Interpretation of the New Regulations on Digital Token Service Providers (DTSP)

On May 30, the Monetary Authority of Singapore (MAS) issued a guidance document on the Digital Token Service Provider (DTSP) license, which detailed the eligibility criteria and license application procedures for DTSP. The new regulations will be officially implemented on June 30, triggering heated discussions in the crypto industry about Singapore's tightening crypto regulation.

In this article, the Beosin Compliance Team will sort out Singapore's crypto regulatory laws and regulations and interpret the new DTSP regulatory regulations to help readers understand the implementation of its regulatory policies and the impact on the development of the industry.

Singapore Crypto Regulatory Regulations

Singapore's cryptocurrency regulation is jointly responsible by multiple government agencies, among which the most important regulatory department is the Monetary Authority of Singapore, which is responsible for supervising the entire financial market, including cryptocurrency-related activities and formulating corresponding policies. MAS divides cryptocurrencies into three categories: Utility Token, Security Token, and Digital Payment Token (DPT).

Among them, utility tokens are not subject to special regulations. If security tokens are defined as capital market products (CMP), they are regulated by the Securities and Futures Act, while DPTs are regulated by the Payment Services Act. Common mainstream cryptocurrencies such as BTC and ETH are identified as DPTs. The following focuses on DPTs and the Payment Services Act.

Payment Services Act

In January 2020, Singapore promulgated the Payment Services Act (PSA), which puts various payment activities under a unified regulatory framework. Payment services defined by PSA include account issuance services, electronic money issuance services (which can be compared with stablecoin issuance in the context of cryptocurrencies), cross-border remittance services, domestic remittance services, merchant collection services, digital payment token services, and currency exchange services.

According to the Payment Services Act, cryptocurrency service providers need to register and obtain a license from MAS before they can operate. Currently, there are three types of PSA licenses: Money-Changing License, Standard Payment Institution (SPI) and Major Payment Institution (MPI).

The licenses applicable to cryptocurrencies are SPI and MPI, which include but are not limited to cryptocurrency exchanges, crypto wallet providers, etc. Digital payment token service providers also need to demonstrate their ability and procedures to meet anti-money laundering requirements, such as risk-based assessment methods, strict customer identification (KYC), transaction monitoring (identifying suspicious transactions, large transactions, frequent small transactions, or transactions with high-risk countries or regions), reporting of suspicious activities (if service providers find signs of money laundering or terrorist financing activities, they must report suspicious transactions to the Financial Crime Investigation Department of the Monetary Authority of Singapore (MAS) and the Singapore Police Force), complete record keeping (cryptocurrency platforms need to keep transaction records for at least five years), etc.

Previously, Beosin has provided KYT services to licensed crypto service providers such as FOMO Pay, Cobo, and HashKey Group to help them comply with PSA regulatory requirements.

Financial Services and Markets Act

In April 2022, Singapore reviewed and passed the Financial Services and Markets Act (FSMA), requiring digital token issuers and service providers to obtain relevant licenses and strengthen anti-money laundering and anti-terrorist financing supervision related to cryptocurrencies. The bill is implemented in three phases:

Phase 1 will be implemented on April 28, 2023, and the following provisions will be migrated from the Monetary Authority of Singapore Act to FSMA:

● General powers over financial institutions, including inspection powers, violations and other miscellaneous provisions.

● Provisions on Anti-Money Laundering/Combating the Financing of Terrorism

● Provisions on Financial Dispute Resolution

Phase 2A commences on 10 May 2024. This phase formally implements:

● New provisions on technology risk management

● Provisions related to the control and resolution of financial institutions

Phase 2B commences on 31 July 2024. This phase introduces and implements Part 3 of FSMA, giving MAS broader and more uniform powers to issue prohibition orders.

Phase 3 will commence on 30 June 2025, when MAS will implement a framework for regulating DTSPs under Part 9 of FSMA. This is also the reason why the DTSP regulatory license came into effect on June 30.

Supervision upgraded again: DTSP license

According to the provisions of FSMA, individuals or partnerships operating in Singapore business premises, or Singapore companies serving customers and digital tokens outside Singapore, will be identified as DTSPs and must hold a DTSP license:

https://www.mas.gov.sg/-/media/guidelines-on-licensing-for-digital-token-service-providers.pdf

In short, people or companies in Singapore need to obtain a license if they provide digital token services to customers outside Singapore. MAS also issued a statement on June 6, saying that such business models have a higher risk of money laundering. MAS will not be able to effectively supervise such people if their substantial regulatory activities are outside Singapore. Therefore, the threshold for issuing DTSP licenses is very high and licenses are usually not issued. Such DTSPs will essentially leave Singapore or cease their business before June 30.

Beosin KYT customers who previously provided digital payment tokens or capital market product token services to Singaporean customers, such as FOMO Pay, Cobo, HashKey Group, etc., are still regulated by the Payment Services Act, the Securities and Futures Act, or the Financial Advisers Act 2001. The scope of its services has not changed, and its business is not affected, but it needs to meet more stringent regulatory requirements: technical risk management, reporting major security incidents within 1 hour, etc.

Summary

Singapore has continuously strengthened its supervision of the cryptocurrency industry through the Payment Services Act and the Financial Services and Markets Act. This new regulation was not introduced suddenly, but is the final stage of the phased implementation of the Financial Services and Markets Act, which aims to increase the supervision of cryptocurrency anti-money laundering and anti-terrorist financing. The implementation of this new regulation will end the regulatory arbitrage of unlicensed DTSPs in Singapore, and also mark that Singapore's crypto market will enter a more compliant and institutionalized stage.