An extract from The Virtual Currency Regulation Review, 3rd Edition
Introduction to the legal and regulatory framework
While there are a vast number of digital tokens available in the market, from a Singapore legal perspective, it is important to look beyond the labels and instead consider the structure and characteristics of each digital token, as different regulatory considerations may apply, depending on whether the structure and characteristics fall within the definition of a regulated product. Accordingly, a factual analysis of each digital token on a case-by-case basis would be necessary to ascertain how each digital token would be categorised from a legal perspective.
In this chapter, we will look at four common types of digital tokens currently in the market, namely security tokens, payment tokens, asset-backed tokens (which have recently been in the spotlight (discussed in Section XI)) and utility tokens. It should be noted that these terms are not specifically defined legal terms; rather, they are used only for ease of discussion.i Security tokens
We use the term 'security tokens' generally to refer to digital tokens that constitute any capital markets product (CMP) under the Securities and Futures Act (SFA),2 which includes securities, shares, debentures, units in a business trust, units in a collective investment scheme and derivative contracts.3
On 26 May 2020, the Monetary Authority of Singapore (MAS) released a revised guide titled 'A Guide to Digital Token Offerings' (the DT Guide).4 MAS clarified5 that offers or issues of digital tokens may be regulated should such digital tokens constitute CMPs under the SFA, which is the main legislation that governs the offering of and dealing in CMPs in Singapore.
To determine whether a digital token would be regulated under the SFA and accordingly trigger the relevant requirements under the SFA, MAS will consider the structure and characteristics of the digital token, as well as the rights attached to such token.6
The DT Guide helpfully provides a list of non-exhaustive examples where digital tokens may constitute CMPs. Examples provided include shares, where such shares represent or confer ownership interest in a corporation, represent the liability of the token holder in the corporation and represent the token holder's mutual covenants with other token holders in the corporation. Another example includes debentures, where such debentures evidence or constitute the indebtedness of the digital token issuer in respect of any money that is or may be lent to such issuer by token holders.7
The relevant requirements are discussed in further detail in Section II.ii Payment tokens
We use the term 'payment tokens' generally to refer to digital tokens that constitute either digital payment tokens or e-money under the Payment Services Act (PSA),8 which came into effect on 28 January 2020.
The PSA is intended to (1) streamline payment services under a single piece of legislation by combining both the previous Money-Changing and Remittance Businesses Act9 and the Payment Systems (Oversight) Act,10 (2) enhance the scope of regulated activities to take into account developments in payment services (including services relating to digital payment tokens and e-money) and (3) calibrate regulations according to the risks such activities pose by adopting a modular regulatory regime.11
Under the PSA, the regulated activities that would require a payment service provider licence include account issuance services, domestic and cross-border transfer services, merchant acquisition services, digital payment token services and e-money issuance.
A digital token may be a digital payment token if, as defined under Section 2 of the PSA, it is a digital representation of value (other than those prescribed by the MAS to be excluded) that:
- is expressed as a unit;
- is not denominated in any currency and is not pegged by its issuer to any currency;
- is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt;
- can be transferred, stored or traded electronically; and
- satisfies such other characteristic as MAS may prescribe.
Some examples of digital payment tokens listed by the DT Guide include Bitcoin and Ether.
Currently, under the PSA, provision of digital payment token services includes the service of dealing in (buying or selling, or both, of) digital payment tokens or the service of facilitating the exchange of digital payment tokens through establishing or operating a digital payment token exchange. Any person who provides any of these foregoing services would trigger licensing requirements under the PSA.12
Some payment tokens may alternatively constitute e-money, which is defined under section 2 of the PSA to mean any electronically stored monetary value that:
- is denominated in any currency or pegged by its issuer to any currency;
- has been paid for in advance to enable the making of payment transactions through the use of a payment account;
- is accepted by a person other than its issuer; and
- represents a claim on its issuer, but does not include any deposit accepted in Singapore, from any person in Singapore.
An issuer of e-money would also trigger licensing requirements under the PSA.
It should be noted that money is defined under the PSA to include e-money but exclude any digital payment token and any excluded digital representation of value.
Digital payment tokens and e-money are discussed further in Section III.ii.iii Asset-backed tokens
The advantages of blockchain technology is that it allows for most (if not all) assets to be tokenised, ownership rights for such assets to be held by multiple parties and the relative ease for digital tokens to be traded in any part of the world. There is, however, a need to carefully consider the specific asset being tokenised as this may lead to multiple legal issues arising.
Real estate is an example of an asset that can be tokenised. If the underlying real estate of a token is held through a special purpose company vehicle and the token represents shares in that vehicle, the token could be deemed a security token. Alternatively, should an issuer collect fiat currency from token holders and pool the contributions to acquire real property (which token holders have no day-to-day control over the management of) and the real property is managed by or on behalf of a manager, with the purported purpose or effect of this arrangement to enable token holders to participate in and receive profits or income arising from the real property, it may be deemed as a collective investment scheme.13 This would then trigger the relevant offering requirements under the SFA. This is discussed in further detail in Section II.
Commodities (e.g., precious metals) is another example of an asset that is often tokenised. The trading of asset-backed tokens where the underlying asset is a precious metal may potentially give rise to the need to fulfil the relevant requirements under the Commodity Trading Act (CTA).14iv Utility tokens
We use the terms utility tokens generally to refer to digital tokens that do not fall within the security token, payment token or any other regulated categorisations.
From a regulatory perspective, it is essential for market players to ensure that the utility tokens being offered in an initial coin offering (ICO) do not constitute CMPs based on their structure and characteristics such that they will also be characterised as security tokens, otherwise the offering and dealings will trigger the relevant requirements under the SFA as mentioned above in Section I.i and discussed in further detail in Section II.
Securities and investment lawsi Securities and Futures Act
Offers of security tokens as well as asset-backed tokens with the relevant characteristics (such that they would constitute CMPs) are subject to the regulatory regime under Part XIII of the SFA.
An offer may only be made if it complies with the relevant requirements under Part XIII of the SFA, such as needing to be made in or accompanied by a prospectus that is prepared in accordance with the relevant requirements, lodged with and registered by the MAS (the Prospectus Requirements), unless otherwise exempt.15
In particular, offers of digital tokens with characteristics that would constitute collective investment schemes would be subject to the relevant authorisation or recognition requirements (A/R Requirements), and would also need to comply with business conduct requirements under the Code on Collective Investment Schemes and the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005, unless otherwise exempt.16ii Exemptions from the Prospectus Requirements and the A/R Requirements
Offers may be exempted from the Prospectus Requirements and the A/R Requirements if made in compliance with the conditions of an applicable offering exemption or safe harbour. The exemptions of note would include:
- a small and personal offer,17 where the total amount raised within any period of 12 months does not exceed S$5 million (or its equivalent in a foreign currency);
- a private placement offer18 that is made to no more than 50 persons within a period of 12 months; and
- when the offer is made to accredited investors19 or institutional investors20 only.
A person who markets or deals in CMPs (which would include digital tokens that constitute CMPs) will be required to hold a capital markets services (CMS) licence for dealing in CMPs under the SFA, unless otherwise exempt.
Separately, a person who is the manager of digital tokens that constitute a collective investment scheme will be required to hold a CMS licence for fund management under the SFA, unless otherwise exempt.iv Financial Advisers Act
Any person who advises others on digital tokens with characteristics that would constitute CMPs or advises others by issuing or promulgating research analyses or research reports on such tokens may be deemed to be providing financial advisory services,21 and accordingly would need to be authorised to do so by obtaining a licence22 under the Financial Advisers Act23 (FAA) unless otherwise exempt.24v Extraterritoriality of the SFA and FAA
The SFA and the FAA have extraterritorial applicability.25
Under the SFA, any acts (including offers and dealing activities) carried out partly in and partly outside Singapore by a person may be treated as being committed wholly in Singapore, and any acts carried out wholly outside Singapore by a person may be treated as being committed in Singapore should they have a substantial and reasonably foreseeable effect in Singapore.26 The requirements under the SFA would accordingly apply to all of the foregoing acts.
Under the FAA, even if a person is based overseas, should that person engage in any activity or conduct that is intended to or likely to induce the public in Singapore or any section of the public to use any financial advisory service provided by that person, including advising others on security tokens, that person would be deemed to be acting as a financial adviser in Singapore irrespective of whether the activity or conduct is intended to or likely to have that effect outside Singapore.27
See Sections V and VII, which discuss the regulation of exchanges and regulation of issuers and sponsors respectively.
Banking and money transmissioni Exception for banks, merchant banks and finance companies
Under the PSA, certain persons are exempt from the requirement28 to hold a payment service provider licence in respect of providing digital payment token services and these include banks licensed under the Banking Act,29 merchant banks approved under the MAS Act30 and finance companies licensed under the Finance Companies Act (notwithstanding, they may still be subject to certain PSA ongoing compliance requirements).31ii Money transmission
The provision of inbound and outbound money transfer services and local payer to local payee money transfer services in Singapore would be considered cross-border money transfer services and domestic money transfer services respectively under the PSA,32 and would require a payment service provider licence,33 if not otherwise exempted.
As the framework of the PSA helpfully differentiates between e-money and digital payment tokens, it is clear that any person who intends to provide the services of transferring fiat currency or e-money, or both, would require a payment service provider licence in respect of domestic money transfer services and cross-border money transfer services, as applicable.
On the other hand, as stated in Section I.ii, the service of dealing in (buying or selling, or both, of) digital payment tokens and the service of facilitating the exchange of digital payment tokens would be digital payment token services for which a licence is required for under the PSA.34
While the transfer of digital payment tokens at present is not a service for which a licence is required for under the PSA, in light of proposed amendments to the PSA, this may change going forward. This is discussed further in Section XI.