MAS consults on proposed amendments to Payment Services Act 2019 and scope of e-money and digital payment tokens

9 January 2020

On 23 December 2019, the Monetary Authority of Singapore (“MAS”) issued the following consultation papers:

• Consultation on the Payment Services Act 2019: Proposed Amendments to the Act
  
• Consultation on the Payment Services Act 2019: Scope of E-money and Digital Payment Tokens
  

The consultations close on 28 January 2020.

Consultation on proposed amendments to the PS Act

When the Payment Services Act 2019 (“PS Act”) takes effect on 28 January 2020, anti-money laundering and countering the financing of terrorism (“AML/CFT”) measures will apply to all three classes of payment service providers (holders of a money-changing licence, standard payment institutions and major payment institutions). The respective AML/CFT Notices will apply to payment service providers providing the following payment services: (i) account issuance service (Activity A), (ii) domestic money transfer service (Activity B), (iii) cross-border money transfer service (Activity C), (iv) money-changing service (Activity G) and (v) digital payment token (“DPT”) service (Activity F).

AML/CFT related amendments

MAS is of the view that DPT transactions carry higher inherent money laundering and terrorism financing (“ML/TF”) risks due to the anonymity, speed and cross-border nature of the transactions. This position is consistent with the revised Financial Action Task Force (“FATF”) Standards, which require countries to regulate virtual asset service providers (“VASPs”) for AML/CFT. MAS intends to amend the PS Act to align with the most recently enhanced FATF Standards. MAS also intends to introduce requirements to mitigate the ML/TF risks arising from certain business models where entities broker remittance transactions between entities in two different countries.

The proposed amendments (among others) expand the scope of DPT service providers’ activities under the PS Act to include:

• Transfer of DPTs: As bad actors could use entities that facilitate the transfer of DPTs to move or layer the proceeds of illicit assets by transferring value in the form of DPTs from one person to another, the proposed amendments expand the definition of “digital payment token service” to include:
  • Any service of accepting DPTs from one DPT address or account, whether in Singapore or outside Singapore, as principal or agent, for the purposes of transferring, or arranging for the transfer of, the DPTs to another DPT address or account, whether in Singapore or outside Singapore; and 
  • Any service of arranging for the transmission of DPTs from one DPT address or account, whether in Singapore or outside Singapore, to another DPT address or account whether in Singapore or outside Singapore.  
• Provision of custodian wallets for or on behalf of customers: As entities that offer standalone custodial services for DPTs are exposed to potential ML/TF risks, such entities could be used to safekeep illicit assets or assets for illicit actors (among others). The proposed amendments expand the definition of “digital payment token service” to include the service of safeguarding or administration of:
  • A DPT where the service provider has control over the DPT; or 
  • A DPT instrument where the service provider has control over the DPT associated with the DPT instrument. 
• Brokering of DPT transactions (without possession of money or DPTs by the DPT service provider): The proposed amendments expand the definition of “digital payment token service” and include the service of inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling any DPTs in exchange for any money or any other DPT (whether of the same or a different type). This includes a situation where the entity providing such a service does not come into possession of money or DPTs.  
• Brokering of cross-border money transfer services (without moneys accepted or received in Singapore by the payment service provider): The proposed amendments expand the definition of “cross-border money transfer service” to include the situation where the payment service provider does not accept or receive moneys in Singapore, but nonetheless provides any service of arranging for the transmission of money accepted in one country or territory, to another country or territory (other than the service of arranging for the receipt of any money from outside Singapore by any person in Singapore, whether as principal or agent).

Entities that carry on a business of providing any of the above mentioned services will be required to be licensed under the PS Act and will be subject to the applicable AML/CFT Notices.

Entities incorporated in Singapore providing DPT services outside of Singapore

MAS intends to introduce, as a new class of financial institutions, entities created in Singapore but which provide VASP services outside of Singapore. These provisions will be set out in a separate Act and consulted upon at a later stage.

For such VASPs that may decide to use Singapore as a base of incorporation, MAS will apply licensing and admission criteria to ensure such entities have a meaningful presence in Singapore with adequate supervisory oversight from MAS, even as these entities provide VASP services outside of Singapore.

Other amendments

Aside from the AML/CFT related amendments, MAS has proposed the following main amendments:

• New power to impose user protection measures on certain DPT service providers: To ensure the safekeeping of customer assets held by DPT service providers, MAS may impose (but is not confined to) measures such as:
  • Anti-comingling measures to require a DPT service provider to segregate customer assets from the licensee’s own assets;
  • Ring-fencing customer assets to protect them from claims from other creditors in the event of the licensee’s insolvency; and
  • Maintenance of customer assets and licensee’s assets in a prescribed manner (e.g. maintaining a prescribed percentage of customer assets / licensee’s own assets in a cold wallet). 
    

For a start, MAS may impose such user protection measures on major payment institutions as well as standard payment institutions that process transactions that only involve DPTs, where the value of the transactions that only involve DPTs, and other payment transactions processed by the standard payment institutions, is similar to the thresholds set out in section 6(5) of the PS Act. Should such regulation be necessary, MAS will consult the public and industry.

• New power to impose additional measures on prescribed DPT services providers: Where it is necessary or expedient to ensure financial stability, to safeguard efficacy of monetary policy, for the protection of users or consumers or in the interest of the public or a section of the public, MAS may impose (but is not confined to) existing measures applicable to account issuance service providers (e.g. stock and flow caps) by way of subsidiary legislation. MAS will conduct further consultation should there be a need to issue such regulations. 
• Expanding the definition of “domestic money transfer service”: MAS proposes to widen the scope of the definition of “domestic money transfer service” to include situations where either the payer or the payee is a financial institution. In this way, customer money is protected for more types of payment transactions. 
• Expanding the scope of section 94 of the PS Act: MAS proposes to amend section 94 of the PS Act to provide that, instead of applying only to individuals, all persons, whether or not such persons are individuals, are to use reasonable care to ensure that any information under or for the purposes of the PS Act provided to MAS is not false or misleading in any material particular. Failure to do so will be an offence.
  

Consultation on scope of e-money and digital payment tokens

Scope of e-money & digital payment tokens

The PS Act established the definitions of e-money and DPTs. Set out below are the two defining characteristics that differentiate e-money and DPTs under the current framework in the PS Act:

• E-money is a digital representation of a single fiat currency, whereas DPT is simply a representation of value, without necessarily any reference to fiat currency; and 
• E-money must represent a claim on the issuer, whereas DPTs need not (and in several instances a DPT may not be issued by an issuer, e.g. bitcoin).
  

However, recent innovations have led to the emergence of new payment instruments such as stablecoins which could potentially challenge how e-money and DPT are distinguished for regulatory purposes. As follows:

• Stablecoins have been designed to maintain a stable value relative to another asset (e.g. unit of fiat currency or commodity) or basket of assets. 
• Stablecoins could potentially perform the functions of money without the excessive price volatility of the first generation DPTs, especially if they were to be widely accepted. 
• Stablecoins could also vary in accessibility to retail/wholesale customers, and ability to be traded on the secondary market.
  

To delineate e-money and DPTs, MAS finds the need to consider the following issues relating to stablecoins:

• Whether the value of a stablecoin can be preserved through methods other than being pegged to a single currency, such as being pegged to more than one currency in a ratio fixed by the issuer, notwithstanding that the permanence of such arrangements may vary according to how robustly that value is backed. 
• The liability of stablecoin issuers and the ability of stablecoin holders to redeem for fiat currency can also vary. One possibility how some issuers may be able to secure trust even without stablecoin holders having a claim on the issuer or redemption rights is to ensure a market always exists for holders to redeem for fiat currency. The certainty of whether stablecoin holders are able to redeem for fiat currency may also vary (e.g. possibility of tightened market liquidity to redeem fiat currency in times of crisis).
  

In essence, the consultation paper seeks views on the scope of e-money and DPTs, and whether their definitions remain appropriate with the emerging class of stablecoins, particularly whether references to a single fiat currency and the claim on the issuers are appropriate as distinguishing features. The consultation paper also seeks views on the regulation of stablecoins.

MAS clarifies in the consultation paper that it is not proposing to amend the definition of e-money or DPT during the consultation and will study the public’s views before making an assessment on whether amendments are necessary.

Regulation of e-money based payment services and digital payment token services 

The PS Act regulates the provision of payment services according to the risks a particular type of service poses. Under the framework which was developed before stablecoins emerged, DPT services and e-money based payment services are regulated differently to mitigate different sets of risks. For example, (i) AML/CFT requirements apply to DPT services but not e-money based services, (ii) safeguarding of float requirements apply to e-money based services but not to DPT services, and (iii) cash withdrawal restrictions apply to e-money accounts but not to wallets containing DPTs.

In reviewing whether the existing regulatory regime set out in the PS Act is relevant and appropriate going forward with the possible advent of global stablecoins, MAS is seeking views on the following main issues:

• Appropriate user protection measures: MAS is consulting on whether the user protection framework under the PS Act for holders of e-money and holders of DPTs is still appropriate and whether holders of certain types of DPTs should be afforded protection of their assets or value of their assets similar to how e-money holders are protected.
  
• Thresholds for application of user protection requirements: MAS seeks feedback on whether DPT service providers that issue custody wallets should be required to comply with user protection measures if DPTs are held above a certain threshold and on the appropriate qualitative or quantitative thresholds. 

The regulation of stablecoins, in particular global stablecoins, is being studied by international bodies. MAS will continue to participate in international work on stablecoin regulation. In order to appropriately mitigate new risks as they arise, MAS will continuously monitor trends and developments in payment services, including stablecoins.