Singapore's financial watchdog, the Monetary Authority of Singapore (MAS), released their "guide to digital token offerings" earlier this week. The 20 odd page document clarifies their stance on cryptocurrency primary markets and how proposed crypto-assets can fall under the existing securities laws.
In addition to sharing their definition of a digital token, the MAS drafted 11 case studies of cryptocurrency business models and they fall under the current regulation.
5 types of digital tokens
MAS classifies cryptocurrencies and digital tokens into five non-exhaustive categories that all fall under Singapore securities laws: Securities and Futures Act ("SFA") and the Financial Advisers Act ("FAA"):
- Share; represents ownership in a company
- Debt; digital token is a loan of money to the issuer by the investor
- Unit in a trust; represents ownership in a business trust
- Security derivatives; a contract that includes a derivative
- unit in a Collective Investment Scheme
Intermediaries issuing tokens on behalf of other projects and those operating from overseas or from Singapore catering to overseas investors still operate under an existing security law framework as noted in the document.
Here, the MES intends to portray digital tokens and cryptocurrencies as conventional financial instruments that are properly regulated. Even "crypto financial advisers" are reminded to acquire and hold a financial adviser license.
Comprehensive token use cases
Singapore authorities drafted a set of token case studies helping issuers navigate through the nascent regulatory framework.
1. Sharing computing power
A sharing economy based on the rental of computing power distributed on a network does not fall under securities law.
2. Real estate investment fund
A company issuing tokens to develop, build and commercialise real assets and give holders access to a claim on revenue constitutes a security.
3. Portfolio management
A token issuer that would manage a fund, undertake asset management, facilitate investment in capital markets, fund revenue-generating activities such as mining or angel investment and share their profits to token holders would fall under a regulated security regime.
If the case study 3 is targeted to foreign investors, the token issuer would not have to comply with the SFA but would still require a capital markets licences.
5. Angel investment platform
Facilitating a marketplace for start-up investment and the possibility of issuing loans constitutes a debenture and therefore a security
6. Payment and exchange solution
Launching a digital token that is considered as a currency, a payment solution or used to exchange other digital tokens requires compliance with security laws. Furthermore, the platform will not be able to promote the trading of other digital token securities. The MAS further states that "operating a digital payment tokens exchange is presently not regulated", but "intends to regulate such activity for AML/CFT purpose".
7. Howie test does not apply
Issuing a token that constitutes securities under US Laws, and passes the Howie test, does not mean it is a security in Singapore de-facto. Moreover, the MIS stipulates that providing the infrastructure for secondary markets to tokens "does not result in a digital token being construed as capital markets under the SFA."
8. Bootstrapped decentralised eco-systems
Platforms that intend to organise a market (such as advertising) and willing to fund their initial development cost via a token that gives rights to vote on features does not fall under security laws
9. Token service providers
Token issued for payment of current or future services and products without the opportunity of earning payments and if the token's utility is only to redeem the product, it does not constitute a security.
10. Tokenisation of physical assets
Commodity-backed digital tokens that represent a claim on a physical asset, such as diamonds, gold or oil are debentures and apply to securities laws.
11. Fiat-backed cryptocurrencies
Similarly to case study 10, fiat currency-backed digital tokens are debentures and therefore securities.
These case studies are the first attempt by a financial regulator to organise and classify digital tokens under the existing regulatory framework.
Finally, the MAS naturally strongly advises cryptocurrency issuers to seek legal expertise before undertaking any offerings. However, the guide concludes that issuers do not need to contact the regulator if a "proposed business model [is] similar to that described in the case studies" - even if the digital token does not fall under securities law.
Opinion: Singapore's watchdog appears more open-minded than the U.S. SEC, that supposedly considers most of the digital tokens offerings as security offerings. Singapore's reported flexibility is very likely an attempt to attract token issuers and make the Lion City the epicentre of cryptocurrency primary markets.