The Initial Coin Offering (“ICO”) fever in 2017 proved to be a high-risk environment for investors since the industry was largely unregulated, a number of token issuers were fraudulent and many of the underlying blockchain platforms did not succeed technologically or commercially. Since then, there has been rapid development in the industry and its regulatory landscape in Singapore.
The Security Token Offering (“STO”) gained traction as investors had the assurance that it was regulated by the securities laws in Singapore. A more recent development is the Initial Exchange Offering (“IEO”), which is a token sale conducted on a well-known token exchange’s fundraising platform, where users can purchase tokens with funds or cryptocurrency directly from their own exchange wallet.
Singapore, with its conducive regulatory environment, has attracted many token issuers in the cryptocurrency industry. The Singapore authorities have responded by putting in place finely-tuned laws to govern this booming industry. Here, we will discuss the different types of tokens and the regulatory requirements for issuing and trading these digital assets.
Types of tokens
Tokens and their related activities may be regulated under the Payment Services Act 2019 (“PSA”) and/or the Securities and Futures Act (Cap. 289) (“SFA”).
Under the SFA, a token could potentially constitute a “security”, depending on its characteristics, and hence be regulated under the SFA, by the Monetary Authority of Singapore (“MAS”).
According to the latest guidelines provided by the MAS, “security” tokens are digital tokens that constitute “capital market products”. The SFA defines capital market products to include:
- Shares when in general they confer or represent ownership, rights, and liabilities in a corporation;
- Debentures that constitutes or evidences the indebtedness of the issuer;
- Tokens that confer or represent an ownership interest in the trust property of a business trust;
- Tokens that represent securities-based derivatives contracts involving any of the assets mentioned above;
- Tokens that represent rights or interests in collective investment schemes (CIS).
The offer of tokens that constitute capital market products is considered an STO and must be compliant with the SFA.
A token can be safely considered a utility token when it is not a security one. Utility tokens in general support services or functionalities on blockchain-based platforms. These types of tokens are not suitable for investment in companies. They give different rights to the owners of the tokens like participation in networks and voting rights.
Regulation of Security Token Offerings (STOs)
Entities who make offers of security tokens must comply with the requirements of the SFA. The most important rule is that the ICO (STO) must be accompanied by a prospectus that must be registered with MAS. There are some exceptions to this rule where a prospectus is not required:
- Small (personal) offers that do not exceed S$5 million within any 12-month period;
- Private placement offers made to no more than 50 persons within any 12-month period;
- Offers made to only institutional or accredited investors
Although a prospectus is not necessary for these types of ICOs they are still subject to some regulations including advertising restrictions.
Payment Services Act 2019 requirements
A token issuer’s activity could potentially constitute one or more of the regulated payment services under the PSA, such as a digital payment token service, account issuance service or e-money issuance service. In these circumstances, the token issuer would have to apply for a licence under the PSA, and comply with the various applicable requirements under the PSA, its subsidiary regulations, and the related Notices and Guidelines issued by MAS. This includes anti-money laundering/ counter-financing of terrorism requirements.
A token issuer may be providing a digital payment token service if it provides a service of buying or selling digital payment tokens (“DPT”) in exchange for money or other types of DPT. A DPT is defined in the PSA as any digital representation of value that, inter alia, is expressed as a unit, 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 and can be transferred, stored or traded electronically. However, the token issuer would not be regulated for carrying on a business of providing digital payment token services if its token constitutes a limited purpose digital payment token, or if it only uses or accepts DPT as payment for goods or services.
Related regulated activities
Intermediaries in the industry, such as brokers, who deal in capital market products, would need to obtain a capital markets services licence under the SFA. Intermediaries who deal in DPT’s would have to obtain a licence under the PSA.
For token exchanges on which capital markets products are traded, they would need to obtain the requisite approval or recognition under the SFA from MAS. Token exchanges that facilitate the exchange of DPT would have to obtain a licence under the PSA.