Over the last 3 to 4 months, much has happened across Singapore’s crypto landscape. The MAS has, amongst other things, effectively banned the advertising of crypto-related services, and declared that stablecoins are not “e-money”. The High Court has released what will likely be a seminal judgment on crypto assets being property that can be subject to injunctions. Within this same period, the world’s largest crypto exchange also withdrew its license application and has since ceased its trading services here.
This article will present a snapshot of the recent legal and regulatory changes. However, amidst these, perhaps most noteworthy is MAS’ stance about crypto, and how its message appears to have adopted a different tone over the last quarter.
Regulatory Changes
In February and March, MAS has implemented several changes that will impact both consumers and digital payment token service providers.
Customer Due Diligence
Applicable to financial institutions across the board (and not only specific to crypto firms), MAS had last month issued a circular on good practices and risk mitigation measures for the use of non-face-to-face technologies for customer due diligence. Given the proliferation of virtual onboarding of customers, the circular stems from anti-money laundering and countering the financing of terrorism (“AML and CFT”) concerns, and addresses actions that can help “mitigate impersonation and fraud risks”.
Stablecoins Not “E-Money”
This month, MAS updated its FAQ on the Payment Services Act (“Act”) clarifying that stablecoins would not be classified as “e-money”, though they may meet the definition of digital payment tokens (see Question 23). This can be seen as a welcome move especially for individual consumers, as the practical effect of not being “e-money” results in stablecoins not being subject to the stock and flow caps (load capacity of $5,000, annual transaction flow cap of $30,000) that apply to personal payment accounts issued by major payment institutions (see section 24 of the Act and Part 3.2.2 of this MAS Guide).
Payment Services Act Notices
Also in March, MAS issued amendments to Payment Services Act Notices PSN02 and PSN08. Digital payment token service providers will have to comply with the relevant changes to their AML and CFT obligations, and the risk disclosure language they are required to include.
Income Tax on NFTs
Further, Finance Minister Lawrence Wong stated in parliament today that “prevailing income tax rules” would apply to those who derive income from NFT transactions or from trading in NFTs. Detailed guidelines or regulations are awaited for more clarity, though Wong mentioned capital gains from NFTs would not be taxable since there is no capital gains tax regime in place.
Court Rules Crypto as Property, Injunctions Possible
March has also seen a landmark decision by the Singapore High Court in the case of CLM. v. CLN and others, which will likely serve as precedent for future crypto cases across several legal issues. The plaintiff alleged that crypto assets had been misappropriated from him by the first defendants, a portion of which was traced to wallets controlled by crypto exchanges operating in Singapore. The exchanges were called into the lawsuit as the second and third defendants. The plaintiff sought injunctions to prohibit the first defendants from dealing with the relevant crypto assets.
Property
The Court’s view was that crypto assets fulfilled the legal definition of property, having satisfied the Ainsworth Test of possessing property rights that are (i) definable, (ii) identifiable by third parties, (iii) capable of assumption by third parties, and (iv) bear some degree of permanence or stability.
Subject to injunctions
Having recognized that crypto assets are “capable of giving rise to proprietary rights”, the Court held that they “could be protected via a proprietary injunction”. Of course, in order for such injunctions to be given, a separate legal test needs to be met. Here, it was found that there would be a real risk of dissipation of the crypto assets, and a proprietary injunction was granted to prohibit the defendants from “dealing with, disposing of, or diminishing the value of” them.
Unidentified Defendants
The Court also ruled that it has jurisdiction to grant orders such as injunctions where defendants are unknown, though the description of the defendants “must be sufficiently certain as to identify both those who are included and those who are not”. It was satisfied that the description used by the plaintiffs, being “any person or entity who carried out, participated in or assisted in the theft of the [crypto assets]… save for the provision of cryptocurrency hosting or trading facilities”, was adequate.
In the crypto context, this is an important development since transactions can be traced to wallet addresses, even if exact identities of the address owners are not known.
Disclosure Obligations of Exchanges
In the proceedings, the plaintiff also sought disclosure orders against the exchanges, asking for information and documents relating to the accounts that had received the assets in question. The plaintiff wished to know what remained of the assets, the extent the assets had been transferred elsewhere, as well as the assets’ whereabouts. These orders were granted by the Court, which viewed that the information would “facilitate the identification of the first defendants, or any persons that may have assisted or acted in concert with them”.
With this precedent, crypto exchanges operating in Singapore will need to be aware that they can be subjected to court orders for disclosure of the above classes of information.
Ban on Advertising and MAS’ Overall Approach to Crypto — A Different Tune?
Last November, mainstream media was rife with headlines on Singapore positioning itself as a crypto hub (see Business Times, Straits Times). This followed MAS Managing Director Ravi Menon’s statements that the nation wants to be “a leading player” in the event the crypto economy takes off. Menon also declared that “the best approach is not to clamp down or ban these things”, but to proceed with “strong regulation”.
Just 2 months later, the official message appeared to have changed. In January this year, MAS issued guidelines discouraging the trading of crypto by the general public, banned crypto-ATMs, and declared that digital payment token service providers could no longer advertise beyond the realms of their own websites, applications, or social media accounts. Promoting crypto services via billboards in public, roadshows, events, and even third party websites, became prohibited.
The guidelines are puzzling for 3 broad reasons. First, just a month after their release, MAS Chairman Tharman Shanmugaratnam (in confirming that MAS does not currently regulate NFTs) stated in parliament that it “does not and cannot possibly regulate all things or products that people choose to invest their money in”. Given that NFTs are arguably more speculative than the various coins of the cryptoverse, this position seems difficult to reconcile with what appears to be a parental controls / child lock approach taken by the guidelines.
Second, is trading or investing in cryptocurrency inherently riskier than dabbling in the stock market? Volatility in crypto is well-known, but surely the uninitiated retail investor faces similar risks when buying obscure penny stocks shilled by Youtubers, or worse, diving into put and call options for them?
Third, could a more nuanced approach (and one more aligned with being a crypto hub) not have been taken? Shortly after MAS released the above guidelines, the United Kingdom’s economic and finance ministry issued a consultation response on the financial promotion of cryptoassets. Promotion would be regulated (instead of being out rightly banned), and firms would need to be authorised to conduct promotions, which would have to be “fair, clear, and not misleading”. Similarly, a regulate, not ban, approach has been taken by Spain, where the National Securities Market Commission has begun to regulate promotion of crypto by social media influencers and their sponsors, with notifications to authorities and risk warnings being required.
Certainly, the official narrative is now more cautious and one that bears a clear message — crypto is a viable, future-based investment, but retail investors should not get involved as they may not appreciate the risks. As Temasek Holdings, the state’s investment arm, continues to actively put money into the crypto space (see FTX, Amber, and Immutable), retail is constantly warned about dipping their toes in the water. Perhaps coincidentally, The Straits Times has been taking great pains to highlight doom and gloom in the cryptoverse. See “Shock to crypto daredevils joins list of scary market omens”, “Shield retail investors from crypto risks”, “Experts advise caution as Bitcoin drops to 5-month low”, and “Too good to be true: Crypto investors should be careful of being scammed”.
The next year or two will provide great clarity into the country’s “crypto-hub” direction. As observed by David Carlisle, Director of Policy and Regulatory Affairs at established blockchain analytics company Elliptic, “[crypto firms] would need to consider whether Singapore is a viable market for them. Again — how will this work in light of the stated objective of wanting to establish the country as a bona fide fintech hub?” In the meantime, as cautioned by MAS, retail investors would do well to pay extra attention to the risks involved.