The Monetary Authority of Singapore (MAS) has published two public consultation papers seeking feedback on the proposed safeguards to reduce the risk of consumer harm from cryptocurrency trading and support the development of stablecoins as a credible medium of exchange in the digital asset ecosystem.
The proposals were first mentioned in August, during the Green Shoots Seminar titled “Yes to Digital Asset Innovation, No to Cryptocurrency Speculation” by MAS managing director Ravi Menon, who says the regulatory body has been reiterating the risks of trading in cryptocurrencies since 2017.
Despite the warnings and measures, consumers are increasingly trading in cryptocurrencies or digital payment tokens (DPTs), enticed by the prospect of sharp price increases. “They seem irrationally oblivious about the risks of cryptocurrency trading,” said Menon during his opening address.
In the consultation papers published on Oct 26, MAS explains that an outright ban would not be feasible, as cryptocurrencies play a supporting role in the broader asset ecosystem. To reduce consumer risk from speculative trading in cryptocurrencies, the MAS will require DPT service providers (DPTSPs) to ensure proper business conduct and adequate risk disclosure.
The proposed measures cover three broad areas like consumer access, business conduct and technology risks. MAS proposes that the DPTSPs apply consumer access measures to customers who are not accredited or institutional investors; who are also a resident in Singapore (for individuals) or incorporated in Singapore (in the case of partnership or corporation).
The DPTSP should assess that a retail customer has sufficient knowledge of the risks of crypto services before providing their services. For instance, they should assess the retail customers’ knowledge of sharp fluctuations in the prices of DPTs and the loss of all monies put into DPTs; inability to readily sell their DPTs such as during illiquid market conditions, system outages and losing access to their DPTs in the event of a technical or operational issue.
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MAS says that offering incentives to retail customers — such as free trading credits or DPTs — can entice retail customers to participate in DPT services without fully considering the risks involved. Therefore, the regulatory body proposes that DPTSPs should not offer any monetary or non-monetary incentives to retail customers to participate in a DPT service or to any person (for example, an existing customer or a celebrity) to refer a DPT service to retail customers.
As price movements of the past few years have shown, cryptocurrency prices are highly volatile, subject to sharp price swings for reasons not always tied to market fundamentals — if there are any. This means that using any form of credit or leverage in the trading of DPTs would magnify losses and cause the customer to lose more than the total amount.
MAS is proposing that DPTSPs should not provide any credit facility (whether in the form of fiat currencies or DPTs) to a retail customer to facilitate their purchase or continued holding, on top of not accepting any payments made by the retail customer using a credit card or charge card, in connection with the provision of any DPT service.
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DPTSPs will also be required to properly segregate customers’ assets, mitigate any potential conflicts of interest arising from their multiple roles, and establish complaints-handling processes. Like other financial institutions such as banks, DPTSPs will be required to maintain their critical systems’ high availability and recoverability.
Necessary or overly prescriptive?
The reactions to the proposed regulatory measures by MAS have been mixed. Nizam Ismail, founder and CEO of compliance consultancy firm Ethikom, says some of the proposals are necessary. Still, others may be overly prescriptive and go against the city state’s regulatory philosophy of a disclosure-based regime and the need to develop a digital assets ecosystem.
“The focus on protecting retail consumers from harm is correct and necessary,” says Nizam in response to queries from The Edge Singapore. “This has to be balanced against Singapore’s regulatory philosophy, which is a disclosure-based regime. This means that the role of the regulator is not to ‘gatekeep’ and only allow certain ‘safer’ investment products to the market, as this could thwart innovation and also create moral hazard issues for the regulator,” says Nizam, who is the founding chairman of the regulatory and compliance sub-committee of the Blockchain Association of Singapore.
“Instead, the regulator’s role under this philosophy is to ensure timely and sufficient disclosure of information about the investment product so that consumers can make informed judgements. It is, therefore, curious that there are no prescriptions for product disclosures, which would have been a central feature of a disclosure-based regime.”
Looking at the thrust of the proposed regulatory measures for DPTSPs, Nizam believes most industry players would acknowledge the need for some measures to enhance fair dealing for retail consumers. For instance, the proposed carve-out for accredited and institutional investors is positive.
Still, Nizam points out a regulatory anomaly where the MAS has not included ‘expert investors’ from this regulatory carve-out, even if a similar carve-out exists under the Securities and Futures Act (SFA). “The requirement for customer knowledge assessment to assess client suitability is also apt, so long as it is not done in an overly tedious manner. This will ensure that only customers who understand the risks of crypto markets will be allowed to participate. It is positive that MAS is seeking to work with the industry on this.”
Nizam also says some of the requirements, such as the segregation of customers’ assets and risk management, disclosures of listing and governance policies, and complaints handling, are already implemented by some DPTSPs. Some of the other proposed measures may be more stringent even compared to capital markets — within which there are complex products such as a contract for differences, derivatives and structured products.
“For instance, the blanket prohibition against offering incentives may be blunt. In contrast, gifts to retail consumers are allowed under the SFA, so long as they do not impair customer judgement. The prohibition against purchase of DPTs by credit cards or by credit could unwittingly encourage retail investors to trade in largely unregulated crypto derivatives except for approved exchanges under the SFA.”
He adds that as various other restrictions already in place or proposed, such as the marketing ban and the requirement for the customer knowledge assessment, these additional measures beyond the MAS regulatory tool kit may be an over-prescription.
The critical focus on preventing harm to retail consumers should instead be on empowering consumers through enhanced efforts at consumer education and ensuring cost-effective recourse for aggrieved consumers. One suggestion, Nizam says, is to do so through the financial industry dispute resolution scheme.
Photo: Nizam Ismail, founder and CEO of compliance consultancy firm Ethikom
Ensuring regulated stablecoins have a high degree of value stability
Stablecoins are currently treated as digital payment tokens (DPTs) under the Payment Services Act (PSA). As Singapore looks to develop a digital asset ecosystem, there is a need to put in place a regulatory regime that supports the development of credible and reliable stablecoins that facilitate digital transactions, MAS states in their public consultation paper, which seeks to regulate the tokens.
“The current regulatory treatment under the PSA is inadequate to achieve this objective as it does not regulate the promise of the peg of stablecoins and any associated stabilisation mechanisms,” it says in the paper.
The MAS’ regulatory approach to stablecoins is framed by three vital guiding objectives — support the development of value-adding payment use cases for stablecoins; adopt a progressive regulatory approach that is fit for purpose and provides for stepping up of measures as needed, as well as maintain an open regime to accommodate different forms of stablecoins.
MAS proposes that it will regulate the issuance of stablecoins pegged to a single currency (SCS) where the value of SCS in circulation exceeds $5 million. The key proposed issuer requirements relate to value stability, reference currency, disclosures and prudential standards.
For instance, SCS issuers must hold reserve assets in cash, cash equivalents or short-dated sovereign debt securities that are at least equivalent to 100% of the par value of the outstanding SCS in circulation. These assets must be denominated in the same currency as the pegged currency. All SCS issued in Singapore can be pegged only to the Singapore dollar or any Group of Ten (G10) currencies.
One such stablecoin pegged to the Singapore dollar was launched by homegrown fintech company StraitsX in 2020. The stablecoin XSGD has a market capitalisation of US$53 million ($74 million) and a 24-hour trading volume of US$30 million, according to insights firm CoinGecko as of Oct 26.
Aside from a requirement to publish a white paper disclosing the details of the SCS, the issuers must, at all times, meet a base capital requirement of the higher of $1 million or 50% of the annual operating expenses of the SCS issuer. They must also hold liquid assets valued at 50% of annual operating expenses or an amount assessed by the SCS issuer to achieve recovery or an orderly wind-down.
Banks in Singapore will also be allowed to issue SCS. No additional reserve backing and prudential requirements will apply when the SCS is issued as a tokenised form of bank liabilities, given the existing rigorous capital and liquidity frameworks applied to banks.
“Today, banks in Singapore are exempted from the requirement to obtain a licence under the PSA to carry on a business of providing any payment service. This will continue to be the case when banks carry out the proposed Stablecoin Issuance Service,” MAS says in the consultation paper. For non-issuance services, DPTSPs can offer all types of stablecoins provided that they clearly label MAS-regulated SCS to distinguish them from the unregulated ones.
