[UPDATE 12 February 2025 by Winston WONG, Max LIEW: The Monetary Authority of Singapore (MAS) issued Response to Feedback Received P008 – 2022 – 3 July 2023 Response to Public Consultation on Proposed Regulatory Measures for Digital Payment Token Services (Part 1) and Response to Feedback Received P008 – 2022 – 23 November 2023 Response to Public Consultation on Proposed Regulatory Measures for Digital Payment Token Services (Part 2), (henceforth referred to as the “MAS Response 2023”) which addresses the requirements for segregation and custody of customers’ assets in part 1, and covers other regulatory measures, inclusive of those on consumer access safeguards in part 2. This update summarizes some key points in relation to Flint & Battery’s submission to the Consultation Paper P008 – 2022 Proposed Regulatory Measures for Digital Payment Token Services.
The following are some key points in the MAS Response 2023:
- Statement Of Accounts: (1) MAS will proceed with requiring DPTSPs to provide monthly statements of accounts to customers. (2) MAS will permit DPTSPs to provide real-time account information in lieu of monthly statements. (3) MAS will exempt DPTSPs from the requirement to provide monthly statements to all customers if there are no changes to any particulars since the date on which the last statement of account was made, and/or the customer has requested in writing not to receive the statement of account on a monthly basis from the DPTSP.
- Risk Management Controls for Customers’ Assets: (1) MAS will require DPTSPs to maintain adequate systems, processes, controls, human resources, and governance arrangements to ensure the integrity and security of customers’ assets and mitigate the risk of any loss of customers’ assets, in a manner that is commensurate with the nature, scale, and complexity of their business. (2) MAS will also require DPTSPs to implement operational controls to prevent the loss of cryptographic keys of DPTs that are held or managed by DPTSPs. (3) DPTSPs are required to implement measures to ensure that movement of customers’ assets is controlled by senior managers, and personnel who resides in Singapore. (4) MAS asserts that an appropriate balance to strike is to have DPTSPs keep at least 90% of customers’ DPTs in cold wallets, while allowing up to 10% to be kept in other wallets (e.g., hot wallets). (5) MAS will not, at this time, be implementing any requirement to have the devices storing means of access located in Singapore.]
- Restriction on Offering of Incentives: MAS will restrict DPTSPs from offering any monetary or non-monetary incentives to retail customers, to participate in a DPT service; or to any person to refer to a DPT service to retail customers.
- Complaints Handling: (1) MAS will proceed with the proposal for DPTSPs to put in place complaints handling policies and procedures, consistent with the International Organization of Securities Commissions (IOSCO) Final Report, which recommends that regulators should require Crypto Assets Service Providers (CASPs) to have an efficient and effective mechanism to address client complaints. (2) MAS will not, at this point in time (2023), require DPTSPs to submit regular returns on complaints data to MAS, but DPTSPs are required to properly monitor and track complaints and complaint trends, such that customer complaints are handled and resolved in a fair and timely manner, and to be able to provide such information to MAS when requested. (3) The unit in charge of handling customer complaints must not be directly involved in the provision of DPT services and must be independent of its business-facing functions.
- Managing Technology and Cyber Risks: (1) MAS believes that DPTSPs must perform risk assessments and determine the system recovery and business resumption priorities. (2) MAS will mandate that DPTSPs will be required to implement the following conditions: (a) put in place a framework and process to identify critical systems, (b) ensure that the maximum unscheduled downtime for each critical system does not exceed a total of 4 hours within any period of 12 months, (c) establish a recovery time objective of not more than 4 hours for each critical system, (d) notify MAS as soon as possible, but not later than 1 hour, up on the discovery of a system malfunction or IT security incident, which has a severe and widespread impact on the bank’s operations or materially impacts the bank’s service to its customers, and submit a root cause and impact analysis report to MAS within 14 days; and (e) implement IT controls to protect customer information from unauthorized access or disclosure.
A New Section 18G sets out requirements as to the security, controls, measures to safeguard customer assets. The Section is wide and will cover technological security, controls and measures.
It is of note that the additional fines may be applied in relation to continuing contravening of the regulations of Division 2A, ostensibly as deterrence against non-action. However, there is no equivalent provision for additional imprisonment time for continuing contravention.]
Response to MAS Consultation Paper P008-2022: Proposed Regulatory Measures for Digital Payment Token Services
Winston WONG, GOH Jun Wei
21 December 2022 – The Monetary Authority of Singapore (MAS) issued Consultation Paper P008-2022: “Proposed Regulatory Measures for Digital Payment Token Services” (Consultation Paper), which seeks to address the risky nature of Digital Payment Tokens (DPTs) and proposes various regulatory measures for DPT services. The following are Flint & Battery LLC’s comments, and feedback on some of the points set out in the Consultation Paper by the MAS. We acknowledge that DPTs and the exchanges and markets on which they are traded today require appropriate regulation on service providers to protect customers’ interests. It is felt that the business conduct of the service providers in the DPT market needs to be adjusted in the interest of fairness with other market participants. We had submitted responses to MAS for certain questions and reproduced the same herein.
Question 1: MAS seeks comments on the proposed scope of “retail customer” for customer access measures
[UPDATE: In the MAS Response 2023, MAS maintains a view mostly consistent with Flint & Battery about the scope of “retail customer” for customer access measures, whereby the use of the definition of Accredited Investors (AI) is implemented. The MAS Response 2023 addresses consumer access measures with the following statements: (1) MAS will proceed to apply consumer access measures to all retail customers, which will be scoped to customers who are not Accredited Investors or Institutional investors (II). The definitions of AI and II will be aligned with that in the Securities and Futures Act (SFA). Guidelines will clarify that the consumer access measures would not apply to DPTSP entities that do not qualify as AI or II. (2) MAS agrees with the suggestion to adopt an “opt-in” regime for AIs (similar to the SFA), for the application of consumer access measures for DPT services. This would better ensure that customers are fully aware and informed of their status as a retail customer/an AI, the regulatory measures accorded to that status, and customers will have flexibility to determine if customer access measures should apply to them after considering their circumstances and understandings of DPTs and DPT services. (3) DPTSPs would treat all customers (other than IIs) as retail customers by default, and where a customer meets the criteria of an AI, have the choice of opting to be treated as one. Further details of MAS’ requirements will be provided in the guidelines. (4) MAS does not agree with creating an additional classification of “Expert Investors” for DPTs. (5) MAS agrees with feedback from the Public Consultation, that consumer access measures should apply to all retail customers. This reduces the risk of DPTSPs setting up in Singapore with intent to primarily serve foreign retail customers who are not subject to MAS’ consumer access measures.
Inter alia, a new Division 2A (pursuant to S 287/2024) implementing many proposed regulatory measures described in the Consultation Paper P008-2022 (October 2022) was added to the Payment Services Act. Division 2A will be described in greater detail in this Update below.]
We agree that there should be customer categorization prior to allowing them to engage in the services provided by the service providers. Firstly, we agree that institutional investors that transact DPTs will not receive any protection as a customer. We further propose for all businesses to be included in this category that receives no protection. Second, we agree that customers with stronger financial ability should be given less protection than those with less financial ability. Thus, we agree with the proposal to categorizing customers into “retail customers” and “non-retail customers”.
On principle, we disagree that this “protection” conferred to retail customers should be in the form of access measures as this is a form of discrimination. Instead, all DPT Service Providers (DPTSPs) intending to serve retail customers should be subject to stringent supervision by MAS in the form of disclosures, audits, liquidity ratios, etc.
However, we note that MAS has not defined the nature of access measures. As such, it is difficult for us to propose an exact mechanism for categorizing customers into retail and non-retail customers. Subject to the exact protective measures being defined by MAS, we agree that the use of the definition for Accredited Investors (AI) to categorize customers into retail and non-retail is suitable.
We disagree that single-currency pegged stablecoins, or any stablecoins, should be treated differently as DPTs with less risk unless they are issued by a country and exempted by MAS on a case-by-case basis. It is our view that it is not the peg but the issuer that determines the risk of a DPT. We surmise that this list would include all national currencies, with certain currencies excluded because such currencies experience instability, such as political instability or experience high inflation.
In line with our views and proposals above, it is our opinion that the definition of DPT under the Payment Services Act 2019 should be revised as follows:
(a) The reference to a representation of value should be removed, i.e., to replace the words “digital representation of value” with “digital fungible token”. The relevant consideration and prerequisite for qualification and regulation is not whether a token represents value, because many tokens have no underlying value and hence do not necessarily represent value. Instead, such a token is fungible in nature and has the potential of being traded (whether speculatively or otherwise) when listed on an exchange as an item representing apparent value, and in our view, sometimes exclusively upon the premium of a popular speculative tradable item.
(b) The definitional link to the intended purpose of a DPT being 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, should be removed, i.e., to delete subsection (c) in its entirety. It is irrelevant whether the DPT is created and/or intended for a medium of exchange and the relevant consideration is that set out in item (a) above.
The definitional link to a DPT’s denomination to currency or being pegged to currency should be removed, i.e., to delete subsection (b) in its entirety. It is irrelevant whether the DPT is denominated or pegged to currency. However, we propose that the MAS may prescribe exemptions where a country issues a DPT denominated or pegged to its currency. It is our opinion that MAS should regulate a DPT irrespective of its link to currency but rather, on the basis of who its issuer is.
Question 2: MAS seeks comments on the options for the treatment of DPT holdings for the purpose of determining a customer’s eligibility as an Accredited Investor (AI).
[UPDATE: The MAS Response 2023 holds a differing view with Flint & Battery’s views on the treatment of DPT holdings as an eligibility factor to be an Accredited Investor. The MAS Response 2023 addresses treatment of DPT holdings in determining a customer’s eligibility as an AI with the following statements: (1) MAS will allow DPTs to be included in the valuation of net worth in determining AI eligibility. (2) DPTs will be subject to a haircut of a minimum of 50%. This provides a level of consistency across the industry in ensuring minimum standards and provides guidance to other DPTSPs and FIs that have yet to develop their own models for assessing and valuing DPTs yet. (3) MAS will apply an overall cap on the value of DPTs to be taken into account when considering an individual’s net worth. Set at whichever of the two is lower: DPT valuation after applying a “haircut” of 50% or S$200,000. (4) MAS will allow MAS-regulated stablecoins to be treated in the same manner as fiat.]
We agree that DPT holdings shall be excluded from the valuation of a person’s net worth in determining whether such person is an AI. We further propose that DPT holdings shall be excluded from the valuation for all other purposes where an individual or entity’s value needs to be calculated unless there is some particular reason otherwise.
Question 3: MAS seeks comments on the proposal to assess the retail customer’s knowledge of the risks of DPT services, as well as the risks to be covered by the assessment. MAS also seeks comments on possible next steps for DPTSPs, should the retail customer be assessed not to have sufficient knowledge of the risks of DPT services.
[UPDATE: On the topic of retail customers having sufficient knowledge, the MAS in its MAS Response 2023 maintains views similar to Flint & Battery’s statements and addresses retail customer knowledge measures with the following statements: (1) MAS will proceed with requiring DPTSPs to assess if a retail customer has sufficient knowledge of the risks of DPT services before providing DPT services to that customer. (2) MAS will require DPTSPs to put in place the appropriate internal policies and procedures to ensure a fair and robust assessment. (3) MAS will include the suggested additional risks (Conflict of interest, custody of DPT) and set them out in the guidelines which will be non-exhaustive in this respect. (4) MAS guidelines will require DPTSPs to consider additional risks to be included in the assessment, relevant to the provision of their DPT services, and to their customers. DPTPSPs must ensure that the risk awareness assessment is focused on the risks of DPT services and not designed in a manner that trivializes the risks involved and/or promoting specific products, services, or tokens. (5) MAS will proceed with allowing DPTSPs to conduct re-assessment(s) for the retail/ customer to retake the risk awareness assessment. (6) MAS will not impose a validity period on risk awareness assessment or require DPTSPs to re-assess retail customers at regular intervals. (7) MAS requires DPTSPs to have internal processes in place to review and update the risk awareness assessment or part thereof, despite not requiring a validity period on risk awareness assessments/re-assessment of retail customers at regular intervals. (8) MAS will clarify in the guidelines that DPTSPs will be required to conduct the risk awareness assessment for all retail customers prior to providing any DPT service after the Guidelines become effective.]
Use of knowledge as a basis to segregate categories of customers of DPT services
We agree that “many retail customers may not have sufficient knowledge of the risks of trading DPTs, leading them to take on higher risks than they would otherwise have been willing, or are able, to bear” and that a customer’s lack of information on the DPT market is one of the main concerns that put such customer at a high risk of financial loss. We agree that there should be an assessment to categorize customers into distinct groups, using the concept of Accredited Investors as defined in the Securities and Futures Act 2001 (SFA). However, we disagree with MAS’s view that customers should be further segregated based on an assessment of their level of knowledge.
The knowledge gap
It is our opinion that there is a knowledge gap of customers resulting in two key consequences that should be of concern to MAS:
(a) Not fully understanding the risks of owning DPTs: This could result in customers employing trading strategies that result in larger than expected financial losses.
(b) Not fully understanding the risks of using DPTSPs: This could result in customers not appreciating the following:
i. the position of conflict that the DPTSPs have vis-à-vis its customers;
ii. whether applicable regulation provides sufficient safeguards to address the abovementioned conflicts;
iii. whether DPTSPs that hold customer assets have other business operations that are likely to endanger customer assets, like a lending business;
iv. whether DPTSPs that hold customer assets have in place sufficient safeguards like the use of an independent custodian, the existence of capital reserves and liquidity ratios; and
v. whether there is an effective audit or verification of the abovementioned safeguards.
The above knowledge gap could result in customers underestimating the risk of using a particular DPTSP.
The use of knowledge-based v. financial ability-based categorization of customers
We are not aware of any similar customer trading activity regulated based on the customer’s level of knowledge. Even outside of activity of trading on an organized market, the prevailing mode of regulation for any form of a risky purchase of goods or services is a combination of information campaign, regulation of the service provider, and police enforcement for nonspecific offenses such as cheating, and other white-collar crimes.
It is prevalent, on the other hand, that service providers are subject to knowledge requirements. For example, financial advisors, fund managers, and capital market professionals are all subject to knowledge-related certification. As a side note, categorization based on knowledge may even be considered an undesirable form of discrimination against customers to certain interest groups, though we express no opinion on this point.
For example, customers of broking service providers and exchanges are protected instead by a combination of rules that regulate the level and timeliness of disclosures, matters that require to be disclosed, conflict of interest, and capital requirements. For example, the SGX requires listcos to immediately disclose matters that may influence share prices and to halt trading, where appropriate. Brokers are subject to rules that diminish the risk of conflicts of interest between the broker and the customer. Also, all market participants, whether broker, exchange, customer, and even a non-participant, are subject, to a differing extent, to rules that target insider trading, and market manipulation.
It is our opinion that the basis of financial ability should be used to segregate customer type and the level of protection that MAS will prescribe to a particular category of customers. We agree with the use of AI as a way to categorize customers of a regulated DPT exchange.
Proposed measures to reduce the knowledge gap
Instead, we propose the following measures to reduce the knowledge gap between customers and service providers. MAS should identify and publish advisories periodically, the risks of:
(a) owning DPTs;
(b) Trading DPTs and the use of leverage in this regard; and
(c) engaging and using a DPTSP, and especially the use of a DPTSP that holds customer assets.
In particular, we identify the following as risks that MAS should specifically warn the public about:
(a) Clarifying that cryptocurrencies and DPTs are not currencies, and in particular, the following:
i. whether the DPTs are backed by assets, and if so, whether a holder can exchange a DPT for the underlying asset;
ii. that there is no central bank to make prudent fiscal policies;
iii. the extent to which the number of DPTs may be increased by the issuer or otherwise;
iv. that even where there are clear published policies governing the dilution of the DPTs, there is no guarantee that the issuer or creator of the DPTs may not otherwise dilute the DPT beyond the level promised; and
v. that the MAS has not audited any DPTs to verify that the manner to which DPTs are promised to function will be, in fact, the manner in such DPTs function.
(b) Clarifying the differing regulatory regimes that apply to DPTSPs on the one hand, and other financial institutions/intermediaries like banks, exchanges, securities brokers, etc. on the other hand. It is proposed that this be provided clearly in a table and list, at a minimum, the following categories:
i. Capital requirements, liquidity ratio requirements;
ii. Rules that address conflicts of interest between the customer and the DPTSP and;
iii. Audit obligations.
We propose that MAS should, in addition to publishing its advisories, work with the Singapore-based media to ensure this knowledge is well circulated.
Question 5. MAS seeks comments on the proposed restrictions on debt-financed and leveraged DPT transactions
[UPDATE When addressing debt-financed and leveraged DPT transactions, the MAS Response 2023 describes a view differing from Flint & Battery’s submission, and has made the following statements: (1) MAS will proceed with the proposal to restrict DPTSPs from; (a) Providing to a retail customer any credit facility to facilitate retail customers purchase/continued holding of DPTs and, (b) entering into any leveraged DPT transaction with a retail customer/facilitating a retail customers’ entry into any leveraged DPT transaction with any other person, which includes margin trading, DPT futures, options, and other derivative transactions. (2) Restrictions would apply to new transactions when the Guidelines become effective. (3) The restrictions that MAS implements will not replace/override the existing prohibition in section 20(1) of the PS Act, and the restrictions will apply alongside section 20(1) of the PS Act. (4) MAS will not allow DPTSPs to accept credit card or charge card payments, except from foreign-issued credit cards or charge cards. MAS is of the view that credit card and charge card usage would allow retail customers easy access to debt financing. The concession for foreign-issued credit cards recognizes that there are limited payment alternatives for a foreign retail customer as compared to a retail customer in Singapore.]
We disagree that MAS should restrict DPTSPs to permit retail customers to use debt to finance their DPT transactions, purchases, and holdings, or allow leveraged DPT transactions.
In respect of MAS’s proposals in para 3.2 of the Consultation Paper, we propose to import the rules that apply to retail investors that presently trade shares, and CFDs in terms of debt financing, and leveraged transactions, for use in the context of retail customers in the DPT market.
It is suggested that a DPTSP engaging in the business of debt-financing and leverage DPT transactions cannot also engage in the business of an exchange facilitating non-debt financing and leverage DPT transactions, to reduce the risk of failure of the non-debt financing and leverage DPT transaction. However, if an exchange is required to use an independent custodian for its customers, and it is recognized by law that DPT ownership of deposits belongs to the customers and not to the DPTSP, then this measure may not be necessary.
Question 6. MAS seeks comments on the proposed segregation measures relating to customers’ assets.
[UPDATE: With regards to segregation of customers assets, the MAS Response 2023’s views are consistent with Flint & Battery’s stance, and addresses the proposed segregation measures with the following statements: (1) MAS will proceed with the proposal in the original document, requiring DPTSPs to segregate customers’ assets from the DPTSP’s assets, and held on trust for the benefit of its customers. (2) MAS will require DPTSPs to keep their own assets on a separate blockchain from their customers’ assets, and DPTSPs will only be allowed to commingle customers’ assets with other customers’ assets. (3) DPTSPs will not be allowed to commingle their own assets with their customers’ assets, even with customers’ consent. (4) MAS has based their decisions on recent (2022) failures within the cryptocurrency space, and will continue to monitor developments, taking into account the needs of the industry and the interests of customers to further finetune their policy regarding segregation of DPTSPs assets and their customers’ assets.
A new Section 18B was added in 2024 (S 287/2024) that requires that assets belonging to a customer received by a regulated entity must be deposited in a trust account by the next business day or immediately returned.
More generally, a new Section 18C sets out more rules in which how customer assets must be handled and treated.
The New Section 18D and 18E sets out regulations relating to the way the regulated entity chooses and transacts with the separate entity that holds the customer assets. It is of note that it specifically sets out disclosure requirements of the regulated entity to the customer before depositing the customer assets, and also the requirement that the regulated entity needs to give written notice to the entity holding the customer assets and obtain acknowledge from it.]
We agree that there should be a clear segregation of customer’s assets (whether retail or non-retail) from the service provider’s assets. Further, we propose that MAS mandates that all DPTs received from customers continue to be owned by the customers and that such DPTs are held on behalf of such customers, unless there is a clear reason, for example, that the DPTSP is in the business of lending out the customer’s DPT, and even so, obtained clear and unambiguous consent and also made the requisite risk disclosures. To be clear, the law should recognize that where the DPTSP is sued by third parties, such third parties cannot claim these customer DPTs to satisfy a judgment against the DPTSP.
In addition to the above, and on a related note, we have also proposed, in Question 10, that if a DPTSP engages in the lending of a customer’s DPT, that should be its only business. For example, such a DPTSP cannot also operate the business of being an exchange. This reduces the risk that a DPTSP functioning as an exchange will also concurrently suffer the risk of a DPTSP in the lending business segment.
Question 7. MAS seeks comments on whether DPTSPs should be required to appoint an independent custodian to hold customers’ assets. MAS also seeks comments on other control measures that would help to minimize the risk of loss or misuse of customers’ DPTs.
[UPDATE: On the topic of independent custodians, the MAS Response 2023’s views differ from Flint & Battery’s, due to the constraints of implementation. The MAS Response 2023 addresses the implementation of independent custodians with the following statements: (1) MAS will not at this juncture of time be requiring the use of independent custodians, due to the limited number of established third-party custodians, and that requiring DPTSPs to hold their customers’ assets with only third-party custodians is not currently an approach that other global regulators or standard-setting bodies enforce. (2) MAS will require DPTSPs to maintain a separate custody function that is operationally independent from other business units and adopt good risk management practices. (3) Whilst MAS will not require the use of an independent custodian currently, they have also noted that an independent custodian could prove beneficial as an additional layer of control, further mitigating the risk of misappropriation and internal fraud.]
We agree that DPTSPs should be required to appoint an independent custodian to hold all customers’ assets (whether retail or non-retail) and that the rules applicable to the fund management industry should be imported, subject to fine-tuning.
Question 8. MAS seeks comments on whether the proposed disclosure and reconciliation measures are appropriate and adequate, and whether any other disclosures would be useful
[UPDATE: The MAS takes a view in the MAS Response 2023 mostly consistent with Flint & Battery’s submission and addresses the topic of requiring daily reconciliation of customers’ assets and monies with the following statements: (1) MAS will proceed with the proposal, requiring DPTSPs to reconciliate customers’ assets (including moneys) daily. (2) for the abovementioned reconciliations to be performed at the entity-level instead of a group-level/consolidated basis, in line with reconciliation requirements for capital markets intermediaries under the Securities and Futures (Licensing and Conduct of Business) Regulations (RG10)]). (3) MAS will require DPTSPs at all times to keep transaction records, and maintain separate books and records for each customer, along with the details (amount and description deposited with DPTSP, movement of assets to and from customer’s custody account, and name of the safeguarding institution) of the customer’s assets.
The MAS Response 2023, on the topic of disclosure measures, prioritizes different key points when compared to Flint & Battery’s recommendations. The MAS Response 2023 addresses the disclosure measures with the following statements: (1) DPTSP’s are required to disclose in writing to customers, the terms and conditions, the arrangements for receiving instructions from the customers, the arrangements for the providing of information to the customers, and all applicable fees and costs. (2) DPTSP’s are required to declare if customers’ assets will be commingled with other customers’ assets, and if so, the risks and consequences of commingling the customers’ assets, should the DPTSP become insolvent. (3) DPTSPs are required to disclose the arrangements made to protect customers’ assets. (4) MAS requires DPTSP’s to make disclosures to all customers. The disclosure must be clear, legible, and in a concise manner. (5) MAS will not prescribe a template or form for the disclosures as they are specific to the arrangements of the DPTSPs.
A new Section 18F sets out the record-keeping obligations of the regulated entity. Although there is no express requirement of how updated the records should be, the particulars of the records that need to be kept are specifically stated in this Section.
It is notable that the new Section 18H only requires an updated computation on customer assets at the end of every business day, as opposed to real-time basis.]
We agree that customers should be adequately informed of the arrangements and risks involved in having their assets held by DPTSPs. We agree with the proposed disclosures and reconciliation measures. However, we further propose that:
(a) DPTSPs shall disclose whether customer assets are used for anything other than transactions specifically instructed by customers.
(b) The reconciliation of DPT holdings of customers shall be available on a real-time basis for all customers not just on a daily basis.
Question 10. MAS seeks comments on the proposed restriction on DPTSPs not to lend out retail customers’ DPTs. MAS also seeks comments on any other measures to protect customers’ DPTs from the risks of unregulated borrowing and lending by DPTSPs.
[UPDATE: The MAS Response 2023 addresses the arrangements for staking and lending of customers’ assets with the following statements: (1) For retail customers, MAS will restrict DPTSPs from facilitating staking arrangements, in addition to lending of retail customers’ assets. (2) For non-retail customers, MAS will not impose any restrictions on DPTSPs enabling or facilitating the entry to staking or lending arrangements. (3) MAS will proceed with the proposal for DPTSPs to provide a clear risk disclosure document and obtain the customer’s explicit consent, before lending or staking the customer’s assets.]
We express no view on the restriction on DPTSP’s not to lend out retail customers’ DPT but may lend out only non-retail customers’ DPT. It is our opinion that if a DPTSP engages in the lending of a customer’s DPT, that should be its only business. For example, such a DPTSP cannot also operate the business of being an exchange.
MAS should conduct a study into at what point a DPTSP will pose systemic risks to the financial market by conducting activity similar to that of a traditional bank or digital bank. Where such risks are present, we propose that regulation similar to that governing a bank should apply: e.g. capital requirements, audit, liquidity ratios, IT redundancy, etc.
The legislation regulating the DPTSP should include a statement clarifying that it makes no statement on whether a DPT is an asset.
Question 11. MAS seeks comments on the proposed measures to identify and mitigate conflicts of interests. MAS also seeks comments on any other measures to identify and mitigate conflicts of interest.
[UPDATE: The MAS in its MAS Response 2023 maintains view similar with Flint & Battery’s, adding on more conditions, and addresses proposed measures to identify and mitigate conflicts of interest with the following statements: (1) MAS will require DPTSPs to establish and implement effective policies and procedures to identify and address conflicts of interest. DPTSPs will be required to disclose to customers the nature of activities and sources of conflicts of interest, and the relevant measures and controls that the DPTSPs have implemented to mitigate conflicts of interest. (2) MAS will require that DPTSP’s and its related entities must not trade in markets that they operate unless for the purposes of matched principal trading. (3) MAS will require DPTSPs that perform specific roles that might cause conflicts of interest to arise, to have measures in place to mitigate those conflicts of interest: (a) if a DPTSP operates a market and also acts as a broker, it is required to set up separate legal entities with separate management teams and ensure that the two functions are independent of one another, and provide clear client disclosures; and (b) if a DPTSP acts as a broker and transacts on its own account, it must put in place proper functional segregation, effective Chinese walls, and provide clear client disclosures. (4) MAS will move ahead with a disclosure-based approach, whereby a DPTSP is required to make appropriate disclosures with regards to the potential conflicts and risks from own or related token listings, specific steps and measures that have been put in place to effectively address the risks and conflicts of interest, including any segregation of its surveillance function from its trading/market function, and proprietary holdings of any tokens at the point of token listing. MAS requires these disclosures to be made in relation to the listing and trading of all DPTs. (5) MAS requires DPTSPs to assess the effectiveness of mitigating measures to address any potential conflicts of interest on a regular basis and be prudent should the measures be assessed to be inadequate in effectively addressing conflicts of interest.]
We agree with MAS’s proposal in para 4.16 of the Consultation Paper. However, it is our opinion that MAS mandates that all DPTSPs specifically address the conflict situations in para 4.15 of the Consultation Paper and what procedure or measure the DPTSP should take to eliminate or reduce these conflicts. Further, all DPTSPs should be required to comply with the measures in paras 4.16 to 4.19 of the Consultation Paper. To the extent that the conflicts in para 4.15 of the Consultation Paper are not eliminated, or the measures in 4.16 to 4.19 of the Consultation Paper are not implemented in full, MAS exemption should be sought and the DPTSP is required to disclose the extent of non-compliance.
Question 12. MAS seeks comments on the proposal for DPT trading platform operators to publish its policies and procedures on the process for selecting, listing, and reviewing DPTs, as well as the relevant governance policies. MAS also seeks comments on any other measures or disclosures to enhance market discipline on DPT trading platform operators, with regard to DPTs traded on their trading platforms.
[UPDATE: MAS were unchanged from their original view that DPT trading platform operators should publish its policies and procedures on the process for selecting, listing, and reviewing DPTs, and thus the viewpoints of MAS are mostly incongruent with Flint & Battery’s. The MAS Response 2023 addresses DPT trading platform operators publishing its policies and procedures on the process for selecting, listing, and reviewing DPTs with the following statements: (1) MAS will require DPTSPs to publicly disclose their listing and governance policies for tokens listed and offered on their markets and trading platforms. (2) All DPTSPs are required to assess if they have provided sufficient and understandable information to allow customers to make informed decisions about the applications of the DPTSPs evaluation criteria before making a DPT available for trading. MAS requires senior managers to take responsibility for the DPSTPs listings and governance policies and be responsible for listing, suspending and de-listing decisions. (3) MAS deems it inappropriate to prescribe a set of common listing evaluation criteria, or to whitelist DPTs for trading. Instead, it is the DPTSPs that are ultimately accountable and responsible for the DPTs made available for trading on their trading platforms.]
We disagree with MAS’s point in para 4.23(a) of the Consultation Paper that DPTSPs need to justify the selection of DPTs available for trading and explain to customers why a particular DPT is suitable for trading. We propose that the starting point should be that all DPTs are inherently risky and speculative. The further issue is that such an explanation can be easily misunderstood, especially by retail customers, that a DPT has sound fundamentals.
We agree with MAS’s proposals in para 4.23(b) to (d) of the Consultation Paper. We feel that, especially for retail customers trading on finance or utilizing leverage, the suspension or removal of a DPT from trading can adversely and seriously harm such retail customers’ financial position. However, MAS needs to consider further if they should regulate the DPTSP’s decisions to suspend trading. If not, all retail customers utilizing finance or leverage must be specifically warned of the risk of DPTs being suspended and them not being able to withdraw their DPTs after suspension.
We propose that, with respect to para 4.24 of the Consultation Paper, the MAS is empowered to require DPTSPs to clarify or elaborate on disclosures made in respect of the above and such clarification and elaboration shall be prominently displayed on the DPTSP’s platform and that such requests, clarifications, and elaborations to be published on MAS’s portal.
Question 16. MAS seeks comments on effective measures, including the implementation of market surveillance mechanisms, to detect and deter unfair trading practices
We considered whether DPTSPs should be regulated under an existing regulatory regime, e.g., Banks, SFA, etc.
On the external, it may seem persuasive that DPTs may resemble commodities, and by parity, its treatment and regulation should be based on that applicable to commodities. However, it is felt that DPTs are dissimilar to commodities for the reason that the property and nature of a traded commodity, like crude oil, or silver, or else, is known and trite. In contrast, the property of a DPT is comparatively complex and obscure. The complex nature of DPTs suggests that the disclosure-heavy regime of securities should be preferred, as are shares of traded companies. However, it is not feasible to enforce this disclosure obligation upon a DPT’s issuer.
We considered whether DPT exchanges should be regulated under the same regime as “organized markets” under the SFA. We note that the present prohibition for operating as an “organized market” as defined in the SFA does not expressly include exchanges for DPTs. It is our opinion that MAS’s concern in respect of the regulation of such entities includes whether the inevitable eventual failure or malfunction of an apparatus resembling an organized market for DPTs will create a contagion to the wider financial system that would adversely disrupt the Singapore financial system, and whether the participation of retail customers in such a malfunction is an issue.
We further opine that irrespective of whether DPTs are endorsed by MAS, considered “currency” or else, that its trading be subject to the laws of market manipulation, insider trading, and other crime. A purposive application of such offenses mandates that they should apply uniformly to any tradable digital token to address issues relating to the conflict of interest and disclosure.
We propose MAS amends the SFA to achieve the following:
(a) To include DPTs as a class of instruments regulated under the organized markets regime.
(b) To expressly bring DPTs under the regulation of market manipulation, insider trading, and related white-collar crimes.
(c) The legislation extending the reach of regulation as stated above expressly clarifies that it makes no statement on whether DPTs are assets.
Question 17. MAS seeks comments on the proposed transition period of 6-9 months. MAS also seeks other comments to facilitate the transition towards the implementation of the regulatory measures.
[UPDATE: MAS intended course of actions aligns with Flint & Battery’s recommendations, and the MAS Response 2023 addresses the proposed transition period with the following statements: (1) Additional implementation details for the measures covered in the MAS response 2023 will initially be provided in the form of Guidelines to be published in mid-2024 with a 9-month transition period for implementation. (2) MAS will also mandate the requirements in the Notice, i.e., MAS Notice PSN05, to DPTSPs in early 2024 with a 9-month transition period for implementation. The amendment bills S 287/2023 and S 827/2024 had made amendments to the Payment Services Regulations 2019 implementing the measures described in MAS Response 2023.]
We agree that a transition period of 6-9 months will be sufficient for the implementation of the regulatory measures on DPTs.
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