SINGAPORE – The Singapore regulator has unveiled new measures that will ring-fence the assets of retail investors in Singapore in a move designed to prevent a repeat of the massive losses that occurred when cryptocurrency companies went bankrupt.
Singapore-licensed digital asset firms must not only segregate clients’ assets from their own, but also keep them in trust, the Monetary Authority of Singapore (MAS) said on Monday. It involves keeping clients’ assets on a separate set of blockchain addresses from those with the company’s own assets.
Under the new rules expected to come into effect later this year, digital token payment (DPT) companies will be required to reconcile clients’ assets on a daily basis, keep proper records, and maintain access and operational controls of clients’ DPTs in Singapore .
MAS said it would allow a DPT company to deposit a client’s assets into a trust account, and that the assets should be protected with Singapore financial institutions, to facilitate the recovery of funds in the event of the insolvency of a company.
Given the limited number of established independent third-party custodians at this time, MAS said it would not mandate the use of independent custodians for client assets for the time being.
But firms will need to ensure that the custody function is operationally independent from other business units. A treasury custodian is a specific entity that holds client assets in custody.
Licensed crypto companies will be required to provide customers with clear information about the risks associated with having their assets held by the service provider.
MAS would restrict DPT service providers from facilitating the lending or staking of their retail customers’ tokens, as these activities are generally not appropriate for the private public. But companies can continue to offer such activities to their institutional and recognized investors.
Staking is the process of locking users’ digital tokens for a period of time to validate transactions on the blockchain so that they can get more tokens as a reward. Lending refers to the process by which crypto companies such as exchanges lend tokens to other companies in the industry to earn large amounts of interest.
The regulator said the new measures have received widespread support and come after the public consultation in October 2022, when it asked for feedback as the regulator sought to introduce safeguards for retail investors.
It is now seeking public feedback on the draft legislative amendments to the Payment Services Regulations here to bring these requirements into effect by October or so.
Separately, MAS on Monday released a consultation document proposing requirements for DPT companies to address unfair trading practices, following last year’s public consultation.
Ms. Grace Chong, regulatory chief at the Association of Cryptocurrency Enterprises and Start-ups, said entities will put in place policies and procedures to improve their IT resilience and maintain regular operations with the new rules. This would improve the overall quality of Singapore’s digital asset ecosystem, she said.
She added that DPT firms are soon expected to step up their efforts to reduce unfair trading practices on their platforms, similar to how it is in traditional finance. “This would lead to more transparent trading rules for exchanges and more supervision of trading activities by DPT service providers to prevent, for example, market manipulation, misleading behavior and insider trading.”
Lasanka Perera, chief executive of exchange Independent Reserve Singapore, described the new rules as “a huge step forward” and said the new measures will “instill greater confidence among the corporate and institutional sectors interested in this space”. He added that some crypto players may need to restructure parts of their businesses or operations to comply.
Ms Angela Ang, a senior policy advisor for blockchain intelligence firm TRM Labs, said MAS’s decision to move ahead with customer asset segregation and custody rules – even as it deliberates other consumer access measures – shows the urgency of those rules , especially in light of the industry’s high-profile failures in 2022.
She noted that the new measures are in line with other jurisdictions, such as Hong Kong, but said Singapore’s version offers crypto firms more flexibility in some key areas.
“Singaporean crypto companies, for example, are only required to hold 90 percent of customer crypto in cold wallets, compared to Hong Kong’s 98 percent minimum, which is the highest in the world, followed by Japan’s 95 percent,” Ms Ang said.
Cold wallets, which are not connected to the internet, are less vulnerable to online hacking and even internal fraud attempts, she noted, adding that they tend to be more expensive than hot wallets, or crypto wallets that are connected to the internet. “In addition, it can be difficult to comply with legal requirements such as Hong Kong’s that require the use of onshore cold wallets, as most players rely on global custodians.”