SINGAPORE, Oct 26 — Consumers will have to take a test before they are allowed to trade cryptocurrencies and they will not be able to use credit cards or payment apps linked to credit cards to buy cryptocurrencies, under a set of proposed new rules put forth by the Monetary Authority of Singapore (MAS) today (October 26).

MAS is consulting the public on these and other recommended rules related to cryptocurrency trading, which are proposed to come under the Payment Services Act.

The proposed rules are set out in two consultation papers, one focusing on consumer protection and another on how to support the development of stablecoins as a credible medium of exchange in the digital asset ecosystem.

Cryptocurrencies, also known as digital payment tokens, are an encrypted data string that denotes a unit of currency. Examples include Ethereum, Bitcoin, and Solana.

Stablecoins are cryptocurrencies that attempt to peg their market value to some external reference, such as a fiat currency like the US dollar, and are thus seen to be less volatile as a medium of exchange. Examples include Tether, Binance, and Paxos.

MAS' managing director Ravi Menon had said earlier this year that the authority was considering implementing measures to reduce the consumer harm caused by volatile crypto investments.

However, Menon said that that time that an outright ban on would be unlikely to work.

Reiterating this on Wednesday, MAS said in a statement: "The fact remains that cryptocurrency trading and services are cross-border in nature, and such a prohibition is unlikely to be effective in limiting consumer harms.”

On the contrary, MAS said that local consumers can easily access cryptocurrency trading platforms overseas through their mobile devices and these platforms may be unlicensed.

Proposals for consumer protection

MAS said that while cryptocurrencies offer "transformative economic potential”, they are "heavily speculated upon, with prices that are not associated with any underlying economic value”.

"Cryptocurrencies can be highly volatile as their prices are typically not related to any economic fundamentals, and are hence highly risky and not suitable for consumers,” said MAS in its consultation paper.

For example, due to the "pseudonymous nature of transactions”, cryptocurrencies also carry a higher risk of being misused for illicit purposes. In 2021, US$3.2 billion (S$4.5 billion) in cryptocurrencies were stolen, and about US$3 billion in cryptocurrencies has been stolen so far this year.

It thus proposed several measures to educate consumers on the risks behind trading cryptocurrencies, as well as measures that service providers should take to protect consumers:

1. Measures to regulate consumer access to cryptocurrency trading:

― MAS proposes that service providers assess their retail customer's knowledge of the risks regarding cryptocurrency trading through a test. They should also provide potential consumers with educational material, not limited to the questions that the customers answer wrongly.

― MAS also expects financial institutions to ensure that any gift or incentive does not unduly influence the decision of the retail customer to purchase any financial product or service

― MAS also proposed that crypto service providers refrain from accepting any payment made by retail customers using a credit card, including payment apps linked to credit cards, or charge card. "The use of any form of credit or leverage in the trading of digital payment tokens would result in the magnification of losses and could cause the customer to lose more than the whole amount put in and more,” said MAS.

2. Measures regulating business conduct and technology risks

― Crypto service providers will be required to implement proper segregation of customers’ assets. For instance, service providers should provide written disclosures to customers of the risks involved in having their assets held by the service provider

― To mitigate any potential conflicts of interest which arise from the multiple roles they perform, service providers could adopt appropriate measures such as segregation of duties, independent reporting lines and information barriers. They should also disclose to their customers the general nature and sources of conflicts of interest and the steps taken to mitigate them

― Processes for complaints handling should also be established, and this can include appointing a member of senior management, or committee of members, who are not directly involved in the provision of crypto services to oversee complaints handling

― Similar to other financial institutions such as banks, crypto service providers will be required to maintain high availability and recoverability of their critical systems, said MAS

― This could include putting in place a framework and process to identify critical systems, to ensure that the maximum unscheduled downtime for each critical systems does not exceed a total of four hours within any period of 12 months.

Proposals for stablecoin development

For stablecoins, MAS said that there is "potential” for it to be "a medium of exchange to facilitate transactions in the digital asset ecosystem, provided they are well-regulated and securely backed”.

Stablecoins are currently treated as cryptocurrencies under the Payment Services Act, and thus entities that provide the service of dealing in or facilitating the exchange of stablecoins would fall within the scope of regulated crypto services.

"As Singapore looks to develop a digital asset ecosystem, there is a need to put in place a regulatory regime that supports the development of credible and reliable stablecoins that facilitate digital transactions,” said MAS.

"The current regulatory treatment under the Payment Services Act is not adequate to achieve this objective as it does not regulate the promise of the peg of stablecoins and any associated stabilisation mechanisms.”

MAS said it intends to focus its regulatory regime on single-currency pegged stablecoins (SCS), which are more stable in nominal value compared to stablecoins pegged to a basket of currencies or other assets.

Thus, MAS proposed a regulatory framework, which will entail the following:

― SCS issuers must hold reserve assets in cash, cash equivalents or short-dated sovereign debt securities that are at least equivalent to 100 per cent of the par value of the outstanding SCS in circulation. These assets must be denominated in the same currency as the pegged currency, and requirements on audit and segregation of reserves, and timely redemption at par value will also apply

― All SCS issued in Singapore can be pegged only to the Singapore dollar or any Group of Ten currencies, which include the US Dollar, British Pound Sterling, and Swiss Franc, among others

― Stablecoin issuers will be required to publish a white paper disclosing details of the SCS, including the redemption rights of stablecoin holders

― SCS issuers must, at all times, meet a base capital requirement of the higher of S$1 million or 50 per cent of annual operating expenses of the SCS issuer. "They are also required to hold liquid assets which are valued at higher of 50 per cent of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down,” said MAS. ― TODAY