A brave new world? Singapore pushes ahead with ringfencing of client assets, and consults on market integrity rules, for digital payment token firms

Late in 2022, the Monetary Authority of Singapore consulted on various new regulatory measures for digital payment token (DPT) providers. Since then, amidst the crypto firm collapses and customer asset losses, it has become more critical than ever to enhance compliance standards consistently across the industry. 

Today, the MAS has launched three new publications (links below) with important updates for the fintech and crypto industry. 

This is a significant step forward to enhance investor protection in the crypto-asset market in Singapore. The regulator has taken a phased, proportionate stance in implementation, and is keen to ensure 'no surprises' - a welcomed approach. DPT firms need to (re)gain the trust of its consumers, and these proposed changes can be a good thing. 

What is new?

Segregation and custody

DPT firms would be required, among other things, to:

1. Segregate clients' assets held in trust. This minimises the risk of loss or misuse of client assets during business-as-usual and assist to return assets upon insolvency.
   
   
2. Conduct daily reconciliation and keep proper books and records. This helps with accountability of client assets.
   
   
3. Provide statement of accounts to clients. If holdings are available on a real-time basis, no such statements are required.
   
   
4. Implement risk management controls. This includes holding at least 90% of clients' DPTs in cold wallets (and conducting periodic reviews to consider if this percentage should be increased) and disclosing its policies on storage arrangements of client assets to its clients.
   
   
5. Have an operationally independent custody function. This mitigates the risk of internal fraud and misappropriation. No independent custodian is required for now. 
   
   
6. Provide disclosures on segregation and custody, in a clear and concise way.
   
   
7. Not facilitate lending or staking of retail clients' DPTs. Lending and staking are not currently regulated in Singapore. This mitigates potential for significant consumer harm. Lending and staking for accredited / institutional investors are allowed.

Proposed changes above are expected to be passed into regulations (Payment Services Regulations), and will take effect in October 2023. The MAS is seeking industry feedback on these draft legislative changes and will publish guidelines in due course to support implementation. 

Market integrity

Crypto-asset markets have been susceptible to unfair trading practices of market manipulation, insider dealing and misleading conduct by bad actors. 

Consistent with IOSCO's May 2023 draft policy recommendations to address market integrity and investor protection issues in crypto-asset markets, the MAS is proposing to (broadly) extend the insider dealing and market abuse type prohibitions which exist in traditional financial services to the crypto-asset market (e.g., on false trading and market rigging, market manipulation, etc.). 

Proposals include:

• All DPT firms are to handle and execute client orders in a fair, orderly and timely manner and prevent and detect unfair trading practices.
  
  
• DPT platform operators are to operate their trading platform in a fair, orderly and transparent manner.

The prohibitions on unfair trading practices will facilitate enforcement actions by MAS as it seeks to clamp down on bad actors.

As a first step, the rules will be set out in a set of Guidelines. Thereafter, details on the regulatory requirements and legislation will be separately published for public consultation in due course. 

The MAS publications

See: 

• Response to Consultation on Regulatory Measures for DPT Firms
• New Consultation on Proposed Amendments to the Payment Services Regulations
• New Consultation on Market Integrity in DPT Services