“When applying the law to your case, you and your legal advisers should look beyond labels and examine the features and characteristics of each token.”– Paragraph 4.2 of “A Guide to Digital Token Offerings” – Monetary Authority of Singapore [Last updated on 5 April 2019]
One of the reasons that we (Holland & Marie) enjoy compliance is because we never stop learning. The field is incredibly broad and there are constantly new laws, regulations, regulatory actions and court decisions to evaluate. We learn new stuff all the time!
The Singapore Payment Services Act (the “PS Act”) has provided an excellent opportunity for learning.1 The PS Act was passed by Parliament in January 2019 and assented to by the President in February. However, the PS Act is not yet effective (it is expected to go into effect in late 2019 or early 2020) as subsidiary legislation and related notices from the Monetary Authority of Singapore (the “MAS”), including AML/CFT standards, need to be published.2 The PS Act will regulate payment services3 and include a licensing framework.
A Guide to Digital Tokens
Shortly before approval of the PS Act, the MAS published a revised edition of “A Guide to Digital Token Offerings” (the “Guide”).4 The purpose of the Guide is to provide general guidance on the application of Singapore securities laws in relation to offers of issues of digital tokens in Singapore.
The Guide includes case studies and provided a non-binding analysis of how Singapore securities laws may apply. It also discusses the potential application of the proposed Payment Services Bill (the “PSB”).5 The MAS emphasized that the case studies were provided for illustrative purposes only and are not indicative or conclusive of how securities laws will apply to a particular case.
Case studies…. new regulations…. AML/CFT considerations… sounds like a party to me!6 So we decided to take a look at Case Study 1 of the Guide to see what we could learn.
CASE STUDY 1
In Case Study 1, the following facts and analysis are presented:
Company A plans to set up a platform to enable sharing and rental of computing power amongst the users of the platform. Company A intends to offer digital tokens (“Token A”) in Singapore to raise funds to develop the platform. Token A will give token holders access rights to use Company A’s platform. The token can only be used to pay for renting computing power provided by other platform users. Token A will not have any other rights or functions attached to it and is not or is not intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt. Company A intends to offer Token A to any person globally, including in Singapore.
Application of securities laws administered by MAS in relation to an offer of Token A
- A holder of Token A will only have rights to access and use Company A’s platform, and the right to use Token A to pay for rental of computing power provided by other Token A will not provide its holder any other rights or functions attached to it. Hence, Token A will not constitute capital markets products under the Securities and Futures Act (Cap. 289) (the “SFA”).
- Company A’s offer of Token A will not be subject to any requirement under the SFA or the Financial Advisers Act (Cap 110). However, Company A must abide by all Singapore laws, including the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (Cap. 65A), the Terrorism (Suppression of Financing) Act (Cap. 325) and various regulations giving effect to United Nations Security Council Resolutions, in the conduct of its business.
Application of the proposed PSB
- Token A will not be considered a digital payment token under the PSB as it is not or is not intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt.
First Reaction
My first reaction to Case Study 1 was that the MAS was trying to demonstrate what kind of tokens were neither capital markets products for purposes of the SFA nor regulated tokens for purposes of the PSB. I thought the MAS was starting out with an easy case and then would move to more difficult cases.
However, as I read more about the PS Act, I began to revisit Case Study 1. In particular, I could not understand why Token A was not a digital payment token for purposes of the PSB.
Dharma Sadasivan of BR Law Corporation summarized my confusion in his article “Clarifications from the Monetary Authority of Singapore on Digital Token Offerings”:7 In his analysis of Case Study 1, Dharma wrote:
“Tokens which are purely for providing access to a platform (in this example, a platform for renting computing power) are not capital markets products. However, it is less clear why providing access to such a platform is not considered a service and therefore within the scope of PSB regulation.”
Definition of a Digital Payment Token
My bias was that the MAS would want to cover all possible tokens within the scope of the PS Act. It looks like that instinct was wrong.
The PS Act defines a digital payment token as:
“any digital representation of value (other than an excluded digital representation of value) that —
- is expressed as a unit;
- is not denominated in any currency, and is not pegged by its issuer to any currency;
- is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt;
- can be transferred, stored or traded electronically; and
- satisfies such other characteristics as the Authority may ”
In Case Study 1, the MAS notes that Token A “is not and is not intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt.” The failure of Token A to satisfy prong (c) above (“Prong C”) appears to be the primary reason Token A is not a digital payment token. An example of a digital payment token is Bitcoin.8
The Universe of Tokens
In Singapore, there have been many utility token offerings. However, “utility token” is not a defined term under Singapore law and the Guide deliberately avoids using the term.9
Instead, the PS Act provides for:
- Digital payment tokens;
- E-money;
- Limited purpose digital payment tokens; and
- Limited purpose e-
Going back to Case Study 1, the MAS wrote that Token A would not be considered a digital payment token. Because Token A is not denominated in or pegged to any currency, it also seems clear that it will not constitute e-money or limited purpose e-money for purposes of the PS Act.
Under that logic, for purposes of the PS Act, Token A would constitute either a limited purpose digital payment token or nothing.
The Case Against Token A Being a Limited Purpose Digital Payment Token
It is not clear whether all “limited purpose digital payment tokens” fall within a subset of “digital payment tokens” due to the terms’ respective definitions. The definition of limited purpose digital payment token does not explicitly cross refer to the definition of digital payment token. In contrast, the definition of limited purpose of e-money clearly indicates that it is a subset of e-money. Meanwhile, the MAS could have highlighted whether Token A as a limited purpose digital payment token in its commentary in the Guide.
Unanswered Questions
Assuming the foregoing analysis is correct, Token A does not fall within the PS Act because it does not satisfy Prong C.
Some important unanswered questions include:
- What underlying facts would cause Prong C to fail? While Bitcoin is clearly a digital payment token, which less well-known/accepted tokens would be caught by Prong C?
- What is an example of a “section of the public”?
- If a token satisfies Prong C, does that disqualify it from being limited purpose digital payment token?
Conclusion
The PS Act is a new law. There are numerous uncertainties in how it will be implemented and interpreted. In the Guide, the MAS states: “If you wish to offer digital tokens in Singapore or operate a platform involving digital tokens in Singapore, you are encouraged to seek professional advice from qualified legal practitioners to ensure that your proposed activities are in compliance with all applicable laws, rules and regulations in Singapore.”10
We agree.
About the Author
Holland & Marie is a compliance, C-Suite and legal solutions firm based in Singapore. We have extensive experience resolving typical compliance issues including regulatory inspections, satisfying regulatory requirements and maintaining best practices in corporate governance to navigate the rapidly changing regulatory landscape.
For further information, contact:
Chris Holland: Partner | Holland & Marie | 201802481R 7 Straits View, Marina One East Tower, #05- 01 Singapore 018936
Disclaimer: The material in this post represents general information only and should not be relied upon as legal advice. Holland & Marie Pte. Ltd. is not a law firm and may not act as an advocate or solicitor for purposes of the Singapore Legal Profession Act.
1 There are many good articles summarizing the PS Act, including “Singapore Parliament Passes Payment Services Bill” written by Clifford Chance (Lena Ng, Luke Grubb and Zhern Leing Thai), January 2019. https://www.cliffordchance.com/briefings/2019/01/singapore_parliamentpassespaymentservicesbill.html
2 The PS Act will become effective on such date as the Ministers appoints by notification in the
3 The PS Act regulates seven activities: account issuance services, domestic money transfer services, cross-border money transfer services, merchant acquisition services, e-money issuance services, digital payment token services and money changing services.
5 Prior to its approval by Parliament, the PS Act was known as the Singapore Payment Services
6 References to “I” or “me” are references to Chris Holland, Partner at Holland & I also get sole credit if you liked any of the jokes herein.
8 See Case Study 6 of the Guide.
9 See paragraph 1 of the Guide.
10 See Paragraph 2.
