20 July 2023

New investor protection measures for digital payment token (“DPT”) services

On 3 July 2023, the Monetary Authority of Singapore (“MAS”) announced new requirements for DPT service providers to safekeep customer assets under a statutory trust before the end of the year.

The new investor protection measures seek to mitigate the risk of loss or misuse of customers’ assets, and facilitate the recovery of customers’ assets in the event of a DPT service provider’s insolvency.

MAS will also restrict DPT service providers from facilitating lending or staking of their retail customers’ DPTs as these activities are generally not suitable for the retail public. However, DPT service providers may continue to facilitate such activities for their institutional and accredited investors.

The new requirements are introduced following MAS’ public consultation on regulatory measures to enhance investor protection and market integrity in DPT services held in October 2022 (“MAS’ October 2022 Public Consultation”).

MAS’ October 2022 Public Consultation received broad support for the imposition of new requirements on DPT service providers to:

  1. Segregate customers’ assets from its own assets and be held in trust

    A DPT service provider will be required to: (i) segregate its customers’ assets from its own assets; and (ii) deposit its customer’s assets in a custody account held on trust for the customer. A DPT service provider must not commingle its moneys with a customer’s moneys, even if it receives a customer’s consent to do so. However, a DPT service provider may deposit a customer’s assets with assets of other customers (i.e. commingle customers’ assets). Should it choose to commingle customers’ assets, the DPT service provider must disclose to its customers the commingling arrangement and the risks of such arrangements.

  2. Safeguard customers’ moneys

    A DPT service provider will be required to safeguard its customer’s moneys in one of the following manners: (i) by an undertaking from a safeguarding institution (as defined under the Payment Services Act 2019) to be fully liable to the customer for the relevant money; (ii) by a guarantee given by a safeguarding institution for the amount of the relevant money; or (iii) by depositing the relevant money in a trust account maintained with a safeguarding institution.

  3. Conduct daily reconciliation of customers’ assets and keep proper books and records

    A DPT service provider will be required to conduct a daily reconciliation of customers’ assets (including digital payment tokens). Further, a DPT service provider will be required to keep books of every transaction carried out on behalf of customers and ensure that a separate record is maintained for each customer.

  4. Maintain access and operational controls to customers’ DPTS in singapore

    A DPT service provider will be required to, in a manner that is commensurate with the nature, scale, and complexity of its business, maintain adequate systems, processes, controls, human resources, and governance arrangements to: (i) ensure the integrity and security of the transmission and storage of customers’ assets; and (ii) reduce the risk of any loss of customers’ assets belonging to customers due to fraud or negligence. For example, a DPT service provider would be required to ensure that the movement of customers’ assets is controlled by senior managers and personnel who reside in Singapore, and such individuals should be authorised to facilitate the return of customers’ assets where required by MAS or in court proceedings.

  5. Ensure that the custody function is operationally independent from other business units

    A DPT service provider will also be required to ensure effective controls and segregation of duties to mitigate potential conflicts of interest that may arise from the safeguarding of customers’ assets.

  6. Provide clear disclosures to customers on the risks involved in having their assets held by the DPT service provider

    A DPT service provider will be required to disclose to its customer: (i) that the customer’s assets will be held on behalf of the customer in a custody account with a safeguarding institution; (ii) whether or not the customer’s assets are commingled with the assets of other customers and, if so, the risks of such commingling; (iii) the consequences for the customer in respect of the customer’s assets if the safeguarding institution becomes insolvent; and (iv) the terms and conditions that would apply to the safeguarding of the customer’s assets.

MAS is currently seeking public feedback on the draft legislative amendments to the Payment Services Regulations 2019 (“PSR”) to put the new requirements into effect. The consultation paper on the amendments to the PSR may be accessed here.

As part of MAS’ October 2022 Public Consultation, MAS also consulted on the broad regulatory approach on market integrity. Some respondents suggested that MAS should impose further measures to prevent market abuse and unfair trading practices. To follow up more specifically on the feedback received, MAS has also issued a separate consultation paper on proposed measures on market integrity in DPT services (“Consultation Paper on Market Integrity in DPT Services”). In the Consultation Paper on Market Integrity in DPT Services, MAS sets out proposed regulatory measures for DPT service providers, as well as prohibitions against unfair trading practices that are generally applicable to all market participants, to address market integrity risks in DPT services. The Consultation Paper on Market Integrity in DPT Services may be accessed here.

IMPORTANT NOTICE: This memorandum is only intended as a guide and does not purport to be an exhaustive or conclusive discussion of the matters set out herein and should not be relied on as a substitute for definitive legal advice. Reference should always be made to the applicable statutes, the relevant subsidiary legislations and other applicable guidelines. This memorandum is not to be transmitted to any other person nor is it to be relied upon by any other person or for any other purpose or quoted or referred to in any public document or filed with any governmental or other authorities without our consent in writing. This memorandum is limited to the laws of Singapore. In issuing this memorandum, we do not assume any obligation to notify or inform you of any developments subsequent to its date that might render its contents untrue or inaccurate in whole or in part at such later time. If you would like to discuss the implications of these legal developments on your business or obtain advice, please do not hesitate to approach your usual contact at Insights Law LLC or you may direct the inquiry to our key contacts stated above.