Response to consultation on Singapore's stablecoin regulatory framework

Due to the nascency of stablecoins, there was a range of feedback received and no firm landing on one regulatory treatment versus another.

On 26 October 2022, MAS issued a consultation paper 2 on the overall regulatory approach for stablecoin-related issuance and intermediation activities, highlighting the key requirements that would be imposed on such activities.The consultation period closed on 21 December 2022, and MAS would like to thank all respondents for their contributions.The list of respondents, and their submissions, can be found in Annexes B and C respectively.1.4.

MAS has carefully considered the feedback received and has incorporated them where appropriate.Comments that are of wider interest, together with MAS’ responses, are set out below.This paper represents MAS’ finalised regulatory approach towards stablecoins in Singapore.A summary of the key requirements of the framework can be found in Annex A.

Consultation on the Payment Services Act 2019: Scope of E-money and Digital Payment Tokens, Dec 2019 here. Consultation on Proposed Regulatory Approach for Stablecoin-related Activities, Oct 2022 here.

MAS sought comments on whether the regulatory scope was adequate and whether there might be reasons for MAS to extend its regulatory powers to SCS issued outside of Singapore.

Some respondents commented that the SCS framework was restrictive as it did not include other prominent currencies.A few respondents cautioned against the prohibition of other types of stablecoins, such as SCS issued outside of Singapore, from being circulated and used within Singapore.

MAS’ Response 2.3.MAS will retain the proposal for the regulatory scope of the SCS framework to include only SCS pegged to the Singapore dollar or G10 currencies that are issued in Singapore.The restriction to SGD and G10 currencies within the SCS framework takes into consideration the availability of high-quality liquid assets in those currencies that would be fundamental to providing a strong reserve backing for SCS.2.4.

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 will continue to monitor developments in the stablecoin landscape, with a view to bringing other types of tokens into the SCS framework.

The G10 currencies are the Australian Dollar, British Pound Sterling, Canadian Dollar, Euro, Japanese Yen, New Zealand Dollar, Norwegian Krone, Swedish Krona, Swiss Franc and the United States Dollar.

Introduction of “Stablecoin Issuance Service” as a new regulated activity 2.5.MAS had consulted on the proposal to introduce a new regulated activity of “Stablecoin Issuance Service” under the PS Act, and whether there was a need to introduce any other regulated services specific to stablecoins.

There were also suggestions and clarifications to include the custody and management of reserve assets backing the SCS as additional regulated payment services.

MAS’ Response 2.7. MAS will retain the proposal to introduce “Stablecoin Issuance Service” as an additional payment service under the PS Act. This additional regulated payment service will encapsulate the necessary activities that a stablecoin issuer undertakes, including custody of SCS issued by the issuer and management of the reserve assets backing the SCS.

Treatment of bank and non-bank SCS issuers Regulatory treatment for non-bank SCS issuers 2.8.MAS had proposed that non-bank SCS issuers with SCS in circulation not exceeding S$5 million in value need not obtain a Major Payment Institution (MPI) licence and comply with SCS issuer requirements under the SCS framework.

Accordingly, their SCS will not be recognised under the new SCS regime, given that issuers of such SCS will not need to be subject to requirements to address the stability in value of the SCS issued.MAS sought comments on whether such a regulatory approach was appropriate.

This would ensure that such issuers could prepare for compliance with the SCS framework ahead of exceeding the S$5 million threshold, given that the circulation of any stablecoin could drastically increase in a short period of time.

Regulatory treatment for bank SCS issuers 2.10.For banks that issue SCS by tokenising liabilities of the bank, MAS had proposed that additional reserve backing and prudential requirements would not be imposed on such banks.This was on the basis that banks were already subject to prudential requirements under the Banking Act.

For banks that issue reserve-backed SCS, MAS had proposed that they be subject to the same regulatory regime as nonbank SCS issuers, except for the prudential requirements.MAS sought comments on whether this regulatory approach for bank SCS issuers, vis-à-vis non-bank SCS issuers, was appropriate and whether it would achieve an equivalent regulatory outcome for SCS issued in Singapore to maintain a high degree of value stability.2.11.

Some respondents agreed with the proposed approach.Reasons included the view that introducing additional regulatory measures for banks issuing SCS in the form of tokenised liabilities would only cause confusion for banks, or that it would introduce unnecessary barriers for banks to enter the stablecoin space given the fact that they were already highly regulated.2.12.

Many respondents were also of the view that requirements for bank versus non-bank issuers should be harmonised, for a level playing field.Some respondents were of the further view that tokenised bank liabilities should not be deemed as SCS, because the risks between tokenised bank liabilities and reserve-backed SCS were inherently different.

Specifically, tokenised bank liabilities adopted the fractional reserve banking model, while SCS would be fully collateralised through their reserve backing.Correspondingly, these respondents were of the view that tokenised bank liabilities and reserve-backed SCS should, at the minimum, be labelled differently to differentiate between the two.

MAS’ Response 2.13.Regarding non-bank SCS issuers, MAS will retain our proposal not to subject SCS issuers with SCS in circulation not exceeding S$5 million to requirements under the SCS framework.Some SCS issuers may have niche use cases, or they may employ other mechanisms to maintain value stability in one form or another.

Any SCS issuer that anticipates or intends its total SCS circulation to exceed S$5 million and would like its SCS to be recognised as being regulated under the SCS framework may still be able to apply for the MPI licence to conduct the “Stablecoin Issuance Service”.2.14.

As to bank SCS issuers, MAS acknowledges the feedback that there are differences in the valuestabilising mechanisms used for fully reserve asset-backed stablecoins and tokenised bank liabilities, and thus the risks they pose to holders.MAS will therefore exclude tokenised bank liabilities from the scope of the SCS framework.However, MAS may impose additional requirements on tokenised bank

liabilities in the future as necessary, taking into consideration the design of such tokenised bank liabilities.

Appropriate term to differentiate MAS-regulated SCS from other stablecoins 2.16.MAS sought comments on whether it would be appropriate to have a single label for SCS that are under the SCS framework.

MAS also sought views on three specific options – “regulated stablecoin”, “qualifying stablecoin”, or “securely-backed stablecoin” to label such SCS, and whether there were alternative terms that could be used to distinguish such stablecoins (which would be regulated for a high degree of value stability) from other types of stablecoins.

While there were mixed preferences as to a specific label, respondents emphasised the need for a straightforward label that would provide sufficient clarity.

MAS’ Response 2.18.On balance, MAS will be adopting the label “MAS-regulated stablecoin” for all SCS that will fall under the SCS framework.MAS is of the view that this label is straightforward and is expected to be easily understood by the public.In order to preserve the credibility of the SCS framework, only SCS regulated under the SCS framework will be permitted to use the label.

All other DPT service providers and persons will be prohibited from using the term “MAS-regulated stablecoin”, or any derivatives of the term, to refer to tokens that are not regulated under the SCS framework.Financial penalties and imprisonment (in the case of individuals) may apply in the case of contraventions.

Composition of reserve assets 3.2.The majority of respondents were supportive of the proposed reserve asset composition requirements.Several respondents requested more specific parameters on the liquidity of assets, proportion of acceptable asset classes as well as credit rating of assets, while one respondent suggested allowing for longer tenor debt securities.3.3.

Some respondents commented that the requirement for reserve assets to be in the same currency denomination as the peg of the SCS was unnecessary, and that reserve assets should be allowed to be denominated in any G10 currency instead, regardless of the peg of the SCS.3.4.

On the requirement that reserve assets, on a mark-to-market basis, must be at least 100% of the par value of the outstanding SCS in circulation at all times, some respondents suggested different approaches to account for price volatility of the reserve assets.

A few respondents suggested requiring reserve assets to be maintained at prescribed levels greater than 100% at all times, while another respondent suggested that an element of margin be permitted, such that the value of reserve assets be allowed to fall to between 90% and 100% of the total value of SCS in circulation.

MAS’ Response 3.5.MAS intends to maintain a simple framework for reserve assets and will thus require SCS issuers to maintain a portfolio of reserve assets with very low risk.However, such SCS issuers will be required to maintain a robust and resilient risk management policy for its reserve assets, covering aspects such as credit, liquidity and concentration risk.

Where necessary, SCS issuers should demonstrate to MAS how they review and determine the appropriate buffers in order to ensure that the valuation of their reserve assets is maintained at a level that is at least 100% of the outstanding SCS in circulation at all times.

Segregation and custody of reserve assets 3.6.MAS had proposed that SCS issuers must hold all reserve assets used to back the SCS in segregated accounts, separate from its own assets which are not reserve assets.MAS had also proposed for reserve assets to be held only in financial institutions licensed to provide custodial services in Singapore.3.7.

There was broad support for SCS issuers to hold the reserve assets of the SCS in segregated accounts, separate from its own assets which are not reserves.However, a few respondents suggested that nonSGD denominated reserve assets should be allowed to be custodised at overseas institutions, aligned with the existing regulatory requirement in the Securities and Futures (Licensing and Conduct of Business) Regulations.

One respondent suggested that permitted custodians should have a minimum credit rating of “A-”.

MAS’ Response 3.8. MAS will go ahead with the proposed requirement for SCS issuers to hold the reserve assets of the SCS in segregated accounts, separate from its own assets which are not reserves. MAS also agrees with respondents that custody of assets by overseas-based custodians may be allowed, provided that such custodians have a minimum credit rating of “A-”, and have a branch in Singapore regulated by MAS to provide custodial services.

Reserve asset audit requirements 3.9.There was a range of feedback on the proposed requirement for reserve assets to be independently attested to on a monthly basis, and for attestations to be published on the issuer’s website and submitted to MAS no later than the end of the following month.Some respondents agreed, with a few suggesting an even higher frequency of publication of reserve asset valuations (e.g.

every fifteen days or daily), while some other respondents said that monthly independent attestations could be too onerous and costly for industry players.One respondent suggested that MAS set the requirements based on thresholds of the SCS issuance amount, such that smaller entities could be subject to less onerous attestation and reporting requirements.

MAS’ Response 3.10. MAS will proceed with the proposal without amendments. This is in view that the SCS framework is intended for SCS issuers with a significant amount of SCS in circulation, and to achieve a high level of transparency and trust in the value of the SCS.

Prudential requirements 3.11.MAS sought comments on whether the following prudential requirements to be applied on SCS issuers under the SCS framework were risk proportionate, and suggestions on alternative approaches to address the risks: (a) Base capital – Higher of S$1 million or 50% of annual operating expenses of the SCS issuer;

(b) Solvency – To hold at all times, liquid assets4 which are valued at higher of 50% of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down;and (c) Business restrictions – An SCS issuer is not allowed to undertake other activities that introduce additional risks to itself.This includes investing in and extending loans to other companies, lending or staking of SCS and other DPTs, and trading of DPTs.

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.sister company in which the SCS issuer does not have a stake in).

One respondent suggested it was excessive compared to the existing capital requirement for e-money issuers (S$100,000 or S$250,000) under the PS Act, or the proposed stablecoin capital requirement of other jurisdictions.On the other hand, some respondents suggested higher base capital requirements, for example, to be in line with that required of banks.

There were also suggestions to adopt a risk-based capital framework instead, or to consider referencing a fixed percentage against the value of SCS in circulation, as opposed to the issuer’s operating expense, since the latter would favour large issuers given economies of scale.

However, one respondent suggested that further specifications, such as specific tenor buckets of negotiable Certificates of Deposits (“CDs”) or 4

Proposed assets that will be considered liquid assets include cash and cash equivalents, debentures of government, negotiable certificate of deposits, and money market funds.

overnight and weekly requirements for money market funds (“MMFs”) that may be recognised as liquid assets, be set out.There were also suggestions that the amount assessed to achieve recovery or an orderly wind-down be subject to independent or regulatory review, at least on an annual basis.

Some respondents proposed for MAS to consider allowing SCS issuers to undertake ancillary DPT/SCS-related services, such as the lending, investing or trading of DPT/SCS, on the condition that additional safeguards be implemented to ringfence the risks.A couple of respondents suggested that instead of a blanket prohibition, SCS issuers should be allowed to undertake DPT/SCS-related services up to a specified limit, such as up to the amount of its reserve assets or capital.

MAS’ Response 3.15.MAS will maintain the base capital proposal as is.The base capital requirement for SCS issuers is set relatively high to ensure that SCS issuers demonstrate a strong financial commitment to carry on its business for the long term.A simplified capital framework takes into account the intent that SCS issuers will be highly restricted in their business operations so as to reduce the risks they are exposed to.3.16.

On solvency, MAS agrees with the feedback and will adjust the proposal to require that the amount assessed to achieve recovery or an orderly wind-down of an SCS issuer be subject to independent audits on at least an annual basis.This will provide an additional layer of verification on the appropriate amount of liquid assets that would be sufficient to meet our objective.3.17.

On business restrictions, MAS reiterates that SCS issuers under the SCS framework should not be exposed to risks beyond the primary activity of SCS issuance.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.

However, MAS does not intend for an SCS issuer under the SCS framework to take on other business offerings such as lending services, dealing or fund management services, which carry significant risks.

One respondent also sought clarification on how the five business day timeline would apply for cases where redemptions take place through an intermediary that is a DPT service provider.

MAS’ Response 4.3.MAS will proceed with the requirement that SCS issuers return the par value of MAS-regulated SCS to holders within five business days.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, for example, 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.MAS notes that the stipulated time period applies only to redemption by parties that redeem directly with the SCS issuer.

MAS sought views on whether it was a likely development that the same SCS could be issued in multiple jurisdictions, and put forth two proposed avenues to recognise SCS with multi-jurisdiction issuance: (a) Require the SCS issuer in Singapore to obtain and submit to MAS an independent attestation on an annual basis that other significant issuers of the SCS are deemed to meet equivalent standards relating to reserve backing and prudential requirements;

or (b) Establish regulatory cooperation among relevant regulatory bodies of the SCS to exchange information on operations of the SCS.

Some respondents also commented that regulatory cooperation might not be sufficient to achieve MAS’ objectives, as there could be challenges in enforcement, without formal schemes in place to recognise regulatory equivalence across jurisdictions.

MAS’ Response 5.3.MAS notes that given the nascent state of stablecoin regulations globally, it would be difficult to establish regulatory equivalence and cooperation with other jurisdictions at this juncture.The current technical standards also do not allow for the tracing of the SCS’ issuance origin (i.e.the issuance entity and jurisdiction), once such SCS are commingled.

This makes it practically difficult to monitor and establish the adequacy and availability of reserve assets held in an overseas jurisdiction that may be utilised towards redemption requests in another jurisdiction.

MAS will continue to monitor regulatory and technical developments relating to stablecoins, and consider formal regulatory cooperation mechanisms with other jurisdictions as stablecoin regulations mature over time.

Correspondingly, MAS sought comments on whether there might be other specific SCS-related activities that would not be caught as a regulated DPT service (including those under the Payment Services (Amendment) Act)5, and which MAS should regulate either as a new payment service or through amendments to the scope of an existing payment service.6.2.

Several respondents proposed that instead of treating all non-issuance activities of SCS as regulated DPT services, MAS should adopt a calibrated risk-based approach, on the basis that SCS has greater value stability than DPT.In particular, one respondent suggested that MAS should scope out payment services arising from intermediaries’ use of SCS (e.g.transmission of SCS, facilitating the exchange of SCS) from the scope of regulated DPT services.

MAS’ Response 6.3. MAS will proceed with the proposal as is, as non-issuance SCS activities carry the same risks as DPTrelated services currently regulated under the PS Act. This means that an entity that is conducting the dealing in or facilitating the exchange of MAS-regulated SCS will have to be regulated as a DPT service provider under the PS Act.

The scope of DPT services that will be regulatable under the PS Act will be expanded when the Payment Services (Amendment) Act takes effect. Please refer to Consultation on the Payment Services Act 2019: Proposed Amendments to the Act for more details.

Timely transfer of SCS 6.4. MAS sought comments on whether three business days would be a reasonable timeline for DPT service providers to transmit MAS-regulated SCS from a payer to payee.

MAS’ Response 6.6.Transfers of SCS, by virtue of them being done on a blockchain, may be expected to be completed more quickly than transactions on traditional payment rails.MAS notes, however, that the transfer of MASregulated SCS may occur on various types of blockchain infrastructure that may have different service standards, and that such infrastructure may not always be fully under the intermediary’s control.

As such, MAS will retain the proposed timeline of three business days.This would mirror the existing money transmission requirement for domestic money transfer services.

Segregation of customers’ SCS 6.7.MAS sought comments on whether the proposal for SCS intermediaries to segregate customers’ MASregulated SCS from other customers’ assets (e.g.DPTs) as well as its own assets in different custody accounts would be appropriate to mitigate the risk of misuse of customers’ SCS.

However, many respondents were concerned that the proposed requirement to segregate customers’ MAS-regulated SCS from customers’ other assets would be too operationally challenging and did not bring any incremental benefit in mitigating the risk of misuse of customers’ SCS.

the proposed segregation requirements were similar to that as outlined in MAS’ consultation paper on “Proposed Regulatory Measures for Digital Payment Token Services”.6

MAS’ Response 6.10.MAS will proceed with the proposal for SCS intermediaries to segregate customers’ MAS-regulated SCS from the intermediaries’ own assets.The upcoming measures7 relating to segregation and custody of customers’ assets for DPT service providers will apply equally to SCS intermediaries, given that SCS intermediaries will also be subject to regulations for DPT service providers.

MAS will therefore not require customers’ MAS-regulated SCS to be further segregated from customers’ other DPT.

The risks of such arrangements, as well as steps taken by the SCS intermediary to mitigate them, will have to be clearly disclosed to its customers.

Consultation on Proposed Regulatory Measures for Digital Payment Token Services, Oct 2022 here. Response to Public Consultation on Proposed Regulatory Measures for Digital Payment Token Services (Part 1), Jul 2023 here. 7

MAS also sought comments on whether key entities of a systemic stablecoin arrangement should be subject to higher regulatory and supervisory standards to safeguard financial stability risk.

However, a few respondents highlighted the impracticalities of subjecting stablecoin arrangements that are hosted on decentralised public blockchains to enhanced regulatory and supervisory standards.The main reason cited was the difficulty in identifying the operator(s) for such stablecoin arrangements, unlike in a typical payment ecosystem, where the operator is identifiable and responsible for the smooth functioning of the payment system that it operates.

MAS’ Response 7.3. MAS will proceed with the proposal, to ensure that MAS has powers to regulate a systemic stablecoin arrangement adequately. MAS notes the challenges and will continue to monitor international developments on the expectations of regulating systemic stablecoin arrangements, before developing the specific requirements to regulate such arrangements.

A respondent clarified if SCS issuers would be required or allowed to pay interest on “deposited cash” relating to the SCS issuer’s SCS.Others provided feedback regarding risks to monetary sovereignty and interoperability with other stablecoins and Central Bank Digital Currencies (“CBDC”).

MAS’ Response 8.2.SCS issuers under the SCS framework will be subject to business restrictions to ensure that they are not exposed to additional risks, including through offering of other business services such as staking or lending, where interest is paid to customers.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.

As such, they will not be covered under the Deposit Insurance Scheme.

The DPT and SCS regulatory regimes will help MAS monitor the growth of the use of DPT and SCS as alternative media of exchange, and consider necessary measures to safeguard the efficiency of monetary policy and maintain stability in Singapore’s financial system.

Annex A: Summary of Finalised Key Requirements KEY REQUIREMENTS FOR MAS-REGULATED STABLECOIN ISSUERS

Requirements for MAS-regulated stablecoin issuers • • Composition

Business Restriction • • WHITE PAPER ISSUANCE

Denominated in currency of stablecoin peg Held in cash/ cash equivalents/ debt securities with up to threemonth 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-” At least equivalent to par value of SCS in circulation at all times Valued at mark-to-market basis daily Held in segregated accounts on trust Held in permitted custodians as follows: - Financial institutions licensed for custodial services in Singapore by MAS;

or - Overseas-based custodians,with minimum credit rating of “A-”,which have a branch in Singapore regulated by MAS to provide custodial services 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 Direct legal claim for redemption at par Redemption requests can be made anytime Timely redemption (no later than 5 business days) Redemption conditions (if any) must be reasonable,

and disclosed upfront Higher of S$1million or 50% of annual operating expenses (“OPEX”) Liquid assets valued at higher of 50% of annual OPEX or amount assessed to achieve recovery/ orderly wind-down Amount assessed to achieve recovery/ orderly wind-down to be independently verified Prohibit provision of other non-issuance services (e.

g.lending, staking, dealing in DPTs other than the SCS being issued and recognised as MAS-regulated stablecoin) in SCS-issuing entity SCS-issuing entity cannot have stake in any other entity White paper to be issued, disclosing details such as, but not limited to: - General information of the issuer;

Requirements for MAS-regulated stablecoin issuers -

ANTI MONEY LAUNDERING/ COUNTERING THE FINANCING OF TERRORISM (AML/CFT) TECHNOLOGY/ CYBER RISK

Operations of the SCS (including value-stabilising mechanism, technology adopted); - Risks arising from use of SCS; and - Rights and obligations related to the SCS (e.g. redemption) etc. Existing AML/CFT standards on DPT service providers and banks, e.g. customer due diligence, travel rule, screening, etc. Existing technology and cyber risk management standards on DPT service providers