Cryptocurrency, the Blockchain, and Legal Regulation in Singapore

07 May 2018

Dharma Sadasivan

​This is an expansive and wide-ranging topic, so I will provide as simple an overview as I can of cryptocurrency, the blockchain, and its existing regulatory framework in Singapore.
 
The common question - is cryptocurrency good or bad, and should I invest in it? 
For many, this will be the underlying question that piques your interest in cryptocurrencies. Unfortunately, it is an extremely tricky question to answer because, as lawyers are so fond of saying – it depends.

​There are a variety of lenses from which to view cryptocurrency, and the value you ultimately attribute to cryptocurrency depends largely on the lens through which you examine it:

• For a traditional investor, cryptocurrency may be seen as a bubble waiting to burst, because it isn't secured by any real property with tangible value.
• For the man on the street, the boom in cryptocurrency value may be an exciting speculative opportunity.
• For technopreneurs, cryptocurrency's underlying technology (the blockchain) has innumerable applications across industries, so its value lies in the potential applications of blockchain technology rather than the value of cryptocurrencies themselves.
• For entrepreneurs, cryptocurrencies offer a fast way of fundraising globally without giving up any ownership in their company, and the fundraising may potentially be exempted from the usual onerous regulations that accompany Initial Public Offerings.
• For economists, some cryptocurrencies can be thought of as money because they are a medium of exchange, store of value, and a unit of account, allowing them to be used in substance as money.
• For many governments, cryptocurrency is treated as a personal property or chattel, rather than as currency (i.e. money), and are consequently not backed by any issuers or assets.
• For skeptics of the current centralized banking systems implemented globally, cryptocurrency represents an independent and decentralized parallel financial system that will prevail in the event that a global financial catastrophe arises.

While the nature of cryptocurrency may not be clear, what is abundantly clear is that there's no simple answer. To even attempt answering this question, you need to understand the blockchain.
 
Separating cryptocurrency from the blockchain
"Cryptocurrency" and the "blockchain" are often conflated. The blockchain is the technology that underlies cryptocurrency. Cryptocurrency is just one of many uses of the blockchain.
 
What is the blockchain?
The blockchain is a technology platform that facilitates the trade or transfer of digital assets.
 
Examples:

• Sending cryptocurrency upon a user's instructions
• Transferring funds from a bank upon confirming receipt of goods
• Releasing a digital document upon receiving payment
• Obtaining access to a digital service upon payment of a cryptocurrency

There can be many types of blockchains, each developed with unique characteristics that set it apart from other blockchains. However there are certain characteristics that are common to all blockchains.
 
Characteristics of the blockchain

Ledger
The blockchain is a digital ledger that records every transaction made between parties who utilize the blockchain.
 
Tokens
A token represents the "thing" being traded or transferred, and can be used to refer to money, goods, or services.

Transferrable
Digital assets can be traded or transferred on the blockchain. These transactions are recorded on the ledger.​

Ongoing validation / fraud resistance
In order for a transaction to be processed, every preceding transaction must be validated.

There are a few ways validation can be carried out. The two dominant approaches are (i) proof-of-work ("POW"); and (ii) proof-of-stake ("POS").

In a POW approach, a network of computers ("miners") contribute processing power to process complex mathematical puzzles, known as proof-of-work problems, to validate transactions, The first miner to solve the problems announces the solution to the entire network simultaneously, and receives a token as a reward. This process is called "mining". Bitcoin uses this validation protocol.

In a POS approach, users must already have tokens. A network of users ("forgers") validates the transactions. In order to do this, the forgers must put their own tokens at stake - if the forger validates a fraudulent transaction, the forger loses his tokens. If the forger validates real transactions, he is rewarded with tokens as a transaction fee. The forgers are selected in a pseudo-random way and different selection processes are used by different blockchains that adopt the POS approach to validation. Tokens are often pre-mined, and the initial distribution of the tokens can be done via an ICO. Ethereum uses a POS validation protocol.

The distributed natures of validation processes mean that it is difficult to alter records on the blockchain ledger because the records are constantly being re-validated, and you would need to alter the ledger on every participating computer/user.
 
As a result, the blockchain is generally considered fraud-resistant.
 
Common uses of the blockchain
 
Cryptocurrency
Given the characteristics above, the blockchain is ideal for creating a parallel financial system that is independent and decentralized. The ledger is fraud-resistant, records exchanges and units of account, and so long as people continue to believe that their cryptocurrency is equivalent to certain things (whether goods, services, or fiat currency), it can act as a store of value (in essence, "money"). Bitcoin, the most well-known of cryptocurrencies, was created for this purpose.
 
Smart contracts
The blockchain can be used for self-executing contracts. For example, in a simple intellectual property licensing arrangement, a digital asset (e.g. photo) can be released to the licensee automatically upon receipt of the licensing fee.

Decentralized applications
A decentralized application (or "DApp") is an application that is open source, decentralized, uses cryptographic tokens or digital assets, and has a protocol for managing the validation of transactions and generating additional tokens. Many blockchain apps that are launched through ICOs are DApps that may use either their own bespoke blockchain, or operate on an existing blockchain that has the functions the DApp requires.

Legal regulation in Singapore
Many countries, including Singapore, treat blockchain tokens as personal property or chattel rather than as currency. Since such tokens are not currency, they are not legal tender, issued by any government, or backed by any issuer or asset. Therefore when you purchase $100 of tokens, it is (from a legal perspective) the equivalent of purchasing $100 of apples, shoes, or any other type of personal property. When you use tokens to procure a good or service, you are bartering. Nevertheless, blockchain tokens fall within some existing regulatory frameworks, including frameworks that also govern traditional fiat currency.

Tokens as financial products
If tokens are offered on the promise of dividends or other economic benefits, or as capital markets products, which includes securities, futures contracts, contracts or arrangements for the purposes of foreign exchange trading, contracts or arrangements for the purposes of leveraged foreign exchange trading, and other products that The Monetary Authority of Singapore ("MAS") prescribes as capital markets products, they will be regulated under Singapore's Securities and Futures Act.

Offers of tokens constituting securities or units in a collective investment schemes ("CIS") are subject to the same regulations as offers of securities or units in a CIS made through traditional means. Generally, such an offer must be accompanied by a prospectus prepared in accordance with the Securities and Futures Act and registered with MAS.
 
Tokens may also be regarded by MAS as shares, debentures, or units in a CIS if the tokens substantially represent such rights/interests.
 
Collectively, these tokens are known as "securities tokens". MAS assesses whether a token is a securities token on a case-by-case basis.
 
By contrast, tokens which are redeemed for goods or services are known as "utilities tokens" and are not regulated by MAS. As such, many blockchain projects issue utilities tokens to avoid onerous financial regulation.
 
Capital Markets Licenses
An intermediary who (i) operates a platform that facilitates the trade of tokens; (ii) operates a platform that permits the offering and issuance of tokens; or (iii) provides financial advice in respect of tokens that constitute capital markets products, securities, futures contracts, or investment products, is required to have a capital markets license under the Securities and Futures Act.
 
This applies extra-territorially – if such trading platforms, crypto-exchanges, or advisors service persons in Singapore, those intermediaries will be regarded as operating in Singapore and subject to licensing under the Securities and Futures Act.
 
Money laundering and the financing of terrorism
Existing regulations to combat money laundering and the financing of terrorism apply equally to tokens. Key regulations include:

• MAS Notices on Prevention of Money Laundering and the Countering of the Financing of Terrorism;
• Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act;
• Terrorism (Suppression of Financing) Act; and
• other regulations giving effect to United Nations Security Council Resolutions

 
Interesting applications of blockchain technology
 
Factom – Preservation and validation of documents
Factom uses the security and immutability of the Bitcoin blockchain ledger to record proof that a digitized asset (e.g. a PDF of a document) exists at a given point in time every 10 minutes and remains untampered. It validates all entries onto the blockchain, and because Bitcoin's blockchain ledger is public, it can be produced any time for audit unless Bitcoin's network is shut down.

Golem – Decentralized supercomputer
Golem lets you to use processing power from a global network of computers, from laptops to giant data centres, so you can carry out tasks that require more processing power than you would ordinarily have access to, such as AI or machine learning, graphics and CGI rendering, data analysis, meteorological and other scientific computations, cryptography, and more. You pay for access to the network using Golem Network Tokens ("GNT"). You are given GNTs in exchange for contributing your own computing power to the network, or you can purchase them.
 
United Nation's World Food Programme – Food vouchers
This food voucher program was run by the United Nation's World Food Programme ("UNWFP") to provide supplies to thousands of Syrian refugees. Run on the Ethereum blockchain, the platform allows direct donations from donors around the world, distributes the donations by issuing tokens to refugees, and allows the refugees to exchange the tokens for food at participating markets by validating the transaction using their biometric data – a refugee can purchase food from local supermarkets in the refugee camps using an eye scan. The ledger allows all the transactions to be recorded, validated, and analysed.

ChromaWay – Sale and purchase of immovable property via smart contracts
Chromaway is building a blockchain-based platform that allows for the sale and purchase of immovable property by connecting the seller, buyer, real estate agent, land registry, and seller's bank. The buyer and seller can view and sign off on sale and purchase contracts, bank loan terms, and other documents through their computers or mobile devices. The smart contracts programmed into the blockchain prompt each of the actors to take the next step in the workflow. For example, the seller is prompted to instruct the bank to pay a deposit, after which the bank is prompted to transfer the funds for the deposit. The transfer is made digitally, and the seller is notified automatically when the deposit has been transferred, while the land registry is notified so that it can begin processing the transfer.
 
Sentinel Chain – Capitalization of livestock
Livestock is the main asset of many farmers in unbanked rural economies and provides ongoing returns to farmers in the form of milk and offspring. In times of crisis, farmers may be forced to sell their livestock for cash, leaving them without assets that can provide further returns and trapping them in the cycle of poverty. Sentinel Chain works with unbanked rural economies to capitalize livestock through tokenization. The tokens can be used to transact with other merchants, effectively providing farmers with access to credit during times of crisis, with the livestock as collateral.
 
Conclusion
The potential applications of blockchain technology are broad, and clever minds are busy identifying new opportunities for solving problems though the blockchain. The speculation on cryptocurrency in 2017 brought increased visibility to blockchain technology and helped to onboard flocks of new users, and where it previously looked like the blockchain was just the realm of tech geeks and early adopters, it now looks increasingly certain that the blockchain is here to stay and will be utilized by all.

​Meanwhile, the Singapore government is cautiously observing the development and applications of the technology while regulating it where needed through existing frameworks, making Singapore an open and positive jurisdiction to test blockchain technologies without overly onerous regulation. This is further enhanced by the MAS's fintech regulatory sandbox, which allows fintech companies (including blockchain-based ones) some time to test their products with a live user base before requiring full regulatory compliance.
 
Contact us if you need regulatory advice or legal assistance with your blockchain project.


Dharma Sadasivan
Associate Director, BR Law Corporation
dharma@brlawcorp.com