29 Nov 2017
By Elise Thomas
The recent release of a Guide to Digital Token Offerings by the Monetary Authority of Singapore (MAS) is the latest sign of the country’s ambition to position itself as a leader in the virtual currency space.
The guide covers the application of Singaporean securities laws, including anti-money laundering and counter-terrorism financing (AML/CTF) obligations, to issues of digital tokens.
It also flags plans for a forthcoming payments framework to bring virtual currency intermediaries under some of the same obligations as traditional financial institutions.
By far the most common type of digital token issues are initial coin offerings (ICOs). The legitimacy and legal status of ICOs has been a hotly debated topic.
ICOs exist somewhere in the grey zone between a traditional IPO and a crowd-funding campaign.
Wannabe cryptocurrency start-ups entice supporters to buy digital tokens or cryptocoins, which effectively function as a share in the venture.
For investors, the hope is that the cryptocurrency will become successful and the cyptocoins they have purchased will increase in value.
Cryptocurrency start-ups have raised almost US$1.3 billion through ICOs in this year alone.
In theory, if an ICO fails to reach its fundraising target all funds should be returned to investors.
In practice, this has not always been the case. An Ethereum-based start-up recently vanished into thin air with $374,000 of ICO investor funds.
ICOs are unregulated in the majority of jurisdictions around the world, leading to a high risk of fraud on top of the inherent risk of failure involved in all new ventures.
Authorities around the world have reacted to ICOs with a range of different regulatory responses. In September 2017 China’s Central Bank banned ICOs, labelling them as disruptive to the social and economic order.
South Korea’s Financial Services Commission followed shortly after, banning “all forms of ICO including securities issuance [and] monetary lending and coin margins.”
Abu Dhabi and Russia have adopted a different tactic, with both countries signalling their intentions to regulate ICOs and cryptocurrencies more broadly.
Singapore’s authorities have been largely welcoming to the cryptocurrency community, and have even created their own Ethereum-based version of the Singaporean dollar.
On the same day as releasing the Guide to Digital Token Offerings, the MAS and the Association of Banks in Singapore also publicly released the source-codes of successful prototypes for distributed ledger inter-bank payments, with the goal of encouraging the private sector and other financial authorities to pursue the technology.
Singapore’s recently-ended 2017 FinTech Festival involved more than 30,000 participants from 100 countries, 65% of whom said blockchain technologies were a key interest.
Singapore’s crypto-friendly policies have led to an ICO boom in the country.
Singaporean start-up Digix raised US$5.5 million via ICO in just twelve hours in 2016, only to be eclipsed in 2017 by the ICO of TenX which raised $34 million in seven minutes.
The Singaporean company ultimately raised $80 million.
Numerous other Singapore-based start-ups either have run or are planning ICOs of their own.
Despite these successes for cryptocurrencies, however, the potential for ICOs to be used as a vehicle for fraud or money laundering has been a significant concern for the MAS.
“ICOs are vulnerable to money laundering and terrorist financing (ML/TF) risks due to the anonymous nature of the transactions, and the ease with which large sums of monies may be raised in a short period of time,” the MAS said in a statement.
It was also recently reported that Singaporean banks have shut down https://www.riskscreen.com/kyc360/news/singapore-cryptocurrency-firms-facing-bank-account-closures/ the accounts of several companies.
In August the MAS announced that it would regulate digital tokens which qualify as securities under Singaporean law, including applying existing AML/CTF regulations.
“MAS does not regulate such virtual currencies per se,” Singapore’s Minister for Finance told the Parliament in October
“However we regulate the activities that surround them if those activities fall within our more general ambit as financial regulator… Virtual currencies, due to the anonymous nature of the transactions, can be exploited for money laundering and terrorism financing risks.
“MAS is working on a new payment services regulatory framework that will address these risks,” the Minister said.
The Guide on Digital Token Offerings attempts to clarify when digital tokens do and do not qualify as capital market products for the purposes of MAS regulation, for example where a digital token constitutes a share, a debenture or a unit in a collective investment scheme.
Importantly, the MAS states that Singaporean securities law may still apply even when the offering is not directly under Singaporean jurisdiction.
The MAS also emphasises the application of AML/CTF laws to digital tokens, noting “digital tokens that perform functions which may not be within MAS’ regulatory purview may nonetheless be subject to other legislation for combating money laundering and terrorism financing.”
In particular this includes suspicious transaction reporting and prohibitions against designated terrorist individuals or entities.
Like the Minister, the MAS flags plans for a new payments services framework directed at virtual currencies.
The New Payments Framework will begin to bring virtual currency intermediaries under some of the same regulatory obligations as traditional financial institutions.
This will include putting in place policies and procedures to address money laundering and terrorism financing risks, such as customer due diligence, transaction monitoring, suspicious transaction reporting and record-keeping.
The exact final form of the framework remains to be seen, but it seems clear that Singapore aims to continue to be a front-runner both in supporting innovation and in pulling cryptocurrencies out of the wild and under regulatory control.
Melbourne-based Elise Thomas has a background in international affairs and a strong interest in financial crime, data and technology issues.
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