MAS' Regulatory Landscape for Stablecoins
In December 2019 through a consultation paper (Consultation on the Payment Services Act 2019 – Scope of E-money and Digital Payment Tokens), MAS sought views on the regulation of digital payment tokens and e-money. At that time, due to the novelty of stablecoins, there were numerous conflicting viewpoints, and a firm consensus could not be reached.
Since then, the digital assets industry has grown further, and there have been new developments that have provided both MAS and the industry players with regulatory standards to maintain and operational frameworks for clarity on the use of Stablecoins.
PDF version: Future of Dital Assets in Singapore: MAS’ Regulatory Landscape for Stablecoins
Introduction
In recent years, there has been a significant growth in the popularity of digital assets, reflecting their increasing appeal to the general public, including investors within and outside of Singapore.
In Singapore, Monetary Authority of Singapore (“MAS”) over this time has continued to engage with industry players to find a fair balance between its regulatory mandate and ensuring the industry growth.
Stablecoins are crypto assets that aim to maintain a stable value relative to a specified asset (typically a unit of fiat currency or commodity), or a pool or basket of assets.
In October 2022, MAS issued another consultation paper with respect to overall regulatory approach to stablecoins and intermediation activities. The consultation paper highlights proposed key requirements to be imposed on such regulated activities.
Calling for early compliance preparations from SCS issuers who intend to have their stablecoins recognised as ‘MAS-regulated’, MAS said “the stablecoin regulatory framework aims to support and facilitate the use of stablecoins as a credible digital medium of exchange, and as a bridge between the fiat and digital asset ecosystems”.
In this publication, we examine the consultation conclusions that were released on 15th August 2023, stemming from MAS’ consultation paper in October 2022.
Scope of Regulatory Framework
Given that there exists a variety of stablecoins with distinct asset-pegging and stability mechanisms, MAS has narrowed down its purview to rest on Single Currency Stablecoins (“SCS”) that are pegged to the Singapore dollar or Group of 10 currencies (“G10”).
This is based on the valuable and high-quality liquid assets in those currencies which are fundamental in providing strong reserve backing for the SCS.
Despite the specific focus of the framework on SCS, the use and circulation of alternative stablecoins remain permissible in Singapore. However, these alternative stablecoins must adhere to the regulatory regime governing Digital Payment Tokens (“DPT”).
Furthermore, MAS has introduced the “Stablecoin Issuance Service” as a regulated activity under the Payment Services Act (“PS Act”). This regulated activity encompasses ancillary functions associated with a stablecoin issuer, including the custody of SCS and the management of the reserve assets that provide backing to the SCS.
Treatment of Bank and Non-Bank SCS Issuers
Detailed Arrangements
Non-bank entities issuing SCS tokens with total value under S$5 million in circulation will not need to get the Major Payment Institution (“MPI“) license or adhere to the SCS issuer obligations outlined in the new framework. Instead, these SCS issuers will be obligated to obtain the Standard Payment Institution (“SPI“) license if they offer DPT services.
This approach is on the basis that such SCS issuers will not be subjected to the requirements relating to maintenance of the stability of SCS issued. Where an issuer plans or foresees that their SCS will surpass the S$5 million threshold, the issuer may exercise the option to apply for an MPI license. This license would allow the issuer to gain recognition within the framework as providing the Stablecoin Issuance Service.
Banks SCS Issuers
MAS concluded that banks using reserve backed SCS will also maintain the same regulatory obligations as non-banks with tokenised liabilities, with the exception of prudential requirements* (see below).
Banks with tokenised liabilities are excluded from the SCS in acknowledgment of the varying degree of risks which they may pose to holders, as well as the differences in the value-stabiliser mechanisms for both options.
However, MAS may introduce additional obligations for tokenized bank liabilities in the future, depending on how the tokenization are structured. In the instance where a token has been structured to meet such standards as in under the SCS framework, MAS reserves the discretion to consider such token as stablecoins under the framework. The exercise of this discretion could also be dependent on global trends and developments.
Differentiation from other Stablecoins
MAS has adopted the tag for all SCS that fall under the SCS framework as “MAS-regulated stablecoins”. This is to ensure there is sufficient clarity and ease of understanding by the public.
Importantly, only SCS regulated under the SCS framework will be allowed to use the term in order to maintain the integrity and credibility of the framework. Any violations may result in penalties, including financial fines and, for individuals, imprisonment.
Composition of Reserve Assets
Detailed Arrangements
SCS issuers that offer MAS-regulated stablecoins are required to have reserve assets backing the issued stablecoins. The following conditions apply to these reserve assets:
- The reserve assets can take the form of cash, cash equivalents, or debt securities, which should have a residual maturity of no more than 3 months and should be issued by the central bank of the currency the stablecoin is linked to or by international organizations with credit ratings of at least “AA–”.
- The value of the reserve assets must be calculated daily and should be at least 100% of the stablecoins in circulation at all times, including those held by the issuer.
- The reserve assets must be in the same currency as the pegged currency of the stablecoin.
MAS intends to maintain a simple framework for reserve assets. Therefore, SCS issuers are required to maintain a portfolio of reserve assets with very low risk. These issuers must also have strong risk management policies in place that address factors like credit risk, liquidity risk, and concentration risk. Additionally, SCS issuers should demonstrate how they review the reserve assets and maintain a buffer to ensure that the value of the assets is always 100% of the total outstanding SCS in circulation.
Segregation and Custody of Reserve Assets
SCS issuers will be required to maintain the reserve assets for the SCS in distinct, segregated accounts that are separate from their own non-reserve assets. In instances where custody of these assets is entrusted to an overseas-based custodian, the custodian must have a minimum credit rating of “A–”. Furthermore, the custodian must possess a branch in Singapore, subject to regulation by MAS, and be authorized to provide custodial services.
Prudential Requirements*
MAS finds it necessary to set higher financial and prudential standards for SCS issuers compared to other payment service providers. This is due to the potential role of SCS as a medium of exchange to support the broader digital asset ecosystem. MAS therefore would be implementing a simplified capital regime with appropriate limitations to mitigate risks for SCS issuers. The requirements are as follows:
- Base Capital: The base capital should be the higher of
- $1 million; or
- 50% of annual operating expenses of the SCS issuer.
- Solvency
- To hold at all times, liquid assets which are valued at higher of 50% of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down.
- This shall be subject to independent audits on an annual basis.
- Business Restrictions
- An SCS issuer should avoid risky business such as investing in other companies, extending loans, staking SCS and other DPTs and trading DPTs.
- This forms part of the safeguards and risk-based capital approach which the SCS issuer shall adopt.
- Alternatively, these actions could be performed by related entities which the SCS does not have a stake in.
Timely Redemption of SCS to Fiat
MAS mandates that an SCS issuer shall promptly return the stated value of the SCS to the holder within 5 business days from receiving a valid request for redemption under normal business conditions. Furthermore, redemption should be prompt and not be subjected to unnecessary delay. The timeline is intended to find a balance between promptly delivering on redemption requests and allowing the SCS issuer enough time even during stress situations.
SCS Issued in Multiple Jurisdictions
To gain recognition as a MAS-regulated stablecoin under the SCS framework, issuers must exclusively issue their SCS from Singapore. This position is rooted in the challenge of establishing regulatory collaboration with other jurisdictions, given that stablecoin regulations are still emerging and current technical standards do not facilitate tracing the origin of SCS issuances once they are comingled.
Nonetheless, MAS will still observe global trends and explore any available cooperation mechanisms.
Requirements Imposed on Issuers of SCS Intermediaries
Scope of regulated SCS-related intermediation services
SCS will retain their classification as DPTs for activities beyond issuance. Therefore, entities providing SCS-related services will be subject to regulation if the service falls within the scope of regulated DPT services as specified within the PS Act.
Any entity involved in trading or facilitating the conversion of MAS-regulated SCS will need to operate as a regulated DPT service provider under the PS Act. This approach is taken due to the similar risks associated that non-issuance SCS activities and DPT-related services both carry.
However, MAS may introduce additional obligations for tokenized bank liabilities in the future, depending on how the tokenization are structured. In the instance where a token has been structured to meet such standards as in under the SCS framework, MAS reserves the discretion to consider such token as stablecoins under the framework. The exercise of this discretion could also be dependent on global trends and developments.
Timely transfer of SCS
MAS will retain the obligation for DPT service providers to complete the transfer of SCS between parties within 3 business days. This requirement will align with the existing requirement for domestic money transfer services.
Segregation of Customers’ SCS
Entities offering services involving the transfer or custody of MAS-regulated SCS shall be required to segregate customers’ SCS separate from their own assets. This is intended to prevent the misuse of customers’ SCS due to comingling.
However, SCS intermediaries are permitted to comingle an individual’s MAS-regulated SCS and/or DPT with those of other customers in a pooled arrangement. Importantly, this pooled account must remain separate from the intermediary’s own assets. Such comingling can occur only if the potential risks and measures to mitigate them have been disclosed to the customers.
SCS Issued in Multiple Jurisdictions
Regulatory treatment of Systemic Stablecoin Arrangements
MAS is proceeding to regulate systemic stablecoin arrangements by designating them as Designated Payment Systems (“DPS”) under the PS Act and the Payment and Settlement Systems (Finality and Netting) Act 2002 (“FNA”). In effect, this will empower MAS to monitor development of such arrangements and make decisions, including on the determination of a systemic stablecoin arrangement.
A stablecoin arrangement could become systemic if its disruption can significantly affect users, the financial system, or public trust and confidence. This determination as systemic will give consideration to factors such as transaction volume, user numbers, market share, interconnectedness, etc.
Conclusion
Other relevant aspects of the regulatory approach to stablecoin-related activities did not receive major changes. For example, relating to Whitepaper issuance, the entities must issue a whitepaper published on their website explaining the stablecoin, the responsibilities of both the issuer and users, potential risks, and regularly update this information, along with a simpler factsheet for users. Such entities must also ensure that AML/CFT arrangements meet existing AML/CFT standards for DPT service providers and banks, e.g., customer due diligence, travel rule, screening, etc.
In conclusion, through such defined framework encompassing aspects like asset composition, custody procedures, audits, and prudential standards, MAS is backing its commitment to ensure stability and growth within the digital assets in Singapore. Applicable entities will therefore look to design their operations to remain compliant and in line with the provisions of the framework for SCS.
