To mitigate retail investor concerns over fictitious trades, cornering and market manipulation in the trading of popular digital tokens, such as Bitcoin and Ether, the Monetary Authority of Singapore (MAS) recently issued a consultation paper on the proposed regulatory approach for derivatives contracts on payment tokens (Consultation Paper).1

The proposed regulatory approach will apply to derivative contracts which reference payment tokens underlying assets (Payment Token Derivatives).

Payment tokens are any digital representation of value that:

  • is expressed as a unit;
  • 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; and
  • can be transferred, stored or traded electronically

This approach looks to examples such as the Chicago Mercantile Exchange and the Intercontinental Exchange Futures US.

The approach will not cover:

  • securities tokens which are already regulated under the Securities and Futures Act (SFA); and
  • utility tokens which are used to access a good or service offered by the token issuer only.

This approach will allow:

  • Payment Token Derivatives to be regulated under the by extending the SFA definition of "underlying thing" to include payment tokens;
  • the SFA-regulated Payment Token Derivatives to be listed on, and offered to Singapore investors through, approved exchanges, giving MAS effective oversight over these products; and
  • MAS to implement a regulatory environment which balances product innovation with high standards.

MAS does not intend to include, within the regulatory scope of the SFA, Payment Token Derivatives that are not offered by an approved exchange, for example those traded on Recognised Market Operators or unregulated trading platforms, or over-the-counter on a bilateral basis.

Despite proposing regulation of Payment Token Derivatives, MAS continues to view Payment Token Derivatives as unsuited for most retail investors. Accordingly, MAS will take the following measures:

  • strong advice to retail investors not to trade in Payment Token Derivatives, and if they choose to do so, to exercise utmost caution; and
  • requiring MAS-regulated financial institutions offering or distributing Payment Token Derivatives to retail investors to collect from retail investors 1.5 times the standard amount of margin required for both listed and over-the-counter Payment Token Derivatives contracts offered by approved exchanges, subject to a floor of 50%, this requirement expected to be implemented by 30 June 2020.

The Consultation Paper seeks comments on the draft amendments to the Securities and Futures (Prescribed Underlying Thing) Regulations 2018 which will reflect the intended regulatory scope of Payment Token Derivatives.

The consultation period ends on 20 December 2019.