An extract from The Virtual Currency Regulation Review, 5th Edition
Introduction to the legal and regulatory framework
As cryptocurrency and blockchain become a permanent part of finance and the global economy, Singapore is seeking to establish itself as a responsible global cryptocurrency hub, not only with innovative players but also with strong corporate governance, regulatory and risk-management capabilities. Hence, the Singapore government's approach towards cryptocurrencies is one that is adaptive, continually evolving and consultative.2 The courts in Singapore have also taken a pragmatic approach towards cryptocurrencies. In a recent Singapore High Court decision, the Singapore High Court ruled that non-fungible tokens (NFTs) were an asset that could be protected via proprietary injunctions.3 At the same time, the city-state has also tightened rules for cryptocurrency providers via the issuance of cryptocurrency trading guidelines4 and the introduction of the Payment Services Act 2019 (PSA) and Payment Services Regulations, as well as the upcoming Financial Services and Markets (FSM) Bill,5 to address the multitude of risks that can materialise in the market, and to boost the credibility of crypto players and crypto platforms in the market.
The Monetary Authority of Singapore (MAS) is Singapore's Central Bank and integrated financial regulator. Its regulatory approach towards digital tokens is to look beyond common labels and examine the features and characteristics of each digital token, to determine the applicable regulatory requirements.6 On the basis of the characteristics of each digital token, it may be treated as a regulated or unregulated product, such as a digital payment token, e-money, capital markets product, asset-backed token or utility token.
Digital tokens that demonstrate the features of regulated products under Singapore law are not expressly prohibited. Instead, parties that carry on business activities in relation to such digital tokens must ensure compliance with the applicable financial advisory and securities law in so far as they apply to the digital tokens. Parties that carry on business activities in relation to digital tokens that do not exhibit the features of regulated securities or other investment products under Singapore law can do so without restriction or licensing, provided that they are first assessed under the PSA to be a 'limited purpose digital payment token' or to be otherwise unregulated or exempted, and are in compliance with other general laws (such as AML and CFT regulations) of Singapore.
In this chapter, we will examine the various legal and regulatory frameworks that apply to different digital token services.i Digital payment tokens and e-money
Payment services such as digital payment token (DPT) services and e-money issuance services are regulated under the PSA.7 The PSA sets up a single regulatory framework for payment services, by merging and modifying the repealed Payment Systems (Oversight) Act 2006 and Money-changing and Remittance Businesses Act 1979. It also enhances the scope of regulatory activities to take into account developments in payment services and calibrates regulations according to the risks that the activities pose by adopting a modular regulatory regime.8
Other specified payment services regulated under the PSA also include account issuance services, domestic money transfer services, cross-border money transfer services, merchant acquisition services and money-changing services.9
Under the PSA, parties that provide the aforementioned services will require a licence.
DPT services refer to the buying or selling of DPTs or facilitating the exchange of DPTs. Notably, with the 2021 PSA amendments, the definition of DPT services has been expanded to include the transfer of DPTs, the provision of custodian wallet services for DPTs and facilitating the exchange of DPTs without possession of moneys or DPTs by the DPT service provider.10
A digital token may fall within the definition of DPT if it is a digital representation of value (other than an excluded digital representation of value) 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 characteristics as the authority may prescribe.11
Examples of DPTs include Bitcoin, Ether, Litecoin, Dash, Monero, Ripple and Zcash.12
Conversely, e-money issuance services refer to the issuance of e-money to any person for the purpose of allowing a person to make payment transactions.13
Under the PSA, a digital token may fall within the definition of e-money if it is an electronically stored monetary value that:14
- 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.
In the past couple of years before 31 May 2022, 11 digital payment token services providers have been granted licences and in-principle approvals by MAS.15
As the time of writing, the three most recent in-principle approvals were announced on 22 June 2022, in the wake of the meltdown of TerraUSD and LUNA, which affected other cryptocurrencies and crypto companies. This shows Singapore's continued interest in partnering innovative and responsible players to grow Singapore as a crypto hub.16ii Capital markets products
Offers or issues of digital tokens that constitute capital markets products (CMPs) are regulated under the Securities and Futures Act (SFA),17 the main legislation regulating the offerings and dealings of CMPs in Singapore.
CMPs include any securities, units in a collective investment scheme (CIS), derivatives contracts and spot foreign exchange contracts for purposes of leveraged foreign exchange trading.18
For example, digital tokens may be regarded as the following types of CMPs:
- shares, where they confer or represent ownership interest in a corporation, represent the liability of the token holder in the corporation, and represent mutual covenants with other token holders in the corporation inter se;
- debentures, where they constitute or provide evidence of the issuer's indebtedness of the digital token in respect of money that is or may be lent to the issuer by a token holder;
- units in a business trust, where they confer or represent ownership interest in the trust property of a business trust;
- securities-based derivatives contracts, which include any derivatives contracts of which the underlying thing is a share, debenture or unit in a business trust; or
- units in a CIS, where they represent a right or interest in a CIS, or an option to acquire a right or interest in a CIS. 19
Asset-backed tokens refer to digital tokens that represent some or all of an underlying asset. This feature allows the ownership of an asset to be shared with multiple parties and traded across different jurisdictions.
The trading of asset-backed tokens is subject to different regulatory requirements, depending on the specific asset that is being tokenised and the rights attached to each digital token. There are two categories of commonly tokenised assets: commodities (e.g., precious metals) and real estate.
The trading of asset-backed tokens, where the underlying asset is a commodity, could potentially constitute spot commodity trading, which is regulated under the Commodity Trading Act (CTA).20 Spot commodity trading refers to the purchase or sale of a commodity at its current market or spot price, where it is intended that such transaction results in the physical delivery of the commodity.21 To carry on such activities, a commodity trading licence would have to be obtained.
However, for asset-backed tokens where the underlying asset is real estate, if an issuer collects fiat money from holders of the digital token and the real estate is managed by a manager to generate profits for token holders, this arrangement may constitute a collective investment scheme under the SFA.iv Utility tokens
Utility tokens are unregulated digital tokens that give token holders access to a blockchain-based product or service.
As utility tokens may have other rights attached to them, one common regulatory concern surrounding utility tokens is whether they contain features of regulated products such as CMPs. If the utility tokens are deemed to contain features of CMPs, offerings and dealings of such tokens could trigger licensing and prospectus requirements under the SFA, which run counter to the considerations underpinning an Initial Coin Offering (ICO) or Initial Exchange Offering (IEO). As such, token issuers should ensure that their utility tokens do not exhibit features of CMPs. It is also prudent for token issuers to ensure that the underlying product or service that the token holder has access to is not regulated. It is also critical to carry out a careful assessment of the token White Paper to ensure that the utility token does not trigger the need for licensing under the PSA. Under Singapore law, the utility token issuer could, for example, be deemed an 'exempt payment service provider' or the token be deemed a 'limited purpose digital payment token' in order to escape licensing under the PSA. If the token issuer is deemed to be 'dealing in digital payment tokens' and is operating a digital payment token exchange or digital payment token service, the issuer will have to apply for a payment institution licence from the MAS first in order to operate legally in Singapore.
Securities and investment lawsi Securities and Futures Act
Offers of digital tokens that constitute CMPs are subject to licensing and prospectus requirements under Part 13 of the SFA.
According to the SFA, an offeror of digital tokens that constitute CMPs must file a prospectus that is prepared in accordance with the SFA and registered with MAS (prospectus requirements).22 Additionally, where an offer is made in relation to units in a CIS, the CIS will be subject to authorisation or recognition requirements, as well as investment restrictions and business conduct requirements under the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005 and Code on Collective Investment Schemes.23
Nevertheless, an offer may be exempt from the prospectus requirements and the authorisation or recognition requirements (in the case of units in a CIS), if the offer is as follows:
- a small personal offer that does not exceed S$5 million (or its equivalent in a foreign currency) within any 12-month period, subject to certain conditions;24
- a private placement offer made to no more than 50 persons within any 12-month period, subject to certain conditions;25
- made to institutional investors only;26 or
- made to accredited investors, subject to certain conditions.27
Exemptions (a), (b) and (d) are respectively subject to certain conditions, which include advertising restrictions.28
Additionally, parties who market or deal in CMPs must obtain a capital markets services (CMS) licence for dealing in CMPs, unless otherwise exempt. Similarly, parties that manage digital tokens that constitute a CIS must also obtain a CMS licence for fund management under the SFA, unless otherwise exempt.
MAS regulates crypto businesses strictly under the SFA, as seen from its recent reprimand of Three Arrows Capital (TAC), a crypto firm based in Singapore. TAC was a registered fund management company, and it had provided false information and managed more assets than it was allowed to under Singapore law.29ii Financial Advisors Act
Parties that provide financial advisory services on digital tokens that constitute CMPs must be authorised to do so, by obtaining a financial adviser's licence under the Financial Advisors Act (FAA),30 unless otherwise exempt. Such financial advisory services include advising others on the aforementioned tokens or advising others by issuing or promulgating research analyses or research reports on such tokens.31iii Extraterritoriality of the SFA and FAA
Under the SFA, where a person carries out offerings and dealings of digital tokens that constitute CMPs, partly in or partly outside of Singapore, or outside of Singapore, the requirements of the SFA may nevertheless apply extra-territorially to the activities of that person under the SFA.32
Under the FAA, where a person who is based overseas, engages in any activity or conduct that is intended to or likely to induce the public, or a section of the public, in Singapore to use any financial advisory service provided by the person (regarding digital tokens that constitute CMPs), the person is deemed to be acting as a financial adviser in Singapore, whether or not the activity or conduct is intended to or likely to have that effect outside Singapore.33