Singapore proposes regulation for digital payment token services

The Singaporean regulations that apply currently to digital payment tokens (DPTs) mainly address anti-money laundering and counter-terrorism financing risks. DPTs are not regulated for customer safety and soundness or customer protection.

The Monetary Authority of Singapore (MAS) has released proposals, detailed in a consultation paper, "Proposed Regulatory Measures for Digital Payment Token Services", published in October 2022, to further regulate DPTs – a term that encompasses, among other things, cryptocurrencies. The paper proposed legislation to introduce a basic level of customer protection.

The MAS took a step further in July 2023 towards enacting these proposals into law by releasing a subsequent consultation paper “Proposed Amendments to the Payment Services Regulations”, which suggests legislative amendments to the Payment Services Regulations to put these proposals into effect.

Asset segregation

The MAS has proposed that DPT service providers (DPTSPs) be required to ensure that their customers’ assets are segregated from their own assets.

The proposed legislative amendments will require licensed DPT service providers (DPTSPs) to:

• deposit their customers’ assets in a custody account held on trust for the customer and must treat and deal with the assets as belonging to the customer;
• refrain from commingling customers’ assets with any other assets (unless an exception applies); and
• refrain from transferring any right, interest, benefit or title in the customers’ assets, save where the customer has given written instructions.

It also proposed that DPTSPs should provide written disclosures to their customers in relation to (among other things) the consequences should the safeguarding institution become insolvent, and the terms and conditions applicable to the safeguarding of those assets.

It is proposed that licensed DPTSPs be required to record and maintain a separate book entry for each customer’s assets to a stipulated level of detail and should have a system in place to reconcile all their customers’ assets.

It would be difficult to argue against the requirement for segregation and disclosure, given that these are the issues that largely precipitated the downfall of the crypto exchange FTX last year. It is almost certain that the crux of these proposals will be enacted into law. This will mean that DPTSPs, in order to comply, will need to draft the appropriate disclosure statements, terms and conditions of business and other related documents.

Lending and staking

In the DPT paper, the MAS highlighted concerns about relatively high yields offered to customers that hold DPTs with some DPTSPs. For instance, these yields may arise from cryptocurrency staking or lending. These activities are largely unregulated and had contributed to the collapse of several cryptocurrency platforms, such as Celsius and Voyager Digital. The MAS proposed to restrict DPTSPs from lending out retail customers’ DPTs.

The DPT paper also discussed risks arising from DPTSPs facilitating staking, which is closely related to lending. Many DPTSPs that lend cryptocurrencies also offer staking as an option for customers to obtain yields or themselves engage in staking to obtain yields. However, the paper did not make any specific proposals to prohibit staking by DPTSPs, which is understandable given that staking is a critical activity for the functioning of proof-of-stake blockchains.

In response to pushback on restricting DPTSPs from facilitating the lending and staking of their customers’ assets, the MAS’ response has been that the potential harm of these activities outweighs their benefits, and it has pointed out that, notwithstanding any restriction, retail customers will not be prohibited from handling their own assets (for example, self-staking).

The MAS stated, in a media release dated 3 July 2023, that it will proceed with the proposal to restrict DPTSPs from facilitating lending or staking of their retail customers’ DPTs, although DPTSPs will be allowed to continue to do so for their institutional and accredited investors.

The impact of this decision on the functioning of proof-of-stake blockchains remains to be seen.

Restriction on offering incentives

The MAS also proposed restricting DPTSPs from offering any monetary or non-monetary incentives (the examples, it cited free trading credits or DPTs) to retail customers to participate in a DPT service or to any person to refer a DPT service to retail customers. The MAS drew a parallel with its subsisting guidelines that require financial institutions to ensure that any gift does not unduly influence the decisions of customers to purchase any financial product or service.

This proposed requirement does not appear to be controversial. It is likely that a restriction on gifts or incentives that entice retail customers will be prohibited in future legislation. In its “Consultation Paper on Proposed Measures on Market Integrity in Digital Payment Token Services” (3 Jul 2023), the MAS addressed this, although somewhat tangentially, by seeking to introduce provisions to prohibit, among other things, the employment of manipulative and deceptive devices.

Osborne Clarke comment

Increased regulation is almost inevitable, given the growing impact that cryptocurrencies have on the financial landscape in Singapore and their growing reach to the "man (and woman) in the street" – that is, the retail customer.  What remains to be seen, however, is how far regulation will go.

The trend towards increased regulation can be seen in, inter alia, the consultation paper, "Proposed Regulatory Approach for Stablecoin-related Activities", which the MAS released simultaneously with its DPT paper. The MAS in its stablecoin paper makes proposals for single-currency pegged stablecoins (SCSs) that parallel the DPT-related proposals.

The MAS proposals included restricting issuers of SCSs from lending or staking SCSs and other DPTs, and for entities providing services of transmission or custody of MAS-regulated SCSs to hold and segregate customers’ MAS-regulated SCSs from other customers’ assets (for example, DPTs) as well as its own assets in different custody accounts. However, there is no parallel restriction on offering incentives.