Introduction

The Monetary Authority of Singapore (MAS) issued a consultation paper on 20 November 2019 to consult on regulating payment token derivatives offered by Approved Exchanges with the aim of introducing a regulated derivative product referencing payment tokens that would be offered by Approved Exchanges. For the purposes of the consultation paper, a “payment token” refers to tokens intended to be payment instruments, such as Bitcoin or Ether, and does not include tokens which are used to access a good or service offered by the token issuer only.

(Background: In the consultation paper, “payment token” is suggested to refer to any digital representation of value that — (a) is expressed as a unit; (b) is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt; and (c) can be transferred, stored or traded electronically, but does not include any payment token that is a digital representation of value where the value is fixed to any of the following in amounts that are determined at the time of issuance of the payment token and thereafter cannot be changed: (i) a single currency; or (ii) two or more currencies.)

In introducing the consultation paper, the MAS observed that trading of popular digital tokens intended for payment instruments such as Bitcoin and Ether has largely been on unregulated markets with allegations of fictitious trades and market manipulation. It recognised a growing demand from international institutional investors on regulated products that could mitigate such concerns and acknowledged regulated products such as Bitcoin futures that have been listed and traded on in the United States futures markets such as the Chicago Mercantile Exchange and the Intercontinental Exchange Futures US. MAS revealed that it has received queries on whether similar products such as derivatives referencing payment tokens are regulated under the Securities and Futures Act (Cap. 249) of Singapore (SFA), and indications of interest for these to be made available in Singapore. In particular, indications of interest are for payment token derivatives to be listed and traded on Approved Exchanges in Singapore.

Regulated Payment Token Derivatives

Under the SFA, a derivative contract is regulated if its “underlying thing” is either a unit in a collective investment scheme, a commodity, a financial instrument (including a currency, currency index or interest rate), the credit of any person, or an underlying thing prescribed by the MAS. Payment tokens are not included in the category of “underlying things” under the SFA, and accordingly payment token derivatives are currently not regulated unless the payment token is also any of the above-mentioned underlying things.

The proposed approach by the MAS is therefore to amend the SFA to include payment tokens as “underlying things” in respect of futures contracts and derivatives contracts (other than futures contracts) traded on Approved Exchanges.

The MAS took pains to highlight that it does not regard it as necessary or appropriate at this point to include all payment token derivatives within the regulatory scope of the SFA as it does not view them as a general asset class that poses systemic risks to the financial system, unless they are offered by an entity that is systemically important such as an Approved Exchange. It therefore emphasized that payment token derivatives not offered by an Approved Exchange would remain unregulated products.

Additional Measures for Retail Investors

MAS observes that even regulated payment token derivatives would not be without risks to investors as the underlying payment tokens tend to exhibit high volatility and are intrinsically difficult to value. In this regard, MAS indicated its intention to introduce measures for retail investors who trade in payment token derivatives offered or distributed by financial institutions regulated by the MAS, which is anticipated to be in place by 30 June 2020. The measures will be extended to cover products like debentures that are based on payment tokens. Again, these mitigating measures are not expected to apply if they deal with an entity which is not regulated by the MAS. Issuers are strongly encouraged to engage MAS in advance if they intend to offer such products to the public.

Conclusion

With the growing demand for investment products making use of distributed ledger and cryptographic technology, as well as allowing investors to enjoy the protective measures under the SFA, the consultation paper once again reveals MAS’s progressive attitude, yet using a balanced and calibrated approach in determining how it intends to adjust its regulatory purview for such developments and products available in the market.

The consultation can be accessed here: The consultation ends on 20 December 2019.