19 December 2018
*Updated 11 March 2019
Singapore's financial regulatory agency – the Monetary Authority of Singapore ("MAS") – released "A Guide to Digital Token Offerings" (the "Guide") on 30 November 2018.
The Guide is the primary piece of regulatory guidance by the MAS that focuses on the application of Singapore's existing financial regulatory framework to digital token issuance (in certain contexts, digital token issuances may be referred to as "initial coin offerings" or "ICOs").
Notably, the Guide contains eleven (11) case studies setting out various scenarios in which tokens are offered by companies, and how securities laws may apply in each. This comprehensive analysis offered by the MAS provides much-needed confirmation on how organizations ought to proceed when issuing digital tokens.
The Guide follows MAS's earlier clarification on 01 August 2017 that securities laws apply equally to digital tokens that constitute products regulated by securities laws, and an earlier and less comprehensive version of the Guide released on 14 November 2017.
This article highlights some of the key clarifications provided by the Guide.
Digital tokens which constitute Securities are subject to the same regulatory regime as Securities
The Guide offers a restatement of MAS's 01 August 2017 position, which is that offers of digital tokens which constitute securities, securities-based derivatives contracts, or units in a collective investment scheme ("CIS"), (collectively referred to as "Securities") are subject to the same regulatory regime under Part XIII of the Securities and Futures Act ("SFA") as offers of Securities made through traditional means.
It also reiterates that the offer must be accompanied by a prospectus prepared in accordance with the SFA and registered with MAS.
Additionally, if the offer is made in relation to units in a CIS, the CIS is subject to authorization or recognition requirements, and must comply with investment restrictions and business conduct requirements.
Offers may be exempt from prospectus and CIS authorization/recognition requirements under certain scenarios, including:
Intermediaries facilitating offers or issues of digital tokens
MAS identified three (3) types of intermediaries ("Intermediaries") in this area:
If a primary platform offers digital tokens that constitute capital markets products, the primary platform operator must hold a capital markets services license unless exempted.
Similarly, if a trading platform trades digital tokens constituting Securities, the operator must be approved by MAS as an approved exchange or recognized as a recognized market operator unless exempted.
Persons who provide financial advice in respect of digital tokens that are investment products must have a financial adviser's license or be exempt under the Financial Adviser's Act ("FAA").
Pursuant to section 339 of the SFA, the SFA applies extra-territorially where the platform is operated partly outside of Singapore, or wholly outside of Singapore but where it has a substantial and reasonably foreseeable effect in Singapore.
The FFA also has extra-territorial jurisdiction. Even if a financial advisor is based overseas, if the advisor's activity or conduct is intended or likely to induce the public or section of the public in Singapore to use any financial advisory service, that advisor will be deemed to be acting as a financial advisor in Singapore.
Money Laundering and Terrorism Financing Concerns
Money laundering and terrorism financing ("AML/CFT") requirements apply to Intermediaries that are:
All persons are also required to comply with suspicious transaction reporting obligations under the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, and prohibitions on dealing with designated individuals and entities pursuant to the Terrorism (Suppression of Financing) Act and various other regulations giving effect to United Nations Security Council Resolutions.
Introduction to Payment Services Bill
The Guide highlights the introduction of the Payment Services Bill ("PSB") and clarifies that a person providing any service of dealing in digital payment tokens, or any service of facilitating the exchange of digital payment tokens, must be licensed, and will be regulated under the PSB for AML/CFT purposes only. This is relevant to the provision of utilities tokens and will be discussed in further detail below.
Notable case studies and commentary
Below are selected case studies, MAS notes, and our commentary.
Case Study 1: Tokens as access to platform
Scenario: Company A offers Token A to raise funds to develop a platform that enables the sharing and rental of computing power. Token A can only be used to pay for renting the computing power and has no other functions.
Selected MAS notes: Token A is not a capital markets product under the SFA because no rights or functions attach to it other than the right to rent computing power. Token A is not considered a digital payment token under the PSB as it is not (and not intended to be) a medium of exchange as payment for goods, services, or the discharge of a debt.
Commentary: Tokens which are purely for providing access to a platform (in this example, a platform for renting computing power) are not capital markets products. However, it is less clear why providing access to such a platform is not within the scope of PSB regulation. Perhaps the answer lies in the definition of "digital payment token", which remains murky.
The PSB defines "digital payment token" as:
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 Authority may prescribe.
Numerous questions arise from this definition. In this particular instance, Token A is being purchased in exchange for rental of computing power. Why isn't rental of computing power considered provision of a service? If we assume that Token A is not offered as a medium of exchange, it is not presently a medium of exchange, and the offeror's intentions are not to offer it as a medium of exchange, at what point does Token A become a medium of exchange notwithstanding the offeror's intentions? When is Token A accepted by "the public" or a section thereof as a medium of exchange, and what are the thresholds for this?
What we can make an educated guess about is that certain well-known and highly-traded tokens such as Bitcoin appear to be more obviously within the definition of "digital payment token", notwithstanding the questions surrounding the definition. However, there mere fact that a token is well-known and highly-traded is not itself a clear indication that it constitutes a "digital payment token" - for example, Ether (ETH) was developed to facilitate smart contracts, but is now broadly accepted (by the public? or a section thereof?) as a form of payment for goods and services in its own right.
We look forward to reading further information, clarifications, and guidelines and information from MAS in due course, which will no doubt help shed light on the boundaries of what constitutes a "digital payment token".
Case Study 4: Tokens not accessible in Singapore
Scenario: Company D is a Singapore-incorporated company with operations in Singapore. It intends to offer Token D to the public but the offering will not be accessible to persons in Singapore. The funds will be pooled and invested in Fintech startups. Profits arising from the investment portfolio will be pooled and distributed to token holders.
Selected MAS notes: Part XIII of the SFA does not apply to this offer because Token D is not offered to persons in Singapore. However, Company D may be carrying on the business of fund management in Singapore, as it manages its investment portfolio from Singapore. Company D may therefore require a capital markets services license to engage in the business of fund management unless exempted.
Commentary: This case study affirms that token offerings that are not accessible to persons in Singapore are not regulated by Part XIII of the SFA – whether such tokens are securitized would therefore be immaterial. However any business operating in Singapore may still need to be licensed if providing capital markets services, financial advisory services, and in relation to AML/CFT requirements.
Case Study 6: Exchanging digital payment tokens for fiat
Scenario: Company F sets up a token exchange platform allowing users to trade digital payment tokens (such as Bitcoin) for fiat currencies. In its initial years of operation, no trading of Securities will be permitted, but this restriction may be lifted after a few years.
Selected MAS notes: The SFA will not apply so long as the token exchange does not permit trading of any products regulated under the SFA. If Company F's restriction on Securities trading is lifted, Company F may be operating an organized market in relation to the Securities trading and will need to be approved by MAS as an approved exchange, or recognized by MAS as a recognized market operator under the SFA, unless exempted. MAS also intends to regulate digital payment token exchanges under the PSB for AML/CFT purposes.
Commentary: This case study clarifies that crypto-to-fiat exchanges are not regulated under the SFA so long as the tokens accepted for exchange are not regulated under the SFA. However in relation to the PSB, it remains unclear what tokens would qualify as a "digital payment token".
Case Study 7: Tokens tradeable on secondary markets
Scenario: Company G is incorporated and has its principle place of business in the United States. It offers Token G globally. Token G is an investment contract and constitutes securities under US laws. Token G is tradeable in the secondary market, on an over-the-counter basis and through third-party cryptocurrency exchanges.
Selected MAS notes: The ability for a digital token to be traded on the secondary market alone does not result in it being a capital markets product under the SFA. The treatment of a token in the US is not a consideration in determining whether it is a product regulated under the SFA.
Commentary: This case study is notable as it confirms that tokens are not capital markets products simply by virtue of being tradeable on the secondary market, and seems to suggest that tokens are assessed on their characteristics at the time of their initial offering.
Case Study 9: Utility tokens
Scenario: Company I provides advisory services on the digital token offering process. Company I's clients raise funds by offering Token I to support the development of their products and services. Company I only offers its services to clients where Token I can be used in exchange for the client's products and services. Token I does not have any other function or provide any rights apart from being used to redeem products and services from Company I's clients.
Selected MAS notes: Token I is unlikely to constitute capital markets products under the SFA as it can only be used to redeem products or services. Company I's advisory services do not relate to fundraising via Securities, so the FAA will not apply. Token I may be a digital payment token under the PSB if it is, or is intended to be, a medium of exchange as payment for goods or services or for the discharge of a debt. In such a case, Company I would be carrying on a business dealing in digital payment tokens and would attract regulation under the PSB as well as require Company I to be licensed under the Payment Services Act when the Act commences.
Commentary: Case Study 9 appears to describe utility tokens – tokens which are used to purchase the token issuer's products or services. Many ICOs have been for the issuance of utilities tokens to avoid securities regulation in the absence of clear laws and regulatory guidelines, making this particular case study very relevant.
Critically, this case study affirms that utilities tokens are unlikely to constitute capital markets products under the SFA if they are only used for redeeming products or services.
Depending on how MAS clarifies the scope of a "digital payment token", many utilities tokens may conceivably be digital payment tokens if they are (or are intended to be) accepted by the public or a section of the public as a medium of exchange for payment for goods or services, or the discharge of a debt. Accordingly, such token issuers would need to be licensed, and would be regulated for AML/CFT purposes under the PSB.
Case Study 11: Stablecoin
Scenario: Company K offers Token K globally and pegs its value to the US dollar at USD1 per Token K. Company K only accepts payments for Token K in the form of electronic deposits of US dollars into its US-dollar denominated bank account. These deposits form a reserve of fiat to back the value of the Token K. Token holders can exchange their Token K for US$1 per token. Company K has no rights to cancel or redeem Token K from token holders.
Selected MAS notes: Company K is under an obligation to buy back Token K from token holders. Token K can be viewed as representing Company K's indebtedness to a token holder, and may therefore constitute a debenture. Consequently, Company K may require a capital markets services license under the SFA. Token K may also be considered "e-money" under the PSB. Company K may therefore require a license under the PSB to carry on a business providing e-money issuance services.
Commentary: "Stablecoins" are cryptocurrencies designed for making and receiving payments, that are pegged to fiat currencies or commodities in order to reduce price volatility. Stablecoins typically have a mechanism for redeeming the assets backing them. In this scenario, Token K would be ordinarily regarded as a type of stablecoin.
The PSB's definition of "e-money" is:
any electronically stored monetary value that: (a) is denominated in any currency, or pegged by its issuer to any currency; (b) has been paid for in advance to enable the making of payment transactions through the use of a payment account; (c) is accepted by a person other than its issuer; and (d) represents a claim on its issuer, but does not include any deposit accepted in Singapore, from any person in Singapore.
On the basis of this definition, stablecoins pegged to currencies will fall within the scope of "e-money", and such stablecoin issuers will need to be licensed under the PSB.
Another notable point raised by this case study is that if a company is obliged to buy back a token from a token holder, the token may constitute a debenture. This is because the token holder has provided the company with funds, and the token holder can call on the funds to be repaid by requiring the company to buy back the tokens. From this perspective it is much clearer that, in substance, the funds are a loan and the token a debenture.
This also raises a question of whether the token would still be considered a debenture if a company was obliged to buy back a token with payment other than fiat currency (or e-money) - for example, if the company was obliged to buy back the token with a utility token, or with a commodity.
Engagement with MAS on digital token offerings
MAS ended the Guide with notes on engaging MAS on digital token offerings. Notably, MAS clarified that it will only review legal opinions and engage digital token issuers where the structure of the proposed token or business model is not similar to those in the case studies provided in the Guide.
In other words, MAS appears to be calling for companies, having a token structure or business model matching any of the case studies, to proceed on the basis of MAS's respective case study notes in the Guide, without further MAS engagement.
Associate Director, BR Law Corporation
Post date. Edit this to change the date post was posted. Does not show up on published site. 19/12/2018
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The posts found in this Law Blog are not legal advice, nor are they given for the purpose of providing legal advice.
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