MAS finalises stablecoin regulatory framework, responds to feedback received on public consultation: Allen & Gledhill

22 August 2023

On 15 August 2023, the Monetary Authority of Singapore (“MAS”) announced the features of a new regulatory framework that seeks to ensure a high degree of value stability for stablecoins regulated in Singapore. The regulatory framework takes into account feedback received following a public consultation in October 2022. MAS has also issued its response to feedback received on the public consultation (“Response”). Details are set out below.

Scope of stablecoin regulatory framework

Stablecoins are digital payment tokens (“DPTs”) that are designed to maintain a constant value against one or more specified fiat currencies. MAS explains that stablecoins, when well-regulated to preserve such value stability, can serve as a trusted medium of exchange to support innovation, including the “on-chain” purchase and sale of digital assets.

MAS’ stablecoin regulatory framework will apply to single-currency stablecoins (“SCS”) which are pegged to the Singapore Dollar or any G10 currency and that are issued in Singapore.

Non-bank SCS issuers with SCS in circulation not exceeding S$5 million and tokenised bank liabilities will not be subject to requirements under the SCS framework. MAS may impose additional requirements on tokenised bank liabilities in the future as necessary. MAS will retain flexibility to consider certain tokens as stablecoins under the SCS framework, should a bank SCS issuer design such tokens to meet standards that are deemed equivalent under the framework.

Only stablecoin issuers that fulfil all requirements under the framework can apply to MAS for their stablecoins to be recognised and labelled as “MAS-regulated stablecoins”. This label will enable users to readily distinguish MAS-regulated stablecoins from other DPTs, including “stablecoins” which are not subject to MAS’ stablecoin regulatory framework. Any person that misrepresents a token as an “MAS-regulated stablecoin”, may be subject to penalties under MAS’ stablecoin regulatory framework, and placed on MAS’ Investor Alert List.

MAS will not allow multi-jurisdictional issuance at the onset and will require SCS issuers to issue solely out of Singapore, if issuers wish for their SCS to be recognised as an “MAS-regulated stablecoin” under the SCS framework.

Other types of stablecoins will not be prohibited from being issued, used, or circulated within Singapore. Such stablecoins, including SCS issued outside of Singapore or pegged to other currencies or assets, will continue to be subject to the existing DPT regulatory regime.

MAS cautions that users should make their own informed decisions on the accompanying risks should they choose to deal in stablecoins that are not regulated under MAS’ framework.

Key requirements for MAS-regulated stablecoin issuers

MAS in its Response states that it has carefully considered the feedback received and had incorporated them where appropriate into the finalised regulatory approach towards stablecoins in Singapore. The key requirements for MAS-regulated stablecoin issuers as set out in the Response are summarised below.

Reserve assets requirements and value stability

SCS reserve assets will be subject to requirements relating to their composition, valuation, custody, and audit to give a high degree of assurance of value stability. The requirements are set out below.

Reserve Assets	Key Requirements
Composition	· Denominated in currency of stablecoin peg · Held in cash / cash equivalents / debt securities with up to three-month residual maturity and issued by (i) government or central bank of pegged currency; or (ii) organisations that are of both a governmental and international character with a minimum credit rating of “AA-”
Valuation	· At least equivalent to par value of SCS in circulation at all times · Valued at mark-to-market basis daily
Segregation & Custody	· Held in segregated accounts on trust · Held in permitted custodians such as (i) financial institutions licensed for custodial services in Singapore by MAS; or (ii) overseas-based custodians with minimum credit rating of “A-” which have a branch in Singapore regulated by MAS to provide custodial services
Independent Attestation & Audit	· Independently attested to on monthly basis, report to be disclosed on entity’s website and submitted to MAS · Annual audit, report to be submitted to MAS

Redemption at par

Issuers must return the par value of SCS to holders within five business days from a redemption request, and users must be able to make redemption requests anytime. There should be a direct legal claim for redemption at par, and redemption conditions (if any) must be reasonable and be disclosed upfront.

MAS explains that the redemption timeline is intended to strike a balance between responsiveness to users’ requests and ensuring there is enough time for the SCS issuer to do so in an orderly manner under various stress situations. In exceptional circumstances, e.g. during times of market stress, MAS may direct SCS issuers to carry out liquidation of the reserve assets within a specified period to meet redemption needs. In normal business conditions, redemption should be expedient and not delayed unnecessarily.

The stipulated time period applies only to redemption by parties that redeem directly with the SCS issuer.

Prudential requirements

MAS will implement the following prudential requirements on SCS issuers:

Base capital: The base capital of an SCS issuer must be the higher of S$1 million or 50% of the annual operating expenses of the SCS issuer;
Solvency: The SCS holder should hold, at all times, liquid assets (such as cash and cash equivalents, debentures of government, negotiable certificate of deposits, and money market funds) which are valued at (i) higher of 50% of annual operating expenses or (ii) an amount assessed by the SCS issuer to be needed to achieve recovery or an order wind-down subject to independent audits on at least an annual basis; and
Business restrictions: An SCS issuer is not allowed to undertake other activities that introduce additional risks to itself, i.e. not be exposed to risks beyond the primary activity of SCS issuance. This includes investing in and extending loans to other companies, lending or staking of SCS and other DPTs, trading of DPTs, and the SCS-entity having a stake in any other entity. This is to ringfence and mitigate risks to the SCS issuer in lieu of a comprehensive risk-based capital regime. Such activities can still be conducted from other related entities, e.g. a sister company which the SCS issuer does not have a stake in. Nonetheless, MAS notes that there may be necessary activities which SCS issuers carry out as part of their business operations, such as custody of issued SCS, or facilitating the transfer of issued SCS to buyers.

Disclosure and white paper issuance

Issuers must provide appropriate disclosures to users, including information on the SCS’ value stabilising mechanism, rights of SCS holders, as well as the audit results of reserve assets.

In particular, SCS issuers will be required to issue a white paper which discloses details such as, but not limited to:

general information of the issuer;
operations of the SCS including its value-stabilising mechanism and technology adopted;
risks arising from the use of SCS; and
rights and obligations related to the SCS (e.g. redemption).

Other requirements

Existing anti-money laundering and countering the financing of terrorism standards on DPT service providers and banks (e.g. customer due diligence, travel rule and screening) and existing technology and cyber risk management standards on DPT services providers will apply to SCS issuers.

Key requirements for SCS-related intermediation services

In its Response, MAS explains the requirements that apply to SCS-related intermediation service providers. These requirements are set out below.

Scope

SCS would be treated as DPTs for the purpose of non-issuance activities, and that intermediaries offering SCS-related services would be regulated under the Payment Services Act 2019 (“PS Act”) as DPT service providers if their services fall within the scope of the regulated DPT services.

Timely transfer of SCS

DPT service providers will have three business days to transmit MAS-regulated SCS from a payer to payee. This mirrors the existing money transmission requirement for domestic money transfer services.

Segregation of customers’ SCS

SCS intermediaries will be required to segregate customers’ MAS-regulated SCS from the intermediaries’ own assets. As SCS intermediaries will be subject to upcoming measures relating to segregation and custody of customers’ assets for DPT services providers, MAS will not require customers’ MAS-regulated SCS to be further segregated from customers’ other DPTs.

In line with the asset segregation requirements for DPT service providers, SCS intermediaries will be allowed to commingle an individual customer’s MAS-regulated SCS and/or DPTs with that of other customers in an aggregated pool, while keeping this pool separate from the intermediary’s own assets. SCS intermediaries will have to clearly disclose to its customers the risks of such arrangements, as well as steps taken by the SCS intermediary to mitigate them.

Regulation of systemic stablecoin arrangements

MAS will proceed on regulating systemic stablecoin arrangements similar to other designated payment systems by designating them under the PS Act and the Payment and Settlement Systems (Finality and Netting) Act 2002. MAS will continue to monitor international developments on the expectations of regulating systemic stablecoin arrangements before developing the specific requirements to regulate such arrangements.

MAS-regulated SCS do not qualify as insured deposits

MAS explains that MAS-regulated SCS are not deposits and will not qualify as insured deposits as set out in the First Schedule of the Deposit Insurance and Policy Owners’ Protection Schemes Act 2011.

Reference materials

The following materials are available on the MAS website www.mas.gov.sg:

alexander.yap@agasia.law