Taking the Payment Services Act to the Moon – A Gentle Reminder on the Financial Services and Markets Bill

With the second reading of the Financial Services and Markets Bill (“FSMB”) last week (4 April 2022), Singapore’s regulatory stance towards digital payments tokens (“DPTs”), and particularly, service providers in that space (encapsulated in the Payment Services Act 2019 (“PSA”)) is closer than ever to being taken to the moon. While the FSMB’s overarching purpose is to allow for a financial sector-wide regulatory approach (as distinct from regulating based on the type of entity/activity), it also enhances the regulation of virtual asset service providers and thus, supplements the PSA’s position.

It will no longer be enough that your DPT/DT services are not provided in Singapore

If the FSMB comes into force, you will no longer be able to rely on the excuse “but .. but .. BUT I AM NOT PROVIDING THE SERVICE IN SINGAPORE!!!” *sad puppy eyes*. Under the FSMB, any individual or partnership who has a place of business in Singapore and is carrying on a business of providing any digital token (“DT”) service (such as those set out below and also includes services involving DPTs) outside Singapore must have a valid licence in force. Additionally, Singapore corporations must not carry on a business of providing any DT service, whether from Singapore or elsewhere, without a valid licence in force. This approach is consistent with the Financial Action Task Force’s call for persons to be licensed in their host jurisdiction of their place of business, and for corporations to be licensed in their jurisdictions of incorporation (regardless of their place of business). And before you CRYPTOBRO BIG BRAIN TIME, it does not matter that the DT service only relates and/or is incidental to another main or primary business that is not subject to or is exempt from regulation – the FSMB presumes that such DT service is separately provided as a secondary business and is therefore independently subject to regulation.

An expansive category of DT services will be regulated, that is much wider than that under the existing PSA

Under the proposed FSMB, the following services involving DTs will be regulated:

• dealing in DTs (i.e. buying and selling of DTs in exchange for money or other DTs);
• facilitating the exchange of DTs;
• accepting (whether as principal or agent) DTs from one DT account, for the purposes of transmitting or arranging for the transmission of the DTs to another DT account;
• inducing or attempting to induce any person to enter into or to offer to enter into any agreement for or with a view to buying or selling DTs in exchange for money or other DTs;
• safeguarding DTs, where the service provider has control over the DTs;
• carrying out for a customer an instruction relating to any DT, where the service provider has control over the DT;
• safeguarding a DT instrument, where the service provider has control over one or more DTs associated with the DT instrument;
• carrying out for a customer an instruction relating to one or more DTs associated with a DT instrument, where the service provider has control over the DT instrument; and
• providing advice, whether directly or through publications or writings, or issuing or promulgating research analyses or research report, in each case relating to the offer or sale of DTs.

The foregoing is actually slightly wider than the existing PSA and even the upcoming Payment Services (Amendment) Act 2021 (the bill of which has been passed by the Singapore Parliament and which will come into force at a later date). Notably, the FSMB regulates advice on DTs which the existing PSA and the Amended PSA does not. Based on the above, apart from the usual suspects such as cryptocurrency exchanges and brokers, we set out below some examples of who may be regulated:

• Certain decentralised applications such as decentralised finance applications (“DeFi”): the term “decentralised application” (“DApp”) is often used to describe programs running on decentralised networks such as Ethereum, Solana and Terra. If a DApp is involved in the exchange of DTs into fiat currency or other DTs (most notably DeFi applications), the creators, owners, operators or other persons who maintain control of influence over that DApp may be regulated under the FSMB. This is especially the case where the DApp in question is highly centralised amongst a few parties – for example, the creators or operators of the network and/or application may have the ability to develop and change functions of the DApp and collect fees;
• Custodial and escrow services: custodial wallet service providers and escrow agents may be providing safeguarding services and carrying out instructions relating to DTs and/or DTs associated with a DT instrument;
• Certain DT managers: the managers and administrators of certain non-traditional fund structures may be subject to the FSMB. For example, Singapore funds that are directly involved in the buying and selling of DTs and/or providing advice relating to the offer or sale of DTs may be regulated under the FSMB; and
• Financial advice on DTs: a service of rendering financial advice on DTs in readable or understandable forms (e.g. online investment advice, cryptocurrency investment seminars and reports) are likely to be regulated under the FSMB.

The above is not intended to be exhaustive and should not be taken as legal advice for your specific circumstances. This is especially since there are certain exceptions to the scope of regulation that may be applicable (for example, technical service providers that are involved in, amongst others, the processing and storing of data, providing a communication network and/or providing and maintaining any terminal or device used for any DT service are exempted). Businesses are expected to carry out their own due diligence and seek legal advice, where necessary, on whether the FSMB applies or not.

You are expected to check whether other service providers that are engaged in or outsourced by your DT business are subject to prohibition orders

Under the FSMB, the Monetary Authority of Singapore (“MAS”) is empowered to issue prohibition orders against any person if it is satisfied that the person is not fit and proper. Regardless of whether you are licensed or exempted under the FSMB, you are prohibited from employing or entering into any arrangement with a person subject to a prohibition order to the extent that the activity, business, service or relevant function provided by that person is prohibited by the prohibition order. The prohibition orders are intended to forestall harm being caused to the financial industry by service providers who have demonstrated such propensity by their own misconduct. Engaging any such prohibited person to carry out any prohibited activities is an offence under the FSMB. DT businesses should therefore ensure that sufficient due diligence is carried out prior to engaging or outsourcing to any service provider, including checking the “enforcement actions” page on the MAS’ website.

I may be regulated. Now what?

Get licensed, or better yet, get in touch with us .. or GET REKTED. If you have any questions or require any additional information, please contact Jeremiah Huang and Wong Ee Vin.