Alexandre Kech of Onchain Custodian discusses the amendments to the Payment Services Act 2019, which was passed by Singapore parliament on 4 January
Cryptocurrencies have found it hard to shake their associations with the darknet. From the time they burst onto the scene, bitcoin and other crypto-related businesses have been portrayed as enablers of money laundering and other criminal activities. There are for sure bad players in the crypto space, as in any industry, but not more than other industries. In fact, due to the complete traceability of transactions on most blockchains and the new anti-money laundering/combating the financing of terrorism (AML/CFT) regulations being implemented by industry, it is expected that over time there will be less illicit activity facilitated by crypto than traditional finance.
But scandals continue to dominate the news headlines: hacks, cyberattacks and lapses in governance that could only happen in the freewheeling world of crypto. Though the virtual asset industry is maturing quickly, there are still some years to go before all actors are regulated and operating at an institutional-grade level. This highlights the importance of working with entities that support the regulated vision of virtual assets and building the enterprise-grade infrastructures that are essential for institutional adoption.
Blockchain technology brings efficiency to many outdated processes in banking, capital markets and trade finance. The many pilots and implementations by reputable players such as the Australian Securities Exchange (ASX), Singapore Exchange (SGX) and J.P. Morgan, as well as the central banks around the world that are experimenting with the issuance of central bank digital currencies (CBDC), are testimonials of that.
The latest institutional interest in bitcoin and other virtual assets from the likes of PayPal, Square, DBS, Microstrategy and others, will continue to drive crypto toward mass scale adoption. Responsible actors are getting ready for this, with 25 out of 39 Financial Action Task Force (FATF) member countries having already implemented the revised FATF standards for money laundering and counter terrorist financing of virtual assets. Standards development is also advancing in areas such as data transfer and virtual asset identification. This significant progress is making the space much more interesting to institutional players.
Singapore, in particular, is fast becoming one of the jurisdictions with the most exhaustive and well-designed regulation and licensing regime for entities dealing with virtual assets, while still allowing the industry to grow in a safe and compliant way.
MAS broadens the scope of licensable digital payment token services
Early November 2019, the Monetary Authority of Singapore (MAS) announced the introduction of a bill into Parliament to amend the Payment Services Act 2019 (PS Act). The PS Act, which regulates the provision of different payment services, was enacted in early 2020. This includes traditional fiat money payment businesses but also those involving digital payment tokens, for example, virtual assets, such as bitcoin, and stablecoins like USDT or XSGD. The latter are deemed e-money as per a majority of law firm opinions.
On 4 January 2021, the bill was passed by Singapore parliament. MAS describes the objective of the PS Act as follows: “Providers of such payment services are required to hold a licence and comply with requirements that are calibrated according to the risks that specific payment services and business models pose. These include requirements to mitigate key risks and concerns relating to money laundering (ML) and terrorist financing (TF), loss of money owed to consumers or merchants due to insolvency, fragmentation and limitations to interoperability, and technology and cyber risks.” An important point to note, is that the PS Act does not cover tokenised securities which remain under the Future and Securities Act.
Entities operating one or more of the newly regulated services — like Onchain Custodian has since 2018 — had the opportunity to request an exemption from the licence while they applied for it. Hundreds of entities have been granted the exemption, but not all exempted entities aim to get the DPT Service licence that is required if the company intends to deal with virtual assets. A little more than 100 of them have ticked that box.
The primary purpose of the amendment to the PS Act is to implement the enhanced international standards adopted by the FATF in June 2019. Ultimately, its aim is to make sure all digital payment token (DPT) Service Providers are caught under the PS Act and are following the various notices dealing with the prevention of ML/TF. Other notices that must be followed (which are equally as essential) include PSN07 Notice of Conduct and PSN08 Notice of Disclosure and Communication, to name only two.
The amendment to the PS Act identifies three new services which have been added to the expanded definition of DPT Services requiring a license:
Transfer of DPTs
This addition covers entities incorporated in Singapore but offering DPT transfer services between clients outside of Singapore. Avoiding service or process-based regulatory arbitrage has been an objective of MAS. Another example of that is the current consultation on the New Omnibus Act for the financial sector. It aims, among other purposes, to regulate virtual asset service providers (VASPs) as defined by FATF, that are established in Singapore, but are providing services only outside of Singapore.
Provision of custodian wallet services for DPTs
The industry was expecting this addition. And some, like Onchain Custodian whose core business is custody of DPT and other virtual assets, were eagerly awaiting it. The potential impact may even go beyond enabling identified custodians, such as Onchain, to operate in a fully licensed way. Indeed, “the provision of custodial wallet services” might also catch any service provider with control over the cryptographic private key to any wallet holding a client’s DPT, and with the ability to access or execute a transaction. Even if the provider only owns part of the cryptographic key to a multi-signature wallet or a multi-party computation wallet, the provider might be deemed to have control, hence, they might fall under the provision of a custodial wallet.
Some companies, whose primary business is not to safe-keep virtual assets though it is essential to their offering (like exchanges), might decide to work with a licenced custodian. Indeed, building an enterprise-grade custody infrastructure is costly and operationally complex.
Custodians are an essential part of the growing virtual assets space. Their focus on the secure, auditable safekeeping of customer assets contributes to the institutionalising the offerings of other players in the ecosystem, such as exchanges or funds. Custodians also provide the right level of transparency, security and professionalism required by traditional institutional players and corporates entering the space, for whom self-custody is not sound or even possible, due to regulatory requirements.
Facilitating the exchange of DPTs without possession of money or DPTs by the DPT service provider
This addition covers advisory, that is, inducing or participating in inducing to buy or sell DPT. It is likely also to include decentralised exchanges (DEX), or at least, those identifiable companies incorporated in Singapore that are offering services facilitating the matching of orders to allow a person to buy or sell any DPT through a DEX.
That one will likely lead to a flurry of legal opinion requests as depending on the company, the operational set-up and the offered service, the answer might be different.
The amendment also provides MAS with additional powers to impose measures on DPT service providers, as the industry evolves, when the regulator’s teams identify new risks. MAS acknowledges the innovative nature of the virtual assets industry and wants to be ready to tackle any emerging risks in an efficient and agile way.
The industry is split into two camps: Those who believe it is too much and too soon and those who welcome this clear regulatory framework. However, both camps agree that regulation is necessary to ensure clarity and protection for consumers, allow growth via broader adoption by retail and institutional markets, and enable the long-term sustainability of cryptocurrencies and other virtual assets.
One thing is sure, with such regulations, it means that cryptocurrencies such as bitcoin and other virtual assets are here to stay. It is excellent news knowing the potential that cryptographic tokenisation on the blockchain offers for the future of banking, finance, and so many other industries.
