Singapore’s central bank finalises regulatory approach to stablecoins

The Monetary Authority of Singapore (MAS) has released its response to public comments following its October 2022 consultation paper on the proposed regulatory approach for stablecoin-related activities.

The MAS response on 15 August 2023 confirms the regulatory approach that will be adopted for single-currency stablecoins (SCS) pegged to the Singapore dollar or Group of 10 (G10) currencies issued in Singapore and spells out requirements for SCS issuers and intermediaries, and key entities in a systemic stablecoin arrangement.

Scope

The MAS will seek to regulate SCS pegged to the Singapore dollar or G10 currencies that are issued in Singapore where the value of SCS in circulation exceeds S$5 million (for non-bank issuers), and reserve-backed SCS (for bank issuers), as “MAS-regulated stablecoin”. Issuers of MAS-regulated stablecoin will be regulated as a “stablecoin issuance service” following amendments to the Payment Services Act 2019 (PS Act).

Non-bank issuers of SCS with a value in circulation of less than S$5 million, bank issuers of tokenised bank liabilities and issuers of other types of stablecoins (including SCS issued outside Singapore or in multiple jurisdictions, and SCS pegged to other currencies or assets) will continue to be subject to the existing digital payment token (DPT) regime. However, the issuers will be prohibited from referring to their tokens as “MAS-regulated stablecoins” or any derivatives of the term.

Reserve asset requirements

Issuers of MAS-regulated stablecoins will be required to maintain a portfolio of reserve assets denominated in the currency of the stablecoin peg with very low risk. That is, cash, cash equivalents or debt securities with up to three-month residual maturity and issued by either  government and central banks of the pegged currency or organisations that are of both a governmental and international character with a minimum credit rating of “AA-”.  Issuers will also need to demonstrate to the MAS, if required, how they ensure that the mark-to-market valuation of such reserve assets is always maintained at a level of at least 100% of the outstanding SCS in circulation.

Issuers must also hold reserve assets in segregated accounts separate from their own assets that are not reserves. These segregated accounts may be held with financial institutions licensed for custodial services in Singapore or overseas-based custodians with a minimum credit rating of “A-”  and a Singapore branch regulated by the MAS to provide custodial services.

The MAS will require issuers to subject their reserve assets to an independent audit on a monthly basis, with attestations to be published on the issuers’ website and submitted to the MAS no later than the end of the following month.

Prudential requirements

Issuers of MAS-regulated stablecoins must meet a number of prudential requirements. They must have a base capital of S$1 million or 50 per cent of annual operating expenses (whichever is higher). They should hold at all times the higher of liquid assets – cash and cash equivalents, government debentures, negotiable certificates of deposits, and money market funds valued at 50 per cent of annual operating expenses or an amount assessed by the issuer to be needed to achieve recovery or an orderly wind-down (with the assessed amount  subject to independent audits on at least an annual basis).

Issuers will also not be allowed to undertake other activities that would expose them to risks beyond the primary activity of SCS issuance, such as lending, staking and dealing in DPTs other than the SCS being issued or fund management services. However, issuers may carry out activities necessary for their business operations, such as taking custody of issued SCS or facilitating the transfer of issued SCS to buyers.

Redemption timelines

Issuers of MAS-regulated stablecoins will be required to return the par value of such stablecoins to holders within five business days of a legitimate redemption request. Redemption conditions, if any, must be reasonable and disclosed upfront.

The MAS may direct issuers to liquidate their reserve assets to meet redemption requests during periods of market stress.

Other requirements

Issuers of MAS-regulated stablecoins will be required to issue white papers stipulating – among other details – information of the issuer, operations of the SCS, risks arising from the use of the SCS, and rights and obligations related to the SCS.

Issuers will also be required to comply with the MAS’s existing AML/CTF standards and technology and cyber risk management standards for DPT service providers and banks.

Regulation of non-issuance SCS activities

Entities conducting activities related to MAS-regulated stablecoins that  are not stablecoin issuance services (such as transmitting or facilitating the exchange of SCS) in Singapore, also known as “SCS intermediaries”, will be regulated under the existing framework for DPT service providers under the PS Act.

The MAS will require SCS intermediaries to transmit MAS-regulated SCS from a payer to payee within three business days, mirroring the existing money transmission requirement for providers of domestic money transfer services under the PS Act.

SCS intermediaries will also be required to segregate their customers’ MAS-regulated SCS from their own assets, though the commingling of their customers’ MAS-regulated SCS and  DPT or both will be allowed with appropriate risk disclosures.

As SCS intermediaries are considered DPT service providers, SCS intermediaries will be subject to the MAS’s upcoming asset custody and segregation requirements for DPT service providers as Singapore looks to propose regulation for digital payment token services .

Designation of systemic stablecoin arrangements

The MAS will have the power to designate systemic stablecoin arrangements for the transfer of SCS. These arrangement will help avoid disruption to its users and Singapore’s wider financial system and any affect this might have on public confidence. They will be deemed designated payment systems (DPS) under the PS Act and Payment and Settlement Systems (Finality and Netting) Act 2022.

The designation would allow the MAS to exercise greater supervision over systemic stablecoin arrangements by imposing higher financial and operational requirements on key entities in a systemic stablecoin arrangement. This will also provide finality to transactions effected through systemic stablecoin arrangements.

Osborne Clarke commentary

The designation of MAS-regulated stablecoins and obligation for issuers of MAS-regulated stablecoins to meet reserve asset, prudential, transparency and customer service requirements will help build trust in the stablecoin industry. Buyers of MAS-regulated stablecoins will take comfort in the fact that their stablecoins hold value and can be readily liquidated.

The reduced regulatory oversight over issuers of other stablecoins continues to reflect the incremental approach by the MAS over digital tokens in general. Buyers of other stablecoins will have to consider if they are willing to accept the risk of dealing with such stablecoins. 

That said, the proposed regulations are unlikely to have a significant impact on the stablecoin industry for now as we do not expect many major stablecoins to be issued in Singapore.