Retail investors in Singapore may have to go through a risk awareness assessment before being allowed to trade cryptocurrencies.
They will also not be able to use credit cards or any form of borrowing to trade cryptocurrencies.
These are among the measures proposed by the Monetary Authority of Singapore (MAS) to protect retail consumers, in one of two consultation papers published on Wednesday (Oct 26).
The Singapore central bank has repeatedly warned the public against investing in cryptocurrencies. Earlier this year, it prohibited cryptocurrency trading service providers from taking up public advertisements and engaging third parties like social media influencers.
Trading in cryptocurrencies, also known as digital payment tokens (DPTs), is “highly risky and not suitable for the general public”, the MAS reiterated in a media release on Wednesday. But it noted that as cryptocurrencies play a supporting role in the broader digital asset ecosystem, it “would not be feasible to ban them”.
“Therefore, to reduce the risk to consumers from speculative trading in cryptocurrencies, MAS will require that DPT service providers ensure proper business conduct and adequate risk disclosure,” it said.
The regulator, in its other consultation paper, also proposed new requirements around so-called stablecoins, which came under the spotlight after the collapse of TerraUSD sent shockwaves through the digital assets markets. These include having secure reserve assets as backing and adequate disclosures.
REDUCING CONSUMER RISKS
The proposed rules to protect retail investors cover three main areas:
Consumer Access
DPT service providers will be required to provide relevant risk disclosures to allow retail customers to make informed decisions regarding cryptocurrency trading. A risk awareness assessment is also being proposed to ensure that retail customers have sufficient knowledge of the risks involved.
MAS noted that a number of industry players are supportive of some form of retail investor assessment and have expressed interest to work together to develop a common assessment template. Having a common template would facilitate consistency and robustness across the industry, it added.
In addition, DPT service providers will not be allowed to offer any monetary or non-monetary incentives to retail customers upon sign-up, or to any person to encourage referrals of its service.
They must also disallow the use of credit facilities and leverage by retail consumers for cryptocurrency trading.
Business Conduct
DPT service providers will be required to implement proper segregation of customers’ assets from its own assets.
MAS said the recent failure of several firms in the industry underscores the importance of DPT service providers having effective and robust arrangements for the identification and segregation of customers’ assets.
“In addition to minimising the risk of loss or misuse of customers’ assets during the ordinary course of business, these arrangements facilitate the return of customers’ assets in the event of … insolvency,” it wrote in the consultation paper.
Firms will also have to mitigate any potential conflicts of interest which arise from the multiple roles they perform, and establish processes for complaints handling.
Technology Risks
Similar to other financial institutions such as banks, DPT service providers will be required to maintain high availability and recoverability of their critical systems.
In its consultation paper, MAS said that despite its consistent warnings about the hazards of cryptocurrency speculation, cryptocurrencies continue to attract “much speculative consumer interest”.
This is partly due to alleged “success stories” of spectacular gains made over a short period of time and celebrity endorsements that encouraged retail participation.
A significant part of the public discourse, usually through promotional activities and social media posts, also “irresponsibly draws little attention to the inherent risks of DPTs”, it said, citing the earlier collapse of algorithmic stablecoin TerraUSD.
The regulator concluded that it is hence appropriate to put in place “targeted regulatory measures” to address the risks posed to Singapore consumers.
“Notwithstanding these regulatory measures, consumers must continue to exercise utmost caution when trading in DPTs and must take responsibility for such trading,” MAS said, adding that regulations “cannot protect consumers from losses arising from the inherently speculative and highly risky nature of DPT trading”.
ENSURING "CREDIBLE" STABLECOINS
While extreme price volatility has ruled out cryptocurrencies as a medium of exchange for transactions in the digital asset ecosystem, stablecoins hold such potential if they are well-regulated and securely backed, according to the MAS.
A stablecoin is a crypto-asset designed to have a stable value, typically by being backed or pegged to an underlying asset such as a currency.
Currently, stablecoins and its service providers fall under the Payment Services Act and are regulated primarily for money laundering and terrorism financing, as well as technology risks. But this is “not adequate”, MAS wrote in its consultation paper, as it does not regulate the promise of the peg and any associated stabilisation mechanisms.
As a start, the regulator intends to focus its regulatory regime on single-currency pegged stablecoins (SCS) with value in circulation of more than S$5 million, and those issued in Singapore. Non-bank issuers that meet these criteria will have to obtain a major payment institution licence and be subject to new value stability, disclosure and insolvency safeguards.
Other stablecoins in the market, such as those pegged to a basket of currencies, commodities or algorithmic mechanisms will continue to be treated as DPTs, as they are seen to be “less stable”.
The proposed regulatory approach for stablecoin issuers covers these areas:
Value Stability
Issuers must hold reserve assets – in cash, cash equivalents or short-dated sovereign debt securities that are at least equivalent to 100 per cent of the par value of the outstanding SCS in circulation – to back the SCS issued.
These reserve assets will have to be denominated in the same currency as the pegged currency, and be held in separate accounts from the issuers’ own assets.
Issuers must also be audited by an external party, and ensure timely redemption at par value for holders of its SCS.
Reference Currency
All SCS issued in Singapore can be pegged only to the Singapore dollar or any Group of Ten currencies.
Disclosures
Issuers will be required to publish a white paper on their website disclosing details about the SCS, including the rights and obligations of the issuer and holders, as well as risks that can affect the stability of the SCS’ value. Such information should also be updated as needed.
Prudential Standards
Issuers must meet a base capital requirement that is either higher than S$1 million or 50 per cent of their annual operating expenses. They are also required to hold liquid assets which are valued at higher than 50 per cent of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down.
Meanwhile, banks in Singapore will be allowed to issue SCS, but they will not need to adhere to further reserve backing and prudential requirements if the SCS is issued as a tokenised form of bank liabilities.
MAS deputy managing director for financial supervision Ho Hern Shin said the enhanced regulatory regime aims to support the development of value-adding payment use cases for stablecoins in Singapore.
Taken together, the two sets of proposed measures mark the “next milestone” in enhancing Singapore’s regulatory approach for an innovative and responsible digital asset ecosystem.
“As we continue to partner industry players to explore the potential benefits of tokenisation and distributed ledger technology, MAS will make appropriate adjustments to its regulatory regime to address the associated risks.”
The consultation period for these proposals, during which the MAS invites comments from all interested parties, will end on Dec 21.
