Today the Monetary Authority of Singapore (MAS) published a draft law requiring digital payment token providers to keep customer assets in a statutory trust. Digital payment tokens is the term using in Singapore for cryptocurrency and stablecoins. MAS asked for feedback within the month and wants to implement the law this year.
Simultaneously it aims to restrict the ability of service providers to enable crypto lending and staking for retail clients.
The collapse of several crypto firms, particularly FTX, has highlighted the degree to which crypto firms commingle their own assets with those of clients. Unfortunately, legislation won’t necessarily prevent it from happening but should make it harder and more likely a whistleblower will report them.
Most of today’s proposed laws aim to protect clients in the event of a bankruptcy. However, MAS acknowledged that in the case of bankruptcy, it can take a long time to recover remaining funds.
The new laws impose requirements that firms handling any other kind of customer assets expect. While client funds have to be kept separately from the firms assets, it is allowable to commingle client funds with other client funds. However, this has to be disclosed as well as the risks involved.
Other requirements include ensuring the digital asset custody function is an independent business unit or arms length. Service providers are expected to keep proper records of client assets and perform reconciliations daily.
Digital asset dilemma: regulate or educate?
Singapore has established itself as one of the most innovative jurisdictions for digital assets. However, it is wary of the risks of cryptocurrencies to retail investors. Earlier this year, MAS Chair and Government Senior Minister Tharman Shanmugaratnam voiced reservations about regulating the sector out of concern this might legitimize the sector. “Does that legitimize something that’s inherently, purely speculative and, in fact, slightly crazy?” he said.
Meanwhile, the nation-state is forging ahead in other areas such as Project Guardian providing a safe environment to support numerous institutions implementing regulated activities on public blockchains. It’s also working with other central banks exploring cross border FX on public blockchains. MAS recently published a paper proposing standards for programmable digital currency that it refers to as purpose bound money.