MAS has published new requirements for DPT service providers and a consultation paper on additional regulations and prohibitions against unfair trading practices.

On 3 July 2023, the Monetary Authority of Singapore (MAS), Singapore’s primary regulator for banks and payment services, announced new custody and segregation requirements for digital payment token (DPT) service providers, including new obligations to safekeep customer assets under a statutory trust.

Additionally, the MAS published a consultation paper (the Consultation Paper) seeking the public’s views on its proposed regulatory measures for DPT service providers and prohibitions against unfair trading practices. The Consultation Paper follows the MAS’ previous consultation paper on proposed regulatory measures for DPT services in December 2022.

The MAS’ proposals largely align with the Hong Kong Securities and Futures Commission’s (SFC) new framework for regulating virtual asset trading platforms (VATP) (see Latham’s blog post), and indicate that virtual asset service providers must comply with regulatory rules similar to the securities regime. This aligned concept aims to ensure investor protection in line with regulators’ “same risk, same regulation” approach.

Measures on the Segregation and Custody of Assets

Regulating the payment services sector in Singapore is one of the MAS’ primary functions, and it has existing powers under the Payment Services Act 2019 (PS Act) to regulate DPT providers. Entities that provide the service of dealing in, or facilitating the exchange of DPTs, such as exchanges and brokers, would fall within the scope of the PS Act, and are regulated primarily for money laundering, terrorism financing, and technology risks.

The new MAS measures will require a DPT service provider to segregate its customers’ assets from its own, and to ensure that its customers’ assets are held on trust for the customers’ benefit. For example, a DPT service provider should keep its customers’ assets on a separate set of blockchain addresses from those containing its own assets, though it will be allowed to deposit (or commingle) customer assets in a trust account together with assets of other customers.

DPT service providers will additionally be subject to PS Act requirements to safeguard customers’ monies by:

1. obtaining an undertaking from a safeguarding institution;
2. obtaining a guarantee from a safeguarding institution; or
3. depositing moneys in a trust account maintained with a safeguarding institution.

Similarly, in Hong Kong, the SFC has imposed an obligation on VATPs to hold client assets on trust for its customers through an “associated entity”. VATPs are required to ensure that client virtual assets and client money are segregated from proprietary assets and held in separate wallets and bank accounts, respectively (such as on an omnibus basis).

Prohibition on the Lending and Staking of Assets for Retail Customers

The MAS will also restrict DPT service providers from facilitating the lending or staking of DPTs for retail customers. DPT service providers may continue to facilitate such activities for institutional and accredited investors, subject to compliance with risk disclosure and customer consent requirements.

In Hong Kong, by way of comparison, the SFC has prohibited VATPs from offering any lending or staking services to any customers (including institutional customers), except that they may offer financial accommodation for off-platform transactions involving institutional professional investors (in limited circumstances).

Consultation Paper

Market Integrity Risks

Under the Consultation Paper, the MAS has proposed new requirements for DPT service providers to implement measures addressing market integrity risks.

These measures include maintaining adequate systems, processes, controls, human resources, and governance arrangements to:

1. handle and execute customers’ orders in a fair, orderly, and timely manner; and
2. prevent and detect unfair trading practices.

DPT service providers who operate a trading platform (DPT Platform Operators) would additionally be required to set clear rules on subjects such as:

1. access criteria;
2. execution protocols;
3. prohibitions on unfair trading practices;
4. order entry controls;
5. price discovery; and
6. alerts on unusual trading activities.

Unfair Trading Practices

Further, the MAS has proposed amending the PS Act to implement prohibitions against unfair trading practices. Such prohibitions currently apply to capital markets products as separately regulated under the Securities and Futures Act 2001. These provisions would include prohibitions on practices and misconduct such as:

1. false trading and market rigging;
2. market manipulation;
3. false or misleading statements;
4. fraudulently inducing persons to deal in DPTs;
5. the employment of manipulative and deceptive devices;
6. practices such as bucketing and cornering of DPTs; and
7. insider trading.

In Hong Kong, VATPs are required to set trading and operational rules governing access, order, and execution arrangements on the platform. They are also required to adopt an effective market surveillance system provided by a reputable and independent provider to identify, monitor, detect, and prevent any market manipulative or abusive activities on their trading platform, and provide access to this system for the SFC when required.

Next Steps

Stakeholders should consider the Consultation Paper and provide feedback on the proposed regulatory approach by 3 August 2023.

The MAS intends to issue new guidelines on expectations regarding market integrity risks for DPT service providers, following the feedback received for this consultation. Further details on the regulatory requirements, legislative amendments, and subsidiary legislation will be separately published for consultation.

Latham & Watkins will continue to analyse and report on the proposed measures.