The Monetary Authority of Singapore (MAS), the central bank and financial regulatory authority of Singapore, has announced new requirements for digital payment token (DPT) service providers to safekeep customer assets under a statutory trust before the end of the year.
These requirements will mitigate the risk of loss or misuse of customers’ assets. They will also facilitate the recovery of customers’ assets in the event of a DPT service provider’s insolvency. MAS will also restrict DPT service providers from facilitating lending and staking of DPT tokens by their retail customers.
These measures are introduced following an October 2022 public consultation on regulatory measures to enhance investor protection and market integrity in DPT services. The consultation received significant interest from a wide range of respondents. There was broad support for DPT service providers to:
- segregate customers’ assets from its own assets and held in trust;
- safeguard customers’ moneys;
- conduct daily reconciliation of customers’ assets and keep proper books and records;
- maintain access and operational controls to customers’ DPTs in Singapore;
- ensure that the custody function is operationally independent from other business units;
- provide clear disclosures to customers on the risks involved in having their assets held by the DPT service provider.
Subsequently, MAS is seeking public feedback on the draft legislative amendments to the Payment Services Regulations to put these requirements into effect. The financial regulatory authority of Singapore will also publish guidelines to support consistent implementation by the industry.
Restricting lending and staking of retail customers’ DPTs
MAS will proceed with the proposal to restrict DPT service providers from facilitating lending or staking of their retail customers’ DPTs. This is because these activities are generally not suitable for retail public. DPT service providers may continue to facilitate such activities for their institutional and accredited investors.
There were diverse views received on this proposal. Some respondents suggested allowing DPT service providers to offer these activities with the retail customer’s consent and risk disclosures. Meanwhile, others advocated a ban on these high-risk and speculative activities. In response, the MAS will monitor market developments and consumer risk awareness as these evolve. It will continue to take steps to ensure that its measures remain balanced and appropriate.
Ensuring market integrity
In the October 2022 public consultation, MAS consulted the broad regulatory approach to market integrity. At the time, respondents agreed with MAS’ observations on good industry practices. Some even thought MAS could impose further measures to address market integrity risks, and prevent abuse and unfair trading practices.
Nine months after the initial consultation, MAS has issued a separate consultation paper proposing requirements for DPT service providers to address unfair practices. In addition to this, it will also set out legislative provisions and the types of wrongful conduct that constitute offences.
Consumers must play their part in protecting their assets
Despite new requirements being put in place, regulations alone cannot protect consumers from all loses. Especially given the extremely high risk and speculative nature of DPT trading. While the segregation and custody requirements will minimise the risk of loss of customers’ assets, consumers may still face significant delays in recovering their assets in the event of insolvency of the service providers.
Consumers must also remain vigilant and not deal with unregulated entities. This includes those based overseas, as they risk losing all their assets.
Supporting emerging technologies
Mahin Gupta, founder of Liminal, Singapore headquartered, wallet infrastructure and custody solutions platform responded to the new requirements saying: “We are delighted to see MAS taking positive steps to safeguard customer funds to promote a healthy crypto ecosystem.
“At Liminal, we have made it our mission to make users aware of the risks involved in storing digital assets without control over the private keys. We strongly believe that this is a masterstroke by MAS which is expected to further boost the adoption of digital assets by significantly reducing the risk, preventing misuse of user funds, and ensuring full recovery of assets in case of any unfortunate event.
“The public consultation on this matter began in October last year and the outcome is not surprising to industry players. The strong policy suggests that MAS has taken into consideration, the aspirations of the industry and demonstrated the highest standard of consumer protection which will be a benchmark for other markets/geographies.
“However, we would like to understand the structure of the trust proposed by MAS. Looking at the independent nature of digital assets, we recommend storing digital assets with an independent, regulated and compliant custodian.
“The latest move by MAS strengthens Singapore’s position as a supporter of emerging technologies which offers a fertile ground for crypto/blockchain-related services. It will attract global entrepreneurs to leverage Singapore’s strong and decisive policy framework for digital assets. Overall, this is a welcome move and we are one step closer to a compliant, regulated, and transparent crypto ecosystem in South East Asia.”
