An increasing number of professionals and institutions are exploring launching or investing in funds that invest in cryptocurrencies⁽¹⁾. In this article we discuss some of the simplest structures for such cryptocurrency funds, outlining structures that involve registered fund management companies (“RFMCs”), licensed fund management companies (“LFMCs”) and management companies that are not eligible for any licensing or registration in Singapore.

REGULATORY BACKGROUND

Definition of Fund Management and Exemptions Fund management is a regulated activity in Singapore. It is defined as “managing the property of, or operating, a collective investment scheme, or undertaking on behalf of a customer (whether on a discretionary authority granted by the customer or otherwise) —

(a) the management of a portfolio of capital markets products; or

(b) the entry into spot foreign exchange contracts for the purpose of managing the customer’s funds, but does not include real estate investment trust management”.⁽²⁾

There are certain licensing exemptions for fund managers in Singapore. Of particular relevance to potential cryptocurrency fund managers is the provision which exempts persons/institutions from the fund management licensing/registration requirements if they are “a person who carries on business in fund management in Singapore by managing the property of, or operating, a collective investment scheme (i) the property of which does not include any capital markets products; and (ii) all of the participants of which are qualified investors” (the “Non-CMP Exemption”).⁽³⁾

Definition of Capital Markets Products

A capital markets product (”CMP”) is defined as any “security, units in a collective investment scheme, derivatives contract, spot foreign exchange contract for the purposes of leveraged foreign exchange trading, and such other product as the Authority may prescribe as a capital markets product”.⁽⁴⁾ We believe it is generally understood that neither mainstream cryptocurrencies such as Bitcoin and Ether nor basic non-fungible tokens (“NFTs”) are considered CMPs under Singapore law. However, the CMP status of more complex products such as derivatives of cryptocurrencies must be considered on a case by case basis.

Definition of Qualified Investors

The definition of qualified investors (“Qualified Investors”) is set out in the Second Schedule of the Securities and Futures (Licensing and Conduct of Business) Regulations (the “Conduct Regulations”). Qualified Investors include certain “accredited investors” (“Accredited Investors”),⁽⁵⁾ and “institutional investors” (“Institutional Investors”). ⁽⁶⁾

FUND MANAGER STRUCTURING OPTIONS

If a potential cryptocurrency fund manager (“Crypto Fund Manager”) satisfies the criteria of the NonCMP Exemption, it may rely on the Non-CMP Exemption to engage in fund management activities, and may, for such purposes, utilise one or more of the following options in terms of a private fund structure.

The Exempt Fund Manager Structure

If the Crypto Fund Manager manages a fund of cryptocurrencies that are not CMPs (“Non-CMP Tokens”) for the benefit of Qualified Investors, then that Crypto Fund Manager can avail itself of the Non-CMP Exemption. One practical way to set up this structure would be for the Crypto Fund Manager to incorporate a Singapore private limited company ⁽⁷⁾ which issues shares to its investors (the “Basic Structure”). In the Basic Structure, the Crypto Fund Manager is a separate legal entity from the Singapore private limited company which invests in Non-CMP Tokens. An open-ended structure can be achieved through the issuance and offer of redeemable preference shares to the Singapore private limited company’s investors. The Basic Structure is more common to private funds as retail funds may prefer a unit trust structure. The Basic Structure may also be suitable for a fund investing in NFTs.⁽⁸⁾

We note that an exempt fund manager will qualify as a “financial institution” under section 27A under the Monetary Authority of Singapore Act and will be expected to comply with applicable MAS guidelines (such as outsourcing or technology risk management) in a manner commensurate with the size, nature and complexity of its business.

Excluded Fund Managers

We note some fund managers manage segregated accounts for specific investors (“Managed Accounts”). When the assets held in such Managed Accounts are not capital markets products or spot foreign exchange contracts, the management of such accounts (“Non-CMP Account Management”) is likely not regulated under the SFA; provided that the MAS may choose to regulate a manager with respect to such Non-CMP Account Management if the manager is otherwise licensed or registered with the MAS. In this scenario, cryptocurrencies should be considered similar to collectibles like wine or art. Ordinarily, managing a person’s wine collection is not regulated under the SFA due the nature of the asset. Therefore, a manager that engages in Non-CMP Account Management ordinarily does not rely on the Non-CMP Exemption.

The Licensed or Registered Fund Manager Structure

If a Crypto Fund Manager wants to operate under a structure where it could apply to be a LFMC or RFMC, it could consider managing a fund of funds where the investee companies themselves purchase cryptocurrencies. Under this structure, the Crypto Fund Manager would go through the process of submitting either an application to the Monetary Authority of Singapore (“MAS”) to be a LFMC or a registration notification to be a RFMC. The Crypto Fund Manager’s fund management activities could not commence until the license has been approved by the MAS or the registration has been acknowledged. Regardless, this structure would be more complicated than managing a fund that directly purchases Non-CMP Tokens and may be inefficient for tax, cost and manpower reasons.

Crypto Fund Managers should take note that, in the MAS’ Reply to Parliamentary Question on Crypto Asset Market published 5 April 2021, the MAS stated that cryptocurrencies are highly risky as investment products and “certainly not suitable for retail investors”.

The Alternative Structure

An alternative to a fund would be to establish a trading company that invests in cryptocurrencies on a proprietary basis for the benefit of its shareholders (the “Alternative Structure”), In the latest update to the Guidelines on Licensing, Registration and Conduct of Business for Fund Management Companies (the “Licensing Guidelines”), the MAS reiterated that a person “that manages own assets or moneys both in form and substance, does not require a fund management license or registration”.⁽⁹⁾ An open-ended structure can be achieved through the issuance and offer of redeemable preference shares to the Singapore private limited company’s investors.

APPLICATION OF THE PAYMENT SERVICES ACT

In the course of its operations, a Crypto Fund Manager may conduct activities that are or will become regulated under the PS Act. ⁽¹⁰⁾ However, a Crypto Fund Manager that relies on the Non-CMP Exemption would not need to be licensed under the PS Act assuming that the payment services are solely incidental to or necessary solely for the Crypto Fund Manager to carry on its exempt fund management activities. Here, the PS Act excludes such incidental or necessary activities from the definition of a “payment service” under the PS Act (the “Incidental Exclusion”).⁽¹¹⁾ We note that the PS Act does not articulate a standard to judge whether an activity is incidental or necessary to the fund manager’s regulated activities.

On the other hand, we think the Incidental Exclusion would not ordinarily apply to a manager that engages in Non-CMP Account Management. The Incidental Exclusion is only available if the fund manager is licensed, approved, registered, regulated or exempt from being licensed, approved, registered or regulated. As mentioned earlier, a manager engaged in Non-CMP Account Management usually cannot rely on the Non-CMP Exemption under the SFA. As a result, such a manager will need to consider whether its business model triggers licensing requirements under the PS Act.

MANAGING A CRYPTOCURRENCY FUND AS AN ADDITIONAL ACTIVITY

If an entity that is already a LFMC, RFMC or venture capital fund manager (“VCFM”) manages (or would like to manage) the portfolio of a variable capital company (“VCC”) and wishes to manage a portfolio of Non-CMP Tokens, that would be permissible if the Crypto Fund Manager suitably addressed any potential conflicts of interests.⁽¹²⁾ In this scenario, (1) the Non-CMP Tokens could be purchased by the VCC or one of its sub-funds and (2) the VCC’s income from the Non-CMP Token

investments would be treated for tax purposes in the same manner as all other income of the VCC; provided that the tax incentives under Section 13R and 13X of the Income Tax Act of Singapore (the “Income Tax Act”) do not apply to Non-CMP Tokens at the moment. VCCs cannot be utilized by fund managers that are neither licensed by the MAS nor a RFMC.⁽¹³⁾

The management of the Non-CMP Token fund would be ordinarily not be subject to any of the MAS’ business and conduct requirements because it is an exempt fund management activity. However, because the VCC requires a MAS-regulated fund manager, the manager will always be subject to the requirements imposed by its license or registration.

An existing fund manager should notify the MAS prior to commencing any new fund management activity as the MAS could impose requirements on such an existing fund manager as part of its prudential supervision over licensed and registered fund managers, including requirements on the maximum percentage of assets under management that are Non-CMP Tokens. ⁽¹⁴⁾

In Part C of the Proposed Amendments to MAS’ Investigative and Other Powers under the Various Acts published 2 July 2021 (the “Consultation Paper”), the MAS highlighted that unregulated businesses such as offering products that are not regulated by the MAS (e.g. bitcoin futures and other payment token derivatives traded on overseas exchanges) present risks that need to be managed. As a result, the MAS has proposed to introduce a power in the SFA to issue legally-binding directions to regulated financial institutions and their representatives in relation to conducting unregulated business. MAS intends to exercise such powers where it considers it necessary in the public interest or in the interest of the investors.⁽¹⁵⁾ The draft amendments to the SFA are enclosed in Annex D of the Consultation Paper.

LIMITATIONS ON THE OFFER OF A COLLECTIVE SCHEME

The offer of the units of the collective investment scheme ⁽¹⁶⁾ (including pursuant to the Basic Structure) must be (i) be accompanied by a MAS-registered prospectus and product highlights sheet and (ii) authorised or recognised by the MAS unless the offer qualifies as an exempted offer (“Exempted Offer”). Exempted Offers are subject to certain conditions, e.g., no advertising and specific disclosures to investors. We recommend that issuers and managers do not reply to press enquiries relating to Exempted Offers in order to adhere to these requirements. Examples of Exempted Offers include:

• an offer which raises S$5 million or less in 12 months;
• an offer made to no more than 50 persons in 12 months; or
• an offer made to Institutional Investors only.

There are also Exempted Offers that have an additional requirement to submit a notification to the MAS through the CISNet portal, such as Exempted Offers made to (i) “relevant persons”⁽¹⁷⁾ (including Accredited Investors and (ii) persons who acquire the units as principal and the offer is made on terms that the units may only be acquired at a consideration of not less than S$200,000 for each transaction. For restricted schemes that do not have a licensed fund manager, such schemes must still submit certain information to the MAS through the CISNet portal before an offer is made.

CONSIDERATIONS

Each Crypto Fund Manager may weigh the positives and negatives of the foregoing structures differently. In the following table, we highlight a few issues for consideration for new fund managers.

 

SUBSCRIPTIONS IN KIND

In theory, funds may accept subscriptions in cryptocurrencies instead of fiat. In practice, accepting subscriptions in cryptocurrencies is still novel and fund managers should consult with their fund administrators to review the process for accepting such subscriptions in kind, especially from an antimoney laundering and counter-terrorist financing perspective.

CONCLUSION

We believe there will be increasing numbers of cryptocurrency funds that consider launching in Singapore, especially if the tax incentives under Section 13R and 13X of the Income Tax Act are extended to Non-CMP Tokens. There is no one structure that fits all strategies. Instead, Crypto Fund Managers should carefully consider their priorities and those of their potential investors. The crypto asset space is constantly evolving. MAS closely monitors developments and has stated that it will continue to adapt its rules as needed to ensure that regulation remains effective and commensurate with the risks posed.⁽¹⁹⁾

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(1) Unless otherwise specified, when we refer to cryptocurrencies in this article we are referring to cryptocurrencies that are not considered “security tokens” or capital markets products under the Securities and Futures Act (the “SFA”).

(2) See Second Schedule of the SFA.

(3) See Section 5(1)(j) of the Second Schedule of the Securities and Futures (Licensing and Conduct of Business) Regulations

(4) See Section 2(1) of the SFA.

(5) As such term is defined Section 4A(1)(a) of the SFA.

(6) As such term is defined Section 4A(1)(c) of the SFA.

(7) Structures established outside Singapore may be considered also.

(8) Assuming the NFTs do not constitute digital payment tokens under the PS Act, it is unlikely such a NFT fund would be regulated under the PS Act or the Payment Services Amendment Act.

(9) See Paragraph 3.5 of the Licensing Guidelines

(10) In the Payment Services Amendment Act, additional activities will become regulated including transmitting or arranging the transmission of digital payment tokens and inducing a person to purchases or sales of digital payment tokens.

(11) See Part 2(i) of the First Schedule of the PS Act.

(12) Managing a portfolio of CMPs and Non-CMP Tokens is also an option for new Crypto Fund Managers that wish to be regulated.

(13) Aside from a LFMC, RFMC or VCFM, certain classes of persons exempt from the requirement to hold a license but still subject to MAS-oversight, such as a licensed bank, are eligible to utilize a VCC.

(14) In particular, the MAS could consider this a requirement for VCFMs that are normally required to

manage funds that invest at least 80% of their committed capital in specified products that are

directly issued by an unlisted business venture that has been incorporated for no more than ten

years at the time of initial investment.

(15) See Paragraph 4.3 of the Consultation Paper.

(16) The Alternative Structure would also be subject to limitations on the offers of its shares similar to the limitations of Exempted Offers (as defined herein).

(17) For the definition of “relevant person” see section 305(5) of the SFA.

(18) For purposes of this table, we are not considering LFMCs, RFMCs or VCFMs that manage both CMPs and cryptocurrencies.

(19) See Paragraph 11 of the Reply.