Legislation requiring cryptocurrency firms to be licensed in Singapore has come into effect, making the city-state one the first jurisdictions to introduce a regulatory framework for cryptocurrency dealing and exchange services.
The Payment Services Act, passed in January last year, came into force on Tuesday. With the new act, the Monetary Authority of Singapore (MAS) has launched the first formal comprehensive supervisory regulation for payments companies handling activities ranging from digital payments to trading of digital tokens, including cryptocurrencies such as Bitcoin and Ether.
According to the MAS, providers of digital payments, dealing and exchange services “carry significant money laundering risks due to their anonymous and borderless nature of transactions”.
As such, they will have to comply with the requirements under the Anti-Money Laundering and Counter-Financing of Terrorism (or AML/CFT).
The new law aims to safeguard against money laundering and terrorism financing, as well as strengthen consumer protection, cyber security and promote confidence in the use of e-payments.
While the act does not impose uniform licensing requirements, it adopts an activity-based licensing framework in recognition of the different kinds of activities and new developments in payment services.
There will be three classes of licenses – for money changers, standard payment institutions and major payment institutions. Each service provider needs to hold only one of the three licenses.
These classes are “broad enough to deal with the different combinations of payment services” a company may offer, the MAS said.
In cryptocurrency dealing and exchange activities, one key risk is that funds entrusted by customers to payment service providers may be lost, such as when the service provider becomes insolvent.
To address this, the law requires major payment institutions to safeguard their clients’ funds by multiple means, such as through an undertaking or guarantee by any bank in Singapore or prescribed financial institution to be fully liable for the funds.
The MAS said it will study the business model of each payment service to determine where regulatory measures should be imposed.
For standard payment institutions providing payment services, but below specified transaction flow or e-money float thresholds, “they will be regulated more lightly, and the regime mimics a ‘permanent sandbox’ environment to encourage innovation and enterprise”, according to the MAS.
“The Payment Services Act provides a forward-looking and flexible regulatory framework for the payments industry. The activity-based and risk-focused regulatory structure allows rules to be applied proportionately and to be robust to changing business models,” said Loo Siew Yee, assistant managing director (policy, payments and financial crime) at the MAS.
“The act will facilitate growth and innovation while mitigating risk and fostering confidence in our payments landscape.”
According to a Bloomberg report, crypto exchange operators Liquid Group and Luno are among the firms looking to apply for licenses.
The key advantage of Singapore’s new legislation is providing regulatory clarity on new types of payments activities such as e-wallets and cryptocurrency exchanges, Nizam Ismail, founder and chief executive of Ethikom Consultancy, told Bloomberg. Ethikom helps potential applicants with licensing and compliance issues.
Hong Kong issues rules
Singapore’s new law comes into force three months after Hong Kong’s financial regulator, the Securities and Futures Commission, published new rules allowing crypto exchanges to receive an operating license.
The new rules, under which exchanges can apply to be regulated, draw on the standards the SFC expects for conventional securities brokers, which stipulate that an exchange that wants to be licensed must provide services to professional investors only, have an insurance policy to protect clients in case assets are lost or stolen, and use an external market surveillance mechanism.
However, cryptocurrency exchanges do not need an SFC license to operate provided they do not trade any products defined as a security. Bitcoin, for example, is not a security, according to the SFC.
At least five crypto exchange firms have been included in SFC’s regulatory sandbox management before giving licenses in Hong Kong, which hosts dozens of cryptocurrency exchanges, including some of the world’s largest.
Twenty of the top 50 crypto exchanges are based in the Asia-Pacific region and accounted for about 40 percent of Bitcoin transactions in the first half of last year, according to Chainalysis data.
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