The issuance and offering of digital assets in Singapore

On 30 November 2018, MAS published an updated Guide to Digital Token Offerings (the “Guide”). The initial version of the Guide was issued by MAS a year ago.

The Guide has five new practical case studies (in addition to the six in the previous version). These new case studies are intended to demonstrate the logic of capital markets regulations in Singapore and provide examples of projects from the blockchain and crypto industry that fall within the ambit of those regulations.

In particular, based on the examination of the new projects included in the Guide, MAS came to the following conclusions.

Whether a token falls under the definition of “security” in Singapore must be determined under the laws of Singapore. The regulator indicated that where a token qualifies as an “investment contract” under US laws, it does not automatically mean that the same token will be qualified as a capital markets product under the Securities and Futures Act (Cap. 289) (“SFA”). A separate assessment under the SFA is required to determine whether the offer of tokens is subject to the requirements applicable to the offer of capital markets products in Singapore.

Issuance of digital tokens to attract financing for the development of a platform is not always subject to securities laws. According to MAS, tokens issued on a decentralised platform to collect user data on consumer spending on various e-commerce websites do not fall within the ambit of the SFA, provided that:

● The digital token does not represent any legal or beneficial title in the shares of any company or a right to claim dividends or return on capital;

● The digital token does not create or acknowledge debt on the part of the issuer; and/or

● The platform does not manage funds received from the token purchasers on a professional basis.

MAS considers provision of advisory services in relation to the offering of digital tokens issued by third party issuers (clients) as regulated activity only if the token itself is a regulated instrument. The scope of the advisory services offered to the client does not affect the qualification. It is unlikely that the token will constitute a capital markets product under the SFA if it can only be used in exchange for the products or services offered by the clients without entitling the token holders to receive payments of any kind from any person or bearing any other functions or rights. Therefore, the provision of advisory services in relation to the issuance and placement of such tokens will not be qualified as a regulated activity by MAS, provided that it does not relate to the raising of funds involving securities, units in a CIS (collective investment scheme) or specified securities-based derivatives contracts.

Issuance, offering and sale of tokens can be considered by MAS as issuance, offering and sale of debentures under the SFA, where token holders are entitled to claim buy-back of their tokens from the issuer. In the example involving a platform for the issuance and trading of “stable coins” backed by diamond reserves, MAS noted that, where an issuer has an obligation to buy-back tokens from its holders, such tokens are “utility” tokens by nature and will be considered capital markets products under the SFA. MAS’s analysis related to tokens issued to attract financing for the development of the platform. Nothing has been said on the qualification of those “stable coins” to be issued and/or traded on such platform.

MAS reached a similar conclusion in relation to the global offering of “stable coins”, whose value is pegged to the price of fiat currency (for example, the US dollar) and which are backed by reserves of fiat currency deposited in the issuer’s bank account. Since the holders of such “stable coins” are entitled to claim buy-back of their tokens for the price of US$1 per token, the regulator noted that tokens may be considered debentures under the SFA (depending on the business activity of the issuer). Moreover, MAS pointed out that, where “stable coins” are used for purchases in retail shops, under the Payment Services Bill[1] the tokens may be considered as “e-money”, subjecting the issuer to additional regulatory requirements.

The update also has other important developments. Firstly, the scope of the updated Guide was extended to expressly cover the following categories of capital markets products that digital tokens may fall under:

(а) a share, where the token confers or represents ownership interest in a corporation, represents liability of the token holder in the corporation, and represents mutual covenants with other token holders in the corporation inter se;

(b) a debenture, where it constitutes or evidences the indebtedness of the issuer of the digital token in respect of any money that is or may be lent to the issuer by a token holder;

(c) a unit in a business trust, where it confers or represents ownership interest in the trust property of a business trust;

(d) a securities-based derivatives contract, which includes any derivatives contract of which the underlying thing is a share, debenture or unit in a business trust (this was not specifically mentioned in the previous version); or

(e) a unit in a CIS, where it represents a right or interest in a CIS, or an option to acquire a right or interest in a CIS (this was also not mentioned in the previous version).

Secondly, as far as organising a market for digital tokens in Singapore is concerned, MAS expressly confirmed that a person who establishes or operates a trading platform in Singapore in relation to digital tokens which constitute securities, derivatives contracts or units in a CIS, may be establishing or operating an organised market. A person who establishes or operates an organised market — or holds himself / herself out as operating a market — must be approved by MAS as an approved exchange or recognised by MAS as a recognised market operator (“RMO”) under the SFA, unless otherwise exempted[2]. Very recently, MAS issued an approval to CapBridge Pte. Ltd., a platform for attracting private investments, to operate as an RMO with respect to its digital tokens trading platform, 1Exchange.

Thirdly, MAS has reinforced the relevance of anti-money laundering and counter-terrorism financing regulations (“AML/CFT requirements”). MAS specifically stated that AML/CFT requirements apply if the person is deemed to be an intermediary conducting one or more of the regulated activities discussed in the Guide and is a:

(a) holder of a capital markets services licence under the SFA;

(b) fund management company;

(c) person exempted under SFA from the requirement to hold a capital markets services licence;

(d) licensed financial adviser under the Financial Advisers Act (Cap. 110) (“FAA”);

(e) registered insurance broker that is exempt under the FAA from holding a financial adviser’s licence; or

(f) person exempt under the FAA from holding a financial adviser’s licence to act as a financial adviser in Singapore in respect of any financial advisory service.

MAS insisted that entrepreneurs follow the principles of the Guide when structuring their projects in Singapore and confirmed that teams are able to send requests to MAS if their project has different parameters from the case studies discussed in the Guide.

The text of the Guide can be found here.

[1] In November 2017, MAS issued a consultation paper to present the Payment Services Bill (PSB). In November 2018, the PSB was submitted to the parliament of Singapore for consideration and approval.

The PSB is, among other things, aimed at broadening the scope of regulated activity in relation to the provision of payment services to include digital payment token services. Organisations providing digital payment token services, including purchasing and selling, will be subject to the licensing regime.

Under the PSB, “Digital payment token” means any digital representation of value (other than an excluded digital representation of value) that: (a) is expressed as a unit; (b) is not denominated in any currency, and is not pegged by its issuer to any currency; (c)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; (d) can be transferred, stored or traded electronically; and (e) satisfies such other characteristics as the MAS may prescribe.

[2] In May 2018, MAS issued the Consultation Paper “Review of the Recognized Market Operator Regime”, where MAS recognised the emergence of new business models in trading platforms, including trading facilities that make use of blockchain technology, or platforms that allow peer-to-peer trading without the involvement of intermediaries, and confirmed it is reviewing the regulatory framework for market operators to ensure that it continues to meet the demands of the changing landscape. To this end, MAS is proposing to expand the current RMO regime from a single tier to three separate tiers that would better match regulatory requirements to the risks posed by different types of market operators.

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