In this bulletin we cover the following key developments in the payments and fintech space:
(a) Payment Services Bill: On 14 January 2019, the Payment Services Bill (Bill) was passed by the Singapore Parliament. When it comes into force, the Payment Services Act (as the enacted Bill will be known) (Act) will introduce two regulatory frameworks: a designation scheme which enables the Monetary Authority of Singapore (MAS) to designate significant payment systems for financial stability reasons, and a licensing regime which allows MAS to regulate a wider range of payment services, including cryptocurrency dealing and exchange services, in a proportionate manner depending on the scope and scale of the provider's services.
(b) Sandbox Express: On 14 November 2018, MAS released a consultation paper on Sandbox Express, which comprises of a set of to pre-defined sandboxes to complement the existing approach of customised sandboxes.
(c) Digital Token Offerings: On 30 November 2018,
MAS updated its Guide to Digital Token Offerings which provides general guidance on the application of the securities laws administered by MAS to offers or issues of digital tokens in Singapore.
1. Payment Services Bill
The Bill proposes to:
(a) streamline payment services under a single legislation by combining the current Payment Systems (Oversight) Act (Cap 222A) and the MoneyChanging and Remittance Businesses Act (Cap 187);
18 JANUARY 2019
Table of contents
1. Payment Services Bill 2. Proposed Sandbox Express 3. Guide to Digital Token Offerings 4. Contacts
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(b) enhance the scope of payments services activities to be regulated by MAS to take into account developments in payment services; and
(c) calibrate regulations according to the risks the activities pose by adopting a modular regulatory regime.
The Bill adopts an activity-based approach covering seven services (see the table below) that are either (i) customer or merchant-facing; or (ii) involve the processing of funds or merchant acquisition services.
IS ACTIVITY CURRENTLY REGULATED?
1. Account issuance services
Issuing, maintaining or operating a payment account, such as an e-wallet (including certain multipurpose stored value cards) or a non-bank issued credit card
No, unless the activity falls within another regulated activity
2. Domestic money transfer services
3. Cross border money transfer services
Local funds transfer services
Inbound or outbound remittance services
Yes, but regulation is narrower in scope. Only outbound remittance is currently regulated
4. Merchant acquisition services
Service of accepting and processing a merchant's payment transactions resulting in a transfer of money to the merchant pursuant to the transaction
No, unless the scope of the activity falls within another regulated activity
5. Electronic money ('e-money') Issuing e-money with which a
user can make payment
Yes, but regulation is narrower in scope. Currently regulated as `stored value facilities', which does not include the use of stored value in peer-to-peer transactions
6. Digital payment token services
Buying or selling digital payment tokens or providing a platform for exchange of such digital payment tokens
7. Money-changing services
Buying or selling foreign currency Yes notes
Service providers may offer one or more of the services referred to in the table above, and will be required to hold one of the three classes of licenses under the licensing regime (a licensee may be a money-changing licensee, a standard payment institution or a major payment institution). The licensing regime will then regulate licensees according to the risks posed by the scope and scale of the services provided by the licensee.
Payment services that are related and incidental to an entity's core business will be regulated under the Act as they carry similar regulatory risks. However, any payment service provided that is solely incidental to a regulated activity under relevant legislation such as the Securities and Futures Act (SFA) will be excluded as the money laundering/terrorist financing (ML/TF) risks are already regulated under other MAS regulations. MAS has also stated that their intention is to regulate any entity with a clear nexus to Singapore, which
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means that foreign entities will be caught if they offer to provide, or issue any advertisement containing any offer to provide a payment service, whether in Singapore or elsewhere, to the public in Singapore.
Regulation of payment services relating to cryptocurrency
The Bill expands the scope of regulated payments activities to include any service dealing in, or facilitating the exchange of, 'digital payment tokens' (generally cryptocurrency and digital tokens/coins which represent value, but which are not pegged to nor representative of fiat currency). As such, brokers who buy or sell digital payment tokens in exchange for fiat or other digital payment tokens, digital payment token exchange providers (whether cryptocurrency-cryptocurrency or cryptocurrency-fiat) and initial coin offering (ICO) platform providers will likely need to be licensed under the new regime.
MAS indicated in its Response to Feedback on the Bill dated 19 November 2018 (Response) that it is not relevant to the determination of the regulatory scope, whether an intermediary (eg a cryptocurrency exchange provider) is operating a centralised or decentralised model, or whether the digital payment token is issued through an ICO. Rather, MAS regards digital payment token intermediaries to be the points of intersection that provide gateways to the regulated financial system and nodes through which value may be moved. Currently, the definition of 'digital payment token exchange' in the Bill appears to focus on centralised exchanges, but based on MAS' comments in the Response, it is expected that MAS will, in time, expand this definition to cover decentralised exchanges.
Requirements for licensees
Licensing and business conduct requirements apply to licensees under the Bill. An applicant for a payment services license (except for a money-changing license) will be required to fulfil certain criteria, including the following:
(a) the applicant must be a company (incorporated in Singapore or overseas); (b) the applicant must have a permanent place of business in Singapore or if the business is carried on
without a permanent place of business, a registered office in Singapore; (c) the applicant must have at least one executive director that is either a Singapore citizen or Singapore
Permanent Resident or such other class of persons as may be prescribed, provided that the applicant for a licence satisfies such conditions as may be prescribed (details to be set out in the coming consultation on subsidiary legislation); and (d) the applicant must satisfy the minimum capital requirements on an initial and on-going basis with the minimum capital requirement for Major Payment Institutions at S$250,000 and for Standard Payment Institutions at S$100,000 (more details to be set out in the coming consultation on subsidiary legislation).
Specific risk mitigating measures will apply to licensees depending on the activities carried out. In particular, MAS has stated that the Guidelines on Technology Risk Management, which set out IT risk management principles and best practices, will be applicable to all licensees. MAS also plans to issue a Notice on Cyber Hygiene, which is currently under consultation, that will apply to all licensees and stipulate minimum requirements that will help FIs strengthen their cyber resilience. Further ML/TF requirements and technology risk management measures will be detailed in subsidiary legislation, and a separate consultation will be conducted before these measures are introduced.
The Act will come into force no earlier than six months after the Bill was passed in Parliament (ie after 14 July 2019). After the commencement date of the Act, MAS has stated that grace periods will be given to allow for certain currently regulated entities and newly regulated entities to transition to the new regime.
The exemption from holding a licence for a specified grace period is intended only for persons which have commenced business on or before the commencement date of the Act and have notified MAS of the date on which they commenced the business of providing the specific payment services on, or within a specified period, after the commencement date of Bill.
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Assuming that the Act commences on 15 July 2019, the table below demonstrates how the grace periods will affect a digital payment token service provider in two different scenarios.
TYPE OF ENTITY
GRACE PERIOD FOR NOT HOLDING A LICENCE UNDER PAYMENT SERVICES
Digital payment token service provider who has been providing the payment services before or on 15 July 2019
Six months (ie the digital payment token service provider will need to obtain a licence by 15 January 2020)
Digital payment token service provider who has not No grace period. The digital payment token service
been providing the payment services before or on provider will need to obtain a licence before
15 July 2019
providing its service
What should payments services providers do to prepare
The Bill introduces key changes to the payments regulatory landscape in Singapore. Accordingly, all entities operating in the payments space will need to consider the impact of the Bill on their respective businesses, and look out for future subsidiary legislation which will set out specific ML/TF requirements and technology risk management measures. In particular, newly regulated entities such as digital payment token exchanges and brokers will need to review their existing business models to check if any notifications need to be made to MAS to qualify for the licensing grace period, and prepare their applications.
2. Proposed Sandbox Express
The proposed Sandbox Express comprises of a set of pre-defined sandboxes that complements the existing approach of customised sandboxes. The objective is to provide firms carrying on certain regulated activities with a faster option to bring innovative financial services or products to the market for testing and to reduce the time and resources required of the applicants.
The proposed Sandbox Express is only suitable for financial services or products which carry low risks, or risks that are well understood and could be reasonably contained by the pre-defined sandbox's constructs. Such pre-defined sandboxes are proposed to be for:
(a) Insurance broking: An entity operating under the insurance broking pre-defined sandbox can conduct any one or a combination of direct insurance broking, general reinsurance broking or life reinsurance broking subject to certain conditions which include that the entity cannot handle or hold onto customers' monies.
(b) Recognised Market Operator (RMO): An entity operating under the RMO pre-defined sandbox can conduct the regulated activity of establishing or operating an organised market as an RMO under the SFA subject to certain conditions which include the entity being able to only on-board institutional and accredited investors.
(c) Remittances: An entity operating under the remittances pre-defined sandbox can conduct the regulated activity of remittance business under the Money-Changing and Remittance Businesses Act (Cap 187) subject to certain conditions which include the entity's approved period being limited to a maximum of six months.
MAS will endeavour to complete the assessment and respond to the applicant within 21 days from the date of receiving the application. The pre-defined sandbox entity must also provide clear and proper disclosure of its sandbox status to every user and obtain an acknowledgement before the user can be on-boarded as its customer. During the approved sandbox period, the entity must submit a progress report to MAS every two months.
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3. Guide to Digital Token Offerings
The Guide to Digital Token Offerings (the Guide) (first issued on 14 November 2017) provides general guidance on the application of the SFA and the Financial Advisers Act (Cap 110) in relation to offers or issues of digital tokens in Singapore.
In this regard, the Guide clarifies that offers or issues of digital tokens may be regulated by MAS if the digital tokens are characterised as 'capital markets products' under the SFA. Capital markets products include any securities, units in a collective investment scheme, derivatives contracts and spot foreign exchange contracts for purposes of leveraged foreign exchange trading.
Given the introduction of the Bill, MAS has updated the Guide to emphasize that a person carrying on a business of providing any service of dealing in, or facilitating the exchange of, digital payment tokens will be required to put in place policies, procedures and controls to address the ML/TF risks.
The updated Guide now makes reference to the Bill and has been expanded with the addition of five new case studies. The updated Guide also gives guidance on when to make digital token offerings' enquiries to MAS, with MAS appending a checklist and a list of critical questions for an offeror of digital tokens to answer in order to determine whether it is necessary to write to MAS. MAS stated that when applying the law to digital token offerors, one has to look beyond labels and examine the features and characteristics of each token. Specifically, MAS has also clarified that the treatment of a token under the US Howey Test is not a consideration for deciding whether a token is a product regulated under the SFA.
Our global fintech group at Herbert Smith Freehills combines our market-leading TMT, financial regulatory and transactional capabilities, which allows us to provide a holistic and comprehensive service to clients operating in the fintech space.
For further information, please reach out to the key contacts below to discuss how the regulatory developments above will impact your business.
Herbert Smith Freehills LLP is licensed to operate as a foreign law practice in Singapore. Where advice on Singapore law is required, we will refer the matter to and work with licensed Singapore law practices where necessary. Our Formal Law Alliance with premier Singapore firm Prolegis LLC allows clients to access our international skills alongside Singapore law advice from Prolegis LLC through one seamless platform.
Natalie Curtis, Of Counsel (Herbert Smith Freehills) T +65 6868 9805 M +65 9138 5944 [email protected]
Grace Chong, Senior Associate (Herbert Smith Freehills) T +65 6868 8059 M +65 8339 6740 [email protected]
Sandra Tsao, Of Counsel (Prolegis) T +65 6812 1353 M +65 9128 9298 [email protected]
Kenneth Lo, Associate (Herbert Smith Freehills) T +65 6868 9827 M +65 9138 5914 [email protected]
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Herbert Smith Freehills LLP 2019 The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on the information provided herein.