Requiring retail customers to demonstrate a set standard of knowledge before being accepted, preventing issuers from introducing certain activities, and the establishment of capital and reserve requirements for stablecoin issuers are among the tough measures floated by the Monetary Authority of Singapore (MAS) in two consultation papers on crypto regulation issue this week.

The MAS says it is proposing the measures “to reduce the risk of consumer harm from cryptocurrency trading and to support the development of stablecoins as a credible medium of exchange in the digital asset ecosystem”.

Reduce risk

It goes on: “Trading in cryptocurrencies (also known as digital payment tokens or DPTs) is highly risky and not suitable for the general public. However, cryptocurrencies play a supporting role in the broader digital asset ecosystem, and it would not be feasible to ban them. Therefore, to reduce the risk to consumers from speculative trading in cryptocurrencies, MAS will require that DPT service providers ensure proper business conduct and adequate risk disclosure.”

Final agreed measures will be part of the Country’s Payment Services act.

The papers, one on measures for digital payment token services, and one on a regulatory approach for stablecoins, cover three broad areas.

• Consumer access. DTP providers must enable retail consumers to make informed decisions about cryptocurrency trading, and must prevent the use of credit and leverage for crypto trading.
• Business conduct. Customer assets must be properly segregated, potential conflicts of interest must be mitigated, and “proper processes” for complaints handling established.
• Technology risks. Providers of DTP services will be required to have the same high availability and recovery of critical systems as more traditional financial institutions.

Stablecoin requirements

On single-currency pegged stablecoins (SCS), the MAS proposes to regulate their issuance, and peg them to a single currency where the value of SCS in circulation exceeds S$5m. Key issuer requirements are specified in the following areas…

• Value stability. Reserve assets in cash, cash equivalents, or short-dated sovereign debt securities at least equivalent to 100% of the par value of outstanding SCS in circulation must be held by issuers. These assets must be in the same denomination as the pegged currency.
• Reference currency. SCS issued in Singapore must be tagged to a G10 currency.
• Disclosures. Stablecoin issuers will have to publish a white paper setting out details of the SCS, including the redemption rights of stablecoin holders.
• Prudential standards. Issuers must meet a base capital requirement of S$1m or 50% or annual operating expenses, whichever is the higher. They must also hold liquid assets valued at the higher of 50% of annual operating expenses or an amount they judge to be needed to achieve recovery.

Regulate to innovate

It’s also proposed that Singapore’s banks will be allowed to issue SCS with no additional reserve backing or prudential requirements if the SCS is issued as a form of tokenized liability. The MAS judges existing frameworks sufficiently rigorous.

Ho Hern Shin, Deputy Managing Director (Financial Supervision), MAS, said: “Regulations go hand-in-hand with innovation in financial services. The enhanced regulatory regime for stablecoins aims to support the development of value-adding payment use cases for stablecoins in Singapore.”