New Requirements for Digital Payment Token Service Providers

On 3 July 2023, the Monetary Authority of Singapore (MAS) released an announcement that it would be introducing new requirements for Digital Payment Token (DPT) service providers to safekeep customer assets under a statutory trust before the end of the year in order to provide for greater investor protection and to raise compliance standards in the digital asset space. These measures follow a public consultation conducted by MAS in October 2022.

The Payment Services Regulations will be amended to give effect to these new requirements, which include:

• Segregation and custody of customers’ digital assets to be held in trust – Customers’ assets must not be comingled with the service provider’s assets, to mitigate the risk of loss or misuse of customers’ assets during the DPT service provider’s ordinary course of business and facilitate the return of customers’ assets in the event of its insolvency.
• Safeguarding of customers’ moneys – The existing safeguarding requirements under the Payment Services Act (PS Act) will be extended to DPT service providers to aid the recovery of customers’ moneys in an insolvency event
• Daily reconciliation of customers’ assets and keep proper books and records
• Providing customers with monthly Statement of Account – This requirement may be dispensed with if the account information can be provided in real-time.
• Establishment of risk management controls for customers’ assets – These will ensure the integrity and security of customers’ assets and mitigate the risk of any loss of customers’ assets, in a manner that is commensurate with the nature, scale, and complexity of the DPT service provider’s business.
• Independent custody function – MAS recognised that the holding of customers’ assets with independent third-party custodians is not currently required by global regulators. Instead, DPT service providers will be required to maintain a separate custody function that is operationally independent from other business units and internal controls should also be implemented to minimize the risk of any loss of customers’ assets due to internal fraud or negligence.
• Providing clear disclosures to customers on the risks involved in having their assets held by the DPT service provider – While there is no prescribed form for the disclosures, these disclosures should be made in writing to the customers in a clear and concise manner.

In the same media release, the MAS also announced that it would be proceeding to restrict DPT service providers from facilitating, lending or staking of DPT of retail customers. Such activities may continue for institutional and accredited investors, but would be prohibited for retail customers on the basis that they are generally not suitable for the retail public. Suggestions that such activities could proceed for retail customers with appropriate consents and risk disclosures were rejected. However, MAS did indicate that it will continue to monitor market developments and consumer risk awareness, and ensure that the measures imposed remain balanced and appropriate.

Market Integrity

MAS has also separately released a consultation paper in relation to proposed requirements to address and prevent unfair trading practices among DPT service providers.

The proposals include the following:

• DPT service providers would be expected to maintain adequate systems, processes, controls, human resources, and governance arrangements to handle and execute client orders in a fair, orderly and timely manner and prevent and detect unfair trading practices.
• DPT platform operators are also likewise expected to ensure that the operations of the trading platform are fair, orderly and transparent.
• Introduction of prohibitions and restrictions on unfair trading practices similar to those under the Securities and Futures Act – e.g. false trading and market rigging, market manipulation, making of false and misleading statements, fraudulent inducement to deal, employment of manipulative and deceptive devices, bucketing and cornering, insider trading, etc.. to facilitate enforcement actions by MAS to deter market participants from engaging in such misconduct and to hold wrongdoers accountable.

For more details, please refer to the first tranche of MAS’ response to consultation feedback here, the proposed legislative amendments to the Payment Services Regulations here, and the consultation paper on market integrity here. MAS invites interested parties to submit their comments on the proposed legislative amendments and the proposed regulatory measures to address market integrity risks by 3 August 2023.