 October 2022
The MAS issued two consultation papers charting its views as to (a) how reduce consumer harm for consumers engaged in cryptocurrency trading, and (b) how to regulate the growing stablecoin industry.

We set out the salient points of each consultation paper below.

  1. MAS Consultation Paper on Regulatory Measures for Digital Payment Token Services
    The MAS has proposed its plans to impose certain consumer protections in Singapore on licensed DPT service providers (i.e. cryptocurrency exchanges). These measures are aimed at helping retail customers in Singapore, who have less access and resources to professional advice, to navigate the digital payment token market. The notable measures proposed include (a) risk awareness assessment and eligibility criteria of “accredited investors”s; (b) restrictions on crypto exchanges providing incentives to attract customers; (c) restrictions on consumers using debt and leverage to speculate on cryptocurrencies; (d) segregation of customer assets; (e) accountability; (f) security; and (g) technology standards.
  1. MAS Consultation Paper on Regulatory Approach for Stablecoin-Related Activities
    The MAS sees potential in stablecoins being a credible digital medium of exchange, and has proposed a licensing regime where an entity can apply to be licensed and approved to issue single-currency stablecoins (“SCS”). This proposed regime will allow a license holder to designate their stablecoins as having a stamp of approval from the Singapore government, provided that certain standards are met, in particular in terms of (a) reserve asset backing; (b) redemption procedures; (c) disclosures; (d) prudential requirements; and (e) transfer timing requirements. The MAS is also looking at cases where SCS are issued in multiple jurisdictions and is considering how sufficient regulatory oversight can be ensured in those cases.

The MAS is taking a proactive stance in regulating cryptocurrencies. This is in contrast to the United States where the Securities and Exchange Commission (SEC) has taken an enforcement-centric approach instead. Critics including lawmakers have been lobbying the SEC to give proactive guidance instead of leaving the industry to interpret the rules through the SEC’s after-the-fact enforcement actions. Hester Peirce, a commissioner with the SEC, echoed this sentiment recently at a digital assets conference held on 20 January 2023. Ms Peirce called for “a coherent and consistent legal framework that works across all asset classes,” including crypto assets. She warned that the SEC’s current enforcement-centric approach would take 400 years to go through all the crypto tokens that are allegedly securities. Interestingly, Ms Peirce’s call for a coherent framework that works across all asset classes is in line with Minister Shanmugaratnam’s call for one regulatory system for both crypto and traditional finance.

Project Orchid
Project Orchid is a multi-year project first conceived in late 2021 that seeks to develop a central bank digital currency (“CBDC”) for the Singapore Dollar. A CBDC would be intended to integrate with some purpose-bound functionality where protocols can be added which specifies the conditions upon which the underlying digital currency can be used.

The MAS has said that it does not rule out the introduction of retail CBDC in the future and that the case for CBDC could strengthen over time especially with innovative uses of digital medium of exchanges gaining traction. Project Orchid is in its first phase with initial trials of certain programmable protocols (e.g.  in the form of digital vouchers) tested during various public/government events over 2022.

Project Guardian
Project Guardian is a collaborative initiative launched in May 2022 that seeks to explore the economic potential and value-adding use cases of asset tokenization. The MAS is working with fintech firms and financial institutions to explore (a) how to create open and interoperable networks where digital assets can be traded, including with existing financial infrastructure; (b) how to establish a trusted environment for DeFi protocols; (c) how to tokenize assets of various forms (such as securities); and (d) if there are to be regulatory safeguards and standards on DeFi protocols.

The first industry pilot was rolled out in November 2022 where trades of tokenized JPY and SGD currency and government bonds were carried out on the public blockchain. Other subsequent industry pilots are planned in relation to issuing tokenized trade finance assets as well as wealth management products, which will turn these into much more liquid and transparent instruments accessible to investors.

Conclusion
We anticipate further developments in the crypto regulatory space over the course of 2023 and have been actively engaging with local regulators to remain up-to-date on new developments. We are also paying attention to crypto regulatory developments in overseas jurisdictions that may have an impact on Singapore’s development as a crypto hub. Companies who are operating in the crypto space (or plan to do so) are recommended to speak with professionals who would be able to advise them on the potential regulatory considerations of their proposed business activities, in the countries that they operate in or provide services to.

For More Information

If you have any questions about this article, please contact Leon Yee, Chairman of Duane Morris & Selvam or Kenneth Lim, Director, Duane Morris & Selvam if you would like to discuss this update.

About Duane Morris & Selvam LLP

Duane Morris & Selvam LLP (DMS) is a joint law venture between international firm Duane Morris LLP (DM) and Singapore-based firm Selvam LLC. DMS runs a unique Latin American-Asian practice out of Singapore, with a team of international lawyers qualified in multiple jurisdictions including Singapore, the US, the UK, Canada, Mexico and Colombia, with substantial experience in international transactions and disputes. DMS also has a wide cooperation network with some of the best Latin American and Asian law firms.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm’s full disclaimer.

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The opinions expressed on this blog are those of the author and are not to be construed as legal advice.

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