Yesterday, the Monetary Authority of Singapore (MAS) announced new regulations for companies offering Digital Payment Token (DPT) services. By the year's end, these companies are mandated to protect customer assets using a statutory trust.
Why the Change?
The MAS believes this strategy should lessen the chances of customer asset loss or misuse and simplify asset recovery, should a DPT service provider become insolvent. Although accredited and institutional investors are exempt, the MAS will also prohibit DPT service providers from enabling retail customers to lend or stake their DPT tokens;
Notably, drafting these new requirements did not come out of left field. Rather, these steps follow a public consultation in October 2022, aimed at enhancing investor protection and ensuring market integrity in the realm of DPT services. The consultation received considerable attention from various respondents, leading to several recommendations. These included separating customer assets from the service provider's own assets, ensuring the safety of customer funds, daily asset reconciliation, keeping thorough records, and maintaining access and operational controls over customer DPTs within Singapore.
With regard to the recommendation for a proposed custody function, it should be operationally distinct from other business units, and customers must be informed transparently about the risks involved in entrusting their assets to the DPT service provider. MAS is now inviting public comment on these draft regulatory amendments to the Payment Services Regulations. Subsequently, guidelines for consistent implementation across the industry will be published.
Essentially, public feedback centered greatly on one thing – transparency. By forcing DPT services to be transparent, accountability then follows, ensuring that companies do not take shortcuts or place their well-being above that of their clients.
Concerning the restriction of DPT service providers from enabling retail customers to lend or stake their DPTs, MAS plans to move forward with the proposal. However, these activities can continue for institutional and accredited investors. Much like in the United States, opinions on this matter varied; some respondents favored allowing these activities with adequate risk disclosures and the customer's consent, while others advocated for a complete prohibition due to their high risk and speculative nature.
MAS is attentive to these views and will monitor evolving market developments and consumer risk awareness, ensuring that regulatory measures remain suitable and balanced. A separate consultation paper was issued, proposing requirements to tackle unfair trading practices among DPT service providers.
Despite its proposal, the MAS continued to emphasize that regulatory measures alone cannot shield consumers from all potential losses due. It notes that this is due to the inherently high-risk and speculative nature of DPT trading.
While the segregation and custody requirements will mitigate the risk of customer asset loss, recovery delays may still occur in case of provider insolvency. Additionally, consumers are warned against engaging with unregulated entities, including overseas-based ones, to avoid total asset loss.
Learning from the Failures of Others
When looking at some of the events that have occurred within the digital asset sector over the past two years, such as the rise and fall of FTX and other similar platforms, these measures are crucial. With the surge in popularity of cryptocurrencies and digital tokens, investor protection has taken center stage around the world.
While various implementations of DeFi look to reduce counterparty risks, there will always be a subset of the population that turns to centralized entities to service their needs. For them, regulatory measures like those implemented by MAS are necessary to ensure that users' funds are secure and that the service providers operate transparently and responsibly. Hopefully, this will help to build trust in such platforms – something essential for their sustained growth and the stability of the broader digital asset sector.