Monetary Authority of Singapore issues Consultation Paper on measures to reduce risks for consumers engaging in cryptocurrency trading

Background

On 26 October 2002, the Monetary Authority of Singapore (“MAS”), Singapore’s Financial Services Regulator and Central Bank, issued a Consultation Paper on “Proposed Regulatory Measures for Digital Payment Token Services” (“Consultation Paper”).

MAS is of the view that trading in digital payment tokens (“DPTs”, otherwise known as cryptocurrency) is highly risky and unsuitable for the general public, due to factors such as speculative trading by such investors in markets that they do not fully understand, which are also prone to volatility. In addition, the presence of fraudulent actors or entities and cybersecurity risks and weaknesses pose additional threats to the digital ecosystem.

In an ongoing effort to reduce the risks to consumers from these factors, the MAS has issued the Consultation Paper to obtain views on a series of proposed measures.

Proposed regulatory measures

The measures can be broadly classified into 3 main areas: consumer access, business conduct and technology and cyber risks.

     A. Consumer access

This category of measures is aimed at retail investors. Retail investors are typically members of the general public, who are not classified as either Accredited or Institutional investors (“AI” investors) under the Securities and Futures Act.

One of the measures proposed is that DPT service providers conduct a risk awareness assessment for retail investors, before providing any DPT services to such investors. The proposed assessment would focus on determining if retail investors have the required knowledge regarding the risks involved in DPT services, the risk of loss of DPTs, market fluctuations and possible fraud. The MAS have proposed additional measures in the event that retail investors do not clear such an assessment, as well as subsequent steps that DPT service providers should take if they clear the assessment.

It is also proposed that DPT service providers should be restricted from providing any incentives, monetary or otherwise, to retail investors, encouraging such investors to participate in DPT services. Restrictions on using third parties for referrals to retail investors in respect DPT services by such service providers are also being proposed.

A third proposed measure is disallowing retail investors from using credit facilities, accepting charge card payments or using leverage to make use of DPT services.

     B. Business Conduct

The Consultation Paper also includes proposals on business conduct measures that DPT service providers should adopt.

One of the proposals is for DPT service providers to ensure the segregation of customers’ assets from their own assets, with such customer assets being held for their benefit. The MAS is considering if such segregation of customer assets should involve an independent custodian holding such assets.

Where DPT service providers engage in multiple activities or services, conflicts of interest may arise. Accordingly, it is proposed that DPT service providers should establish and implement effective policies and procedures to identify and address such conflicts of interest. Disclosures should also be made to customer of such conflicts of interest as well as the measures taken to mitigate them.

Another proposal is for DPT service providers to disclose to customers how their orders are handled and executed. Such entities should also disclose in what capacity they handle customers’ orders, i.e. as agents of the customer, or as the principal.

It is also proposed that DPT service providers, in particular platform operators, should publish their policies and procedures for the selection, listing and review of DPTs on their platforms.

DPT service providers may also have to implement proper processes and procedures for handling customer complaints. Towards this end, it is proposed that such entities have dedicated units to handle complaints, a timeframe and process for handling complaints, publishing information on handling complaints and providing customers with written reasons on rejection of their complaints.

     C. Technology and cyber risks

Similar to other Financial Institutions that the MAS exercises regulatory oversight of, such as banks, there is also a proposal for DPT service providers to manage technology and cyber risks.

Specifically, it is proposed that DPT service providers meet the requirements for addressing risks such as system outages, cyber-attacks, proper incident reporting and management, as well as protecting customer information from unauthorised access or disclosure among other things.

Market Integrity

In order to promote market integrity, the MAS encourages DPT service providers to follow good industry practices and to detect and deter unfair trading practices in DPT markets. This can be done through having systems in place to monitor trades on DPT platforms, as well as processes and procedures to implement fair, orderly and transparent trading and market operation.

Conclusion

The proposed measures outlined in the Consultation Paper are designed to ensure that there is adequate protection for both retail and non-retail investors in respect of DPT services that they engage in. However, the MAS have also cautioned consumers that they should “exercise utmost caution when trading in DPTs and must take responsibility for such trading”, adding that regulations cannot protect consumers from losses arising from the “inherently speculative” and “highly risky nature of DPT trading”.

While some of the proposed measures may result in increased compliance requirements as well as expending additional resources, such measures are designed to ensure that the interest of consumers, in particular retail consumers are better protected.

It is to be expected that there may be some curtailment or restriction to certain types of DPT services, but such regulatory measures should be balanced against the interests of consumer protection, parity of information, risk management and enhancing market integrity through proper practices and procedures.