Bill seeks to regulate Singapore entities providing virtual-asset services overseas
Published on 18th Feb 2022
What are the new Financial Services and Markets Bill's main features and what could it mean for digital token services providers?
Proposed omnibus legislation to beef up the Monetary Authority of Singapore’s (MAS) regulatory powers has been introduced in the form of the Financial Services and Markets (FSM) Bill, which was read in the Singapore Parliament for the first time on 14 February 2022.
In July 2020, MAS launched a public consultation into the new omnibus Act and on proposed changes that would enhance and consolidate its regulatory powers in the financial services, including regulating risks relating to digital token services.
MAS issues prohibition orders (POs) to bar persons from conducting certain activities or holding key roles in financial institutions.
Currently, MAS is only able to issue POs under the Securities and Futures Act (SFA), the Financial Advisers Act (FAA), and the Insurance Act (IA). It is unable to issue POs to persons regulated under other acts administered by MAS, such as the Banking Act, even if they have committed serious misconduct in the financial sector.
The FSM Bill gives MAS a harmonised and expanded power to issue a PO against any person who is not a fit and proper person in accordance with the "Guidelines on Fit and Proper Criteria", which comprise the elements of:
- Honesty, integrity and reputation.
- Competence and capability.
- Financial soundness.
In addition to barring persons from holding key roles in financial institutions, the FSM Bill allows MAS to prohibit persons from carrying out functions that are critical to the integrity and functioning of financial institutions such as:
- Handling of funds and assets, including the safeguarding or carrying out of an instruction relating to a digital payment token or digital payment token instruments.
- Risk taking.
- Risk management and control.
- Critical systems administration.
Virtual asset service providers
The enhanced standards introduced by the Financial Action Task Force (FATF) require countries to regulate virtual asset service providers (VASPs) for money laundering and terrorist financing risks and that VASPs be at least licensed or registered in the jurisdictions they are created.
Currently, VASPs that provide their services in Singapore would already be subject to licensing and regulation under the Payment Services Act (PS Act) (in the case of digital payment tokens), the SFA (in the case of capital markets products) or the FAA (in the case of financial advisory services).
However, there exists a gap: entities that are created in Singapore but offer services outside of Singapore are not captured under the current legislation.
The FSM Bill seeks to plug this gap by regulating all VASPs created in Singapore that provide virtual asset services outside of Singapore as a new class of financial institutions: namely, digital token (DT) service providers.
''Digital token'' is defined in the FSM Bill to mean:
- A digital payment token; or
- A digital representation of a capital markets product (as defined in the SFA), which (i) can be transferred, stored or traded electronically and (ii) satisfies other characteristics that MAS may prescribe, but does not include an excluded digital token.
''Digital token service'' is defined in the FSM bill to include the following:
- Dealing in DTs.
- Facilitating the exchange of DTs.
- Inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling any DTs in exchange for any money or any other DTs (whether of the same or a different type).
- Accepting DTs for the purposes of transmitting, or arranging for the transmission of, the DTs.
- Safeguarding of a DT or DT instrument, where the service provider has control over the DT or over one or more DTs associated with the DT instrument.
- Financial advice relating to the offer or sale of DTs.
DT service providers will have to be licensed and subject to ongoing requirements, including (in the case of a corporation):
- Being incorporated in and having a permanent place of business in Singapore.
- Having at least one executive director who is resident in Singapore.
- Satisfying financial, operational or other requirements as may be prescribed by MAS.
- Having the relevant persons be fit and proper persons under the "Guidelines on Fit and Proper Criteria".
Additionally, as MAS considers all transactions relating to DT services to carry higher inherent money laundering and terrorist financing risks due to their anonymity and speed, the FSM Bill also gives MAS powers to conduct anti-money laundering (AML) and countering the financing of terrorism (CFT) inspections and render assistance to domestic authorities and MAS’ foreign AML/CTF supervisory counterparts. To facilitate investigations, the FSM Bill imposes a general duty on persons who provide MAS with any information to use reasonable care to ensure that the information provided is not false or misleading.
Digital payment service providers should be mindful that the FSM Bill, when it is passed, will complement the licensing and regulatory regime under existing legislation such as the PS Act. For example, MAS will be able to issue POs against persons running licensed payment service providers who are not fit and proper persons by invoking the FSM Bill even though the PS Act itself does not give MAS the power to issue POs. This will enable MAS to respond more effectively to risks in the financial sector.
Digital payment service providers that are entities incorporated in Singapore but offer services outside Singapore should also be aware that they will be regulated under the FSM Bill when it is passed, and that they will be subject to licensing requirements, as well as AML/CFT requirements similar to those imposed on digital payment service providers operating in Singapore which are already regulated under the PS Act.
Rozalin Mohanty, a Legal Trainee in the OC Singapore office, helped draft this article.