The Monetary Authority of Singapore (MAS) proposes a new Omnibus Act1 (New Act), which will contain a new regulatory framework for Singapore digital token service providers performing digital token services outside Singapore. The new regulatory framework entails two key aspects: (a) licensing requirements; and (b) anti money laundering (AML) and countering the financing of terrorism (CFT) regulations
Summary of new provisions
The Financial Action Task Force recently revised the FATF Standards (Standards) to enhance regulation of virtual asset service providers to mitigate money laundering and terrorism financing risks. The enhanced Standards include requiring virtual asset service providers to be licensed or registered in the jurisdiction where they are created.
MAS supports the enhanced Standards. To implement the enhanced Standards, MAS proposes to regulate persons in Singapore which are carrying on the business of providing digital token (DT) services outside Singapore, under the New Act.
What types of digital tokens will be regulated under the New Act?
Under the New Act, DT will be defined as:
- a digital payment token (DPT) as defined in the Payment Services Act 2019 (PS Act); or
- a digital representation of a capital markets product as defined in the Securities and Futures Act, Cap 289 (SFA) which (i) can be transferred, stored or traded electronically, and (ii) satisfies such other characteristics as MAS may prescribe.
In other words, the New Act will capture digital tokens that currently fall under the PS Act as well as the SFA.
What types of DT-related services will be regulated under the New Act?
The following types of DT services will be regulated under the New Act:
- dealing in DTs;
- facilitating the exchange of DTs;
- inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling any DTs in exchange for any money or any other DTs (whether of the same or a different type);
- accepting DTs for the purposes of transferring, or arranging for the transfer of, the DTs or arranging for the transmission of DTs (where the service provider does not come into possession of the DTs);
- safeguarding or administration of a DT or DT instrument, where the service provider has control over the DT or the DT associated with the DT instrument; and
- advisory services relating to the offer or sale of DTs.
How does this compare with current legislation?
Current legislation such as the PSA, SFA and Financial Advisers Act (FAA) already regulate DT services performed in Singapore. For example, carrying on the business in Singapore of dealing in DTs that are digital representations of securities would be regulated as dealing in capital markets products under the SFA.
In some situations, current legislation with extra-territorial reach will also capture DT services that are provided by entities outside Singapore. For example, if a foreign entity solicits Singapore investors to deal in DTs that are digital representations of securities, such foreign entity may be caught by the extra-territorial provisions in the SFA and subject to the licensing requirement in the SFA.
The New Act seeks to regulate individuals or entities in Singapore2 that perform DT services outside Singapore. In the consultation paper, MAS stated that such entities may not be captured under current legislation.
What regulations apply to in-scope DT service providers?
DT service provides which fall under the scope of the New Act as summarised above, will be subject to the following regulations:
- they must be licensed under the New Act; and
- they must comply with AML/CFT requirements.
Licensing criteria at the point of admission:
For the purpose of the licensing requirement under the New Act, the in-scope DT service provider must meet the following criteria at the point of admission:
- the applicant must appoint at least one executive director who is resident in Singapore;
- the applicant must be incorporated as a company in Singapore;
- the applicant must have a permanent place of business in Singapore;
- the applicant must satisfy such financial requirements as may be prescribed by MAS; and
- each of the directors and chief executive officer, or equivalent persons, of the applicant is a fit and proper person.
Ongoing requirements for licensed DT service provider (licensee):
On an ongoing basis, a licensee must meet the following requirements:
- the licensee must have a permanent place of business in Singapore;
- the licensee must appoint at least one person to be present, on such days and at such hours as MAS may specify by notice in writing, at the licensee’s permanent place of business to address any AML/CFT related queries or complaints from any DT user that uses any DT service provided by the licensee or is a customer of the licensee;
- the licensee must keep, or cause to be kept, at the licensee’s permanent place of business, books of all the licensee’s transactions in relation to any DT service provided by the licensee. Such books must be made available to authorities in a timely manner upon request;
- the licensee must satisfy such financial requirements as may be prescribed or specified by MAS by notice in writing; and
- each of the directors and chief executive officer, or equivalent persons, of the licensee is a fit and proper person.
Additionally, the licensees will also be subject to MAS’ approval for any change of control and audit requirements, similar to other DT service providers that are regulated under current legislation.
MAS intends to issue a Notice to Digital Token Services Providers on Prevention of Money Laundering and Countering the Financing of Terrorism.
MAS expects the money laundering and terrorism financing risks posed by DT activities to be similar in nature to the DPT. Accordingly, the AML/CFT requirements for DT service providers under the new Notice will be similar to the requirements imposed under PS Notice 02 for DPT service providers under the PS Act. DT service providers under the New Act will also be required to establish and staff an adequate AML/CFT compliance function in Singapore.
Existing MAS-regulated financial institutions that are incorporated in Singapore, but carry on a business of providing DT services wholly outside Singapore, will have to be licensed under the New Act, unless an exclusion applies. In general, these exclusions relate to:
- persons who carry on DT services outside of Singapore that are already regulated under existing MAS legislation (i.e. based on the draft New Act, this would include foreign entities caught by the extra-territorial provisions in the SFA and FAA); and
- persons excluded from licensing as specified in the Third Schedule of the New Act (such as advocates and solicitors, Official Assignees, Public Trustees and liquidators).
Singapore-based individuals and entities, including FIs already regulated by MAS, which perform digital token services outside Singapore and are currently out of regulatory scope should consider whether the activities provided outside of Singapore will be subject to the New Act. Such individuals and entities should also take precautions to ensure that their activities performed outside Singapore are not already subject to existing legislation such as the SFA, FAA and PS Act. Each legislation has some form of extra-territorial provision, albeit in different manner.
The consultation on the New Act closes at 11.30 PM on 20 August 2020.
We would be happy to advise you further on the specific impact the proposed provisions may have on you as well as assist you in providing feedback to MAS on any of the proposals.
1 see Consultation Paper at: https://www.mas.gov.sg/-/media/MAS/News-and-Publications/Consultation-Papers/2020-July-Consultation-on-FSMA/Consultation-Paper-on-a-New-Omnibus-Act-for-the-Financial-Sector.pdf
2 Based on the draft New Act, this refers to: (a) individuals operating from a permanent place of business in Singapore; (b) any corporation incorporated in Singapore; and (c) any partnership or limited liability partnership formed in Singapore.