The Monetary Authority of Singapore (MAS) published an updated version of A Guide to Digital Token Offerings (the Guide) on 30 November 2018.  The Guide provides general guidance on the application of the securities laws to offers or issues of digital tokens in Singapore.  The Guide now also includes information concerning the potential application of the new Payment Services Act (PSA)[1] to certain digital tokens and activities related to those tokens and a significantly expanded discussion of MAS’s anti-money laundering / countering the financing of terrorism (AML/CFT) requirements as they apply to digital token offerings.  Although the Guide is expressly non-binding and non-exhaustive, it provides welcome reassurance and clarity for existing and potential issuers of digital tokens in Singapore.  This article updates our November 2017 article on the previous version of the Guide.

Digital Tokens as Capital Markets Products

The Guide’s central message is that offers or issues of digital tokens may be regulated by MAS if they constitute ‘capital markets products’ under the Securities and Futures Act (SFA).  Such products include securities, units in a collective investment scheme (CIS), derivatives contracts and spot foreign exchange contracts for purposes of leveraged foreign exchange trading.  MAS noted that it will look to the structure and characteristics of, including the rights attached to, a digital token when considering if it is a capital markets product under the SFA.

MAS has stated that offers of digital tokens that amount to offers of capital markets products are subject to the usual offering requirements as set out in Part XIII of the SFA, unless exempted.  Exemptions are available for small (personal) offers (broadly, raising no more than S$5 million within any 12-month period), private placements (offers to no more than 50 persons within any 12-month period) and offers to institutional or accredited/high net worth investors.

The Guide also highlights that intermediaries who facilitate offers or issues of digital tokens that are capital markets products will require capital markets services licences or other approvals to operate.  Examples include: an intermediary operating a primary platform for offering or issuing digital tokens in Singapore that constitute capital markets products; an intermediary providing financial advice in Singapore in respect of digital tokens that are considered investment products; and an intermediary establishing or operating a trading platform in Singapore for digital tokens that are securities or futures contracts.

Such licensing or other approval requirements under the SFA may apply equally to intermediaries based partly or wholly outside of Singapore.  Similarly, a person based overseas who provides financial advisory services in Singapore could be deemed to be acting as a financial adviser in Singapore and may require a licence under the Financial Advisers Act (FAA).

The Guide reviews the AML/CFT requirements for intermediaries conducting regulated activities.  For example, those intermediaries must take appropriate steps to identify, assess and understand their money laundering and terrorism financing (ML/TF) risks; develop and implement policies, procedures and controls to enable them to manage and mitigate the risks they have identified; perform enhanced measures where higher ML/TF risks are identified; and monitor the implementation of those policies, procedures and controls, and enhance them if necessary.

MAS also notes that a person dealing in digital payment tokens (tokens that are not capital markets products, are not denominated in or pegged to a fiat currency and are accepted by the public for goods and services or to discharge a debt) or facilitating the exchange of digital payment tokens will require a licence under the PSA and will be subject to AML/CFT requirements.  However, even if a token is not a capital markets product and the person transacting in the token is not required to be licensed under the PSA, MAS has emphasised that the ML/TF laws continue to apply.

Expanded and New Case Studies

The Guide now includes 11 case studies that help explain the approach MAS will take when assessing digital tokens.  The key points from these case studies are summarised below.

• A digital token only carrying the right to access a platform and/or pay for a service offered by the issuer of the token would not constitute a capital markets product under the SFA.

• A digital token that represents a share in a company would constitute a security under the SFA.  Unless an exemption applies, the issue or offer of such a token would trigger the prospectus requirements under the SFA, the company may require a capital markets services licence for dealing in securities and the company may require a licence under the FAA to provide financial advice with regard to the token.

• A company that pools funds raised from an offer of digital tokens to invest in shares and that distributes profits arising from managing its portfolio to token holders will have to establish a CIS, and the tokens will constitute units in a CIS and will therefore be capital markets products under the SFA.  The CIS will need to be authorised or recognised under the SFA and may trigger the prospectus requirements in the SFA.  The company will also require a capital markets services licence for carrying on the regulated activity of fund management, unless exempted.

• An offer of tokens by a Singapore-incorporated entity that cannot be accessed by persons in Singapore will not be regulated under the SFA.  However, if the token seller pools the proceeds of the sale to invest in shares of companies, the seller may nevertheless be carrying on the business of fund management in Singapore and therefore require a capital markets services licence.

• Digital tokens that amount to loans or debentures will constitute securities under the SFA and will trigger the prospectus requirements, unless an exemption applies.

• Platforms for trading digital tokens that are capital markets products will require MAS approval or recognition as organised markets in accordance with the SFA.

• Token issuers should consider whether their conduct amounts to providing financial advice in Singapore, thereby necessitating a licence under the FAA.

• A digital token is not a capital markets product under the SFA merely because it is a security under the ‘Howey Test’ of US law and is traded on secondary markets to which Singapore persons have access.  The digital token must be independently assessed under the SFA to determine if it is a capital markets product in Singapore.  Singapore does not rely on the Howey Test to determine whether a token is a capital markets product.

• A digital token that only confers the right to vote on features of the platform with which it operates and serves as a reward for participating in activities of the platform will not be a capital markets product under the SFA.

• A company that provides advisory services to clients that sell digital tokens that are not capital markets products will not be engaged in the SFA-regulated activity of advising on corporate finance or the FAA-regulated activity of providing a financial advisory service.  However, if the token is a digital payment token under the PSA, the company may require a licence to carry on the business of dealing in digital payment tokens and may therefore also be subject to AML/CFT requirements under the PSA.

• If a token gives the holder the right to sell the token back to the issuer for a certain amount, the token would be a debenture and thus a capital markets product under the SFA.  If the token is a debenture, an offer of the token would trigger the prospectus requirements under the SFA and the seller of the token would require a licence under the SFA to deal in capital markets products.

• If the value of a token is pegged to an underlying fiat currency and the token represents the obligation of the issuer to buy the token back for the stated value of the currency, the token would constitute a debenture with the same consequences as the previous bullet.  In addition, however, the token may constitute “e-money” under the PSA which would result in the seller needing a licence under the PSA to provide e-money issuance services.

MAS has reaffirmed that businesses seeking to apply technology in innovative ways to provide financial services that are or are likely to be regulated by MAS are eligible to apply to enter the MAS regulatory sandbox and face relaxed specific legal and regulatory requirements.

Finally, MAS notes that it only wishes to receive inquiries regarding the application of the securities laws to digital tokens after a person has reviewed the case studies and answered certain critical questions set out in the Guide.  If an inquiry is warranted, MAS provides a helpful checklist of items to consider submitting in support of the inquiry.  MAS stresses that any reply to an inquiry would not be an endorsement of the inquirer’s digital token, offering or business model and would not preclude MAS from taking enforcement action based on the characteristics of the token as issued and/or the actions of the inquirer related to the issuance of the token.

[1] The Guide analysed the proposed version of the PSA, the Payment Services Bill, but there are no material differences between the PSA and the Bill with respect to the matters discussed in the Guide.  Please see our article providing an overview of the PSA [link].

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