The Monetary Authority of Singapore (MAS) published a consultation paper in October 2022 (Consultation Paper) in which it proposes an approach to regulating stablecoins and related activities under the Payment Services Act 2019 (PS Act). MAS’s proposed approach centers on robust regulation of a narrow category of stablecoins that MAS hopes will then serve as “credible and reliable” mediums of exchange for Singapore’s digital asset ecosystem.

The consultation paper, Proposed Regulatory Approach for Stablecoin-Related Activities (P009-2022, 26 October 2022), seeks public comment until 21 December 2022, after which MAS intends to finalise its regulatory approach.  MAS will then separately consult on the new regulations and changes to existing legislation necessary to implement its regulatory approach.

Current Regulation of Stablecoins in Singapore

The PS Act does not define or distinguish stablecoins from other digital tokens within its scope.  MAS clarified in its March 2022 update to the Frequently Asked Questions (FAQs) on the Payment Services Act (PS Act) that SCS will be regulated as digital payment tokens (DPTs) under the PS Act (assuming they have all the characteristics set out in the definition of DPT in the PS Act).  MAS explained that stablecoins will not be regulated as e-money (a defining characteristic of which includes being pegged to a currency) because their exchange rate relative to the pegged currency may vary when they are traded on third-party cryptocurrency exchanges and because holders may use SCS without having a relationship with the issuer.  MAS reiterates that view in the Consultation Paper.

The Regulatory Objectives Driving MAS’s Proposed Approach

In MAS’s view, the values of stablecoins available today are too volatile to serve as credible and reliable mediums of exchange.  MAS’s ultimate objective is therefore to regulate SCS in a manner that achieves a high degree of value stability.  MAS further frames its proposed regulatory approach with three guiding objectives:

a.      Support the development of value-adding payment use cases for stablecoins, and anchor strong stablecoin issuers as utility service providers for the digital asset ecosystem.

b.     Adopt a progressive regulatory approach that is fit for purpose and provides for stepping up of measures as needed.

c.      Maintain an open regime to accommodate different forms of stablecoins, including bank-issued ones.

Overview of MAS’s Proposed Regulatory Approach

The PS Act does not presently regulate licensees for the value stability of stablecoins they may issue.  Under the proposed approach, a “stablecoin issuance service” would become a new service regulated under the PS Act, similar to the digital payment token service, e‑money issuance service and other services currently regulated under the PS Act.  Also, a new class of digital token, yet to benamed (MAS suggested “regulated stablecoin”, “qualifying stablecoin” or “securely-backed stablecoin”; we will call them “MAS-regulated stablecoins” or “MRS” in this article), would be created to represent the stablecoins issued by providers of the stablecoin issuance service.

Classes of Stablecoin Issuance Service Licensees

Stablecoin issuance service licensees can be separated into four classes:

• Non-banks that issue MRS with a total circulation in excess of S$5 million.
• Non-banks that issue MRS with a total circulation equal to or less than S$5 million, but who choose to be regulated as if the circulation exceeded S$5 million.
• Banks that issue MRS backed by a segregated pool of qualifying reserve assets.
• Banks that issue MRS backed by liabilities on their balance sheets.

By default, non-banks that issue MRS with a total circulation equal to or less than S$5 million will not be regulated as stablecoin issuance service providers, but their stablecoins will then be classified as DPTs and not as MRS.  Those issuers would be regulated as DPT service providers only if they otherwise qualify as DPT service providers.

Regulation of Non-Banks That Issue MRS 

Non-banks that issue MRS will be regulated as follows:

• They will be required to hold a major payment institution (MPI) licence for stablecoin issuance service under the PS Act. However, they will not be required to hold a licence for any other regulated service under the PS Act.
• They will be subject to the same anti-money laundering and countering the financing of terrorism, technology risk and cyber risk management requirements as other PS Act licence holders.
• Their MRS may only be pegged to the Singapore Dollar or a Group of Ten currency (Australian Dollar, British Pound Sterling, Canadian Dollar, Euro, Japanese Yen, New Zealand Dollar, Norwegian Krone, Swedish Krona, Swiss Franc and the United States Dollar).
• They must hold reserve assets in the form of cash, cash equivalents or qualifying debt securities denominated in the same currency as the pegged currency and equal in value to at least 100% of their MRS in circulation.
• They must obtain a monthly independent attestation that they meet the reserve requirements, such as by an auditor, andengage an external auditor to conduct annual audits of reserves and report to MAS.
• They must segregate reserve assets and hold them with licensed banks, merchant banks, finance companies or capital market services licensees providing custodial services in Singapore.
• They must redeem their MRS at par and disclose fees, minimum redemption amounts and other redemption conditions that are reasonable.
• They must honour legitimate redemption requests within 5 business days.
• They must publish and maintain a white paper or similar document on their website disclosing all relevant information regarding their MRS.
• They must maintain a base capital of the higher of S$1 million or 50% of annual operating expenses.
• They must at all times hold liquid assets valued at the higher of 50% of annual operating expenses or the amount they deem necessary to wind down the business in an orderly fashion in case of insolvency.
• They may not engage in other businesses that increase their risk, such as lending or staking SCS or DPTs or trading DPTs.

Regulation of Banks That Issue MRS Backed by a Segregated Pool of Qualifying Reserve Assets

Banks that issue MRS backed by a segregated pool of qualifying reserve assets will be subject to the same requirements as non-banks set out above, except for the base capital, liquid asset holding and business restriction requirements in the last three bullets. 

Regulation of Banks That Issue MRS Backed by Liabilities on Their Balance Sheets

Banks that issue MRS backed by liabilities on their balance sheets will only be required to comply with the timely redemption at par and disclosure requirements set out for non-banks above. 

Singapore-Issued SCS Fungible with SCS Issued in Other Jurisdictions

It is possible that SCS issued in Singapore are fungible with SCS issued in other jurisdictions, whether through an arrangement among independent companies or by affiliated members of a global group.  In that case, MAS will only recognise the SCS issued in Singapore as MRS if the Singapore issuer is able to submit an independent attestation that the other SCS issuers meet equivalent standards regarding reserve backing and prudential requirements or if MAS is able to establish cooperative relationships with the relevant regulatory bodies in the other jurisdictions.  If neither of those conditions can be satisfied, the SCS issued in Singapore will not qualify as MRS and the Singapore issuer will not qualify for a stablecoin issuance service licence. 

Regulation of MRS Intermediaries

MAS proposes to regulate MRS activities other than issuance as if the MRS were DPTs.  However, DPT service providers licensed under the PS Act and dealing with MRS will be subject to the following additional requirements:

• Disclosures and labelling to help customers distinguish MRS from other stablecoins offered by the service provider.
• Transfers of MRS must be completed within 3 business days.
• Segregation of MRS from other customer assets and from the service provider’s own assets.

Regulation of Systemic Stablecoin Arrangements

MAS proposes to supervise stablecoin arrangements as “payment systems” under the PS Act.  If MAS deems the arrangement to be systemic—that is, its failure could disrupt Singapore’s financial system or cause the loss of public confidence in Singapore’s financial system—MAS could designate the stablecoin arrangement as a “designated payment system” under the PS Act, resulting in more stringent regulation under the PS Act and other financial services legislation.  MAS notes that no current stablecoin arrangement in Singapore is likely to qualify as systemic.

Key Takeaway

MAS proposes a regulatory approach intended to spur the creation of anew class of stablecoins with a high degree of value stability that will serve as “credible and reliable” mediums of exchange in Singapore’s digital asset ecosystem.  The new MAS-regulated stablecoins would be issued by stablecoin issuance service providers licensed under the PS Act and subject to robust financial, operational and prudential regulations.  MAS seeks public comment on its proposals, after which it will finalise its regulatory approach and then adopt regulations and changes to the PS Act to implement its approach.

For More Information

OrionW regularly advises clients on FinTech matters.  For more information about the regulation of stablecoins in Singapore, or if you have questions about this article or other FinTech matters, please contact us at fintech@orionw.com.

Disclaimer: This article is for general information only and does not constitute legal advice.