On 4 October 2024, the Monetary Authority of Singapore (MAS) publishes a Consultation Paper on Proposed Regulatory Approach, Regulations and Notices for Digital Token Service Providers issued under the Financial Services and Markets Act 2022 outlining the proposed regulatory framework for Digital Token Service Providers (DTSPs). This new consultation paper is issued under the Singapore’s Financial Services and Markets Act 2022 (FSM Act) which aims to ensure proper regulation of DTSPs providing services from or within the Singapore to customers inside and outside the country. The public is invited to provide feedback on these proposals, with submissions open until 4 November 2024.
The consultation paper introduces amendments to regulate the activities of DTSPs focusing on their operations abroad to prevent risks related to money laundering and terrorism financing, which are heightened in cross-border digital services. The consultation paper mandates the DTSPs to apply for a license under the FSM Act, even when they do not serve customers within Singapore so that DTSPs maintain high standards of compliance and do not harm Singapore’s financial reputation.
Digital token services are defined in the FSM Act as any activity related to the transfer, storage, or trading of digital tokens. Digital tokens refer to either digital payment tokens, such as cryptocurrencies, or digital representations of capital markets products, as outlined in existing legislation. The consultation paper proposes provisions for DTSPs to comply with regulations that prevent the misuse of these digital assets for illegal purposes, including money laundering and terrorism financing. Previously, companies providing digital token services from Singapore to international customers were not subject to the same level of regulatory scrutiny as domestic services. With the proposed changes, all DTSPs, even those whose services are offered outside Singapore, must apply for a license under the FSM Act.
The application process involves demonstrating that the business model is economically viable and complies with international regulatory standards. DTSPs must appoint an executive director who is a resident in Singapore, to ensure local accountability and oversight. They are also required to maintain a permanent place of business within the country. MAS review applications on a case-by-case basis. Digital Token Service Providers are subject to licensing and ongoing requirements under the Singapore’s Payment Services Act 2019 (PS Act), Singapore’s Securities and Futures Act 2001 (SFA), and/or Singapore’s Financial Advisor Act 2001 (FAA).
After receiving a license, DTSPs will need to meet ongoing regulatory requirements which includes the obligation to inform MAS of any significant changes in their business operations or model. MAS proposes that DTSPs be subjected to regular audits and be required to maintain comprehensive compliance frameworks including the appointment of compliance officers who must be suitably qualified to oversee the company’s adherence to regulations.
DTSPs must implement proper governance structures to ensure that their operations are continually aligned with MAS’s standards. DTSPs will be required to conduct thorough due diligence on their customers, including performing background checks and verifying the identity of both new and existing clients. In cases where DTSPs identify higher risks, such as transactions involving certain jurisdictions or anonymous customers, enhanced due diligence measures must be applied. MAS will require DTSPs to provide regular updates on any significant changes to their operations or business models. MAS proposes further amendments to the Financial Services and Markets Notices, including updates to the guidelines on reporting requirements, technology risk management, and cyber hygiene for DTSPs.
