The Monetary Authority of Singapore announced a new framework that seeks to ensure value stability for stablecoins regulated in Singapore.
On 15 August 2023, the Monetary Authority of Singapore (MAS), Singapore’s primary regulator for banks and payment services, announced its new stablecoin regulatory framework. The new framework introduces licensing and other requirements for stablecoin issuers with operations in Singapore.
This framework follows a consultation paper in October 2022, on the MAS’ proposed approach to the regulation of stablecoin issuers and intermediaries, and a consultation paper on the scope of e-money and digital payment tokens in December 2019, in which the MAS considered the need to review its regulatory approach to accommodate stablecoins with the potential to become more widely used as payment instruments. These publications, together with the Hong Kong Monetary Authority’s discussion paper on its proposed approach to the regulation of stablecoins, (see Latham’s blog post), indicate that Asian regulators continue to consider appropriate guardrails for cryptocurrencies in light of significant consumer interest.
How Are Stablecoins Currently Regulated in Singapore?
Stablecoins are blockchain-based tokens that attempt to maintain a stable value by reference to an underlying fiat currency or a basket of assets. The use of stablecoins has risen sharply from less than US$3 billion in market capitalisation at the beginning of 2019 to approximately US$150 billion in December 2021. Stablecoins are important to the cryptoasset ecosystem because they function as an intermediary token, which can be used between cryptocurrency intermediaries and allows users to avoid cashing out their investments into a bank account.
One of the MAS’ primary functions is regulating the payment services sector in Singapore, and it has existing powers under the Payment Services Act 2019 (PS Act) to regulate payment services providers. Currently, stablecoins may be treated as digital payment tokens (DPTs) under the PS Act if they fulfil certain requirements. Entities that deal in or facilitate the exchange of such stablecoins would fall within the scope of the PS Act, and are regulated primarily for money laundering, terrorism financing, and technology risks. These service providers are also required to provide risk warning disclosures to customers.
MAS’ New Regulatory Approach to Stablecoin Issuers
The MAS notes that the current regulatory treatment of stablecoins under the PS Act is not adequate as it lacks regulations on stabilisation mechanisms or measures to ensure that stablecoins maintain a high degree of value stability.
To address this concern, the MAS will introduce a new regulated activity of “Stablecoin Issuance Service” under the PS Act. The new licensable activity would regulate the issuance of single-currency pegged stablecoins (SCS) in Singapore which meet the following requirements:
- the SCS is pegged to the Singapore dollar or Group of Ten (G10) currencies;[1] and
- the SCS in circulation exceeds or is anticipated to exceed SGD$5 million in value.
An SCS which meets these requirements would be labelled a “MAS-regulated stablecoin”, and only SCS issuers regulated under the new framework would be permitted to use this label.
Generally, a Singapore-based entity that performs the function of controlling the total supply of, and minting and burning of MAS-regulated stablecoins, would fall within the scope of this new category and would need to obtain a major payment institution (MPI) licence under the PS Act. Banks in Singapore would be exempted from this requirement to obtain a licence under the PS Act.
Besides licensing, the MAS will impose requirements on issuers of MAS-regulated stablecoins, in order to maintain a high degree of value stability of the SCS. These requirements include the following:
1. Reserve Asset Backing
Issuers would be required to hold reserve assets equivalent to at least 100% of the par value of the outstanding SCS in circulation at all times (including those held by the issuer), in a portfolio of low-risk, highly liquid assets. Issuers would be required to maintain a robust and resilient risk management policy for their reserve assets, covering aspects such as credit, liquidity, and concentration risk.
Reserve assets must be held in segregated accounts separate from the issuer’s other assets, and held in the custody of a licensed financial institution in Singapore, unless the issuer itself is a licensed bank.
Furthermore, SCS issuers must obtain independent attestation, such as by external audit firms, that the reserve assets meet the MAS’ requirements on a monthly basis. This attestation, including the percentage value of the reserve assets in excess of the par value of outstanding SCS in circulation, must be published on the issuer’s website and submitted to the MAS. SCS issuers must also appoint an external auditor to conduct an annual audit of their reserve assets and submit the report to the MAS.
2. Base Capital / Solvency Requirements
Under the new framework, SCS issuers would be required to maintain a base capital at all times which is the higher of: (i) SGD$1 million; or (ii) 50% of their annual operating expenses.
Furthermore, such issuers would be required to hold at all times liquid assets valued at the higher of: (i) 50% of annual operating expenses; or (ii) an amount that the SCS issuer determined is necessary to achieve recovery or an orderly wind-down. The latter amount would be subject to independent audits on at least an annual basis.
3. Business Restrictions
An SCS issuer should not undertake activities that introduce additional risks, such as lending services, dealing, or fund management services. Such activities can still be conducted from other related entities if the SCS issuer does not hold a stake in the related entity.
4. Disclosure / Redemption Requirements
The MAS would require issuers of MAS-regulated stablecoins to publish and maintain a white paper on their corporate websites, to disclose information such as: (i) the description of the SCS; (ii) the rights and obligations of the SCS issuer and SCS holders; and (iii) the risks that can affect the stability of the SCS value and ability of the SCS issuer to fulfil its obligations. As a matter of good practice, the white paper should be accompanied by a factsheet summarising the key information relevant to the SCS holders.
An SCS issuer must specify and disclose that all the holders of its SCS would have a direct legal right to redeem the SCS for the pegged currency at par value (or any other currencies of equivalent value), and that redemption requests can be made at any time with the SCS issuer. Any conditions that the SCS issuer wishes to impose for redemptions, such as fees and minimum redemption amount, must be reasonable. Such conditions must also be clearly disclosed on the SCS issuer’s corporate website and any other communication channels with the public regarding the SCS. An SCS issuer should return the par value of the SCS to the SCS holder within five business days from receiving a legitimate redemption request.
5. No Multi-jurisdictional Issuance
Following the public consultation, the MAS has decided that it would not allow multi-jurisdictional issuance for stablecoins regulated under the new framework. SCS issuers would be required to issue solely out of Singapore if their SCS is to be recognised as a “MAS-regulated stablecoin”.
Besides these requirements, the MAS will further amend the PS Act to empower it to supervise stablecoin arrangements. These include: (i) the power to collect information on stablecoin arrangements from relevant persons in Singapore, such as SCS intermediaries and validators of transactions; and (ii) bringing “systemic” stablecoin arrangements (i.e., stablecoins which are deemed significant enough such that disruptions to the arrangements could disrupt or affect public confidence in Singapore’s financial system) within the scope of the PS Act’s designated payment system framework.
Next Steps
Stakeholders should consider the requirements of the new stablecoin framework and the potential impact on operations in Singapore.
The MAS has noted previously that further details on the regulatory requirements, legislative amendments, and transitional arrangements will be separately published for consultation after it has finalised the regulatory approach to stablecoins.
Latham & Watkins will continue to analyse and report on the new stablecoin regulatory framework.
Endnote
[1] The G10 currencies are the Australian dollar, British pound sterling, Canadian dollar, euro, Japanese yen, New Zealand dollar, Norwegian krone, Swedish krona, Swiss franc and the US dollar.
