MAS Consults on Proposed Regulatory Approach for Stablecoin-Related Activities
October 2022
Stablecoins are defined by the Financial Stability Board (FSB) as crypto-assets that aim to maintain a stable value relative to a specified asset (typically a unit of fiat currency or commodity), or a pool or basket of assets. In addition, like other cryptocurrencies, stablecoins are instruments which can be transferred either on a peer-to-peer basis using private crypto wallets, or through third-party service providers.
Stablecoins are treated as digital payment tokens (DPTs) under the Payment Services Act 2019 (PS Act) today. Correspondingly, entities that provide the service of dealing in and/or facilitating the exchange of stablecoins would fall within the scope of regulated DPT services. DPT service providers are regulated primarily for money laundering (ML) and terrorism financing (TF), and technology risks. They are also required to provide risk warning disclosures to customers.
As the current regulatory treatment under the PS Act does not regulate to ensure that stablecoins maintain a high degree of value stability and any associated stabilisation mechanism, MAS intends to set out a specific regulatory regime to address the regulation of stablecoin issuers and intermediaries.
MAS intends to focus its regulatory regime on Single-currency pegged stablecoins (SCS). As compared to other types of stablecoins (such as those pegged to a basket of currencies or other assets such as commodities), SCS has a stronger use case for payment and settlement.
Non-SCS will continue to be subject to the existing DPT regime under the PS Act. MAS views such stablecoins as being less stable in nominal value and should be treated differently from SCS. In addition, even among SCS, there is variation in the stabilisation mechanism. MAS views stablecoins which are algorithmically-pegged, unbacked or backed by other cryptocurrencies to be more susceptible to volatility in value. Correspondingly, such stablecoins will also continue to be treated as DPTs.
SCS issued in Singapore. The immediate priority of MAS is to elevate the standard of SCS issued in Singapore. This regulatory perimeter is scoped based on MAS’ ability to directly impose requirements on the reserve management, redemption policies and prudential standards of the SCS issuer.
Accordingly, MAS intends to introduce a new regulated activity of “Stablecoin Issuance Service” under the PS Act. The regulatory objective is to maintain a high degree of value stability in SCS. Generally, an entity that is based in Singapore and performs the function of controlling the total supply of, and minting and burning of SCS, will qualify under the aforementioned new category. Correspondingly, all regulatory obligations for this new activity will be placed on this entity.
To maintain a high degree of value stability of SCS, MAS proposes the following requirements:
(i) Reserve asset backing of SCS – SCS issuers offering MAS-regulated SCS must hold reserve assets to back the SCS issued. MAS proposes the following key requirements in relation to the reserve assets:
Reserve assets must be valued on a marked-to-market basis daily, and be equivalent to at least 100% of the par value of the outstanding SCS in circulation (including those held by the issuer) at all times.
Reserve assets can only be held in the form of cash, cash equivalents, or debt securities with no more than three months residual maturity and are issued by (i) the central bank of the pegged currency; or (ii) organisations that are of both a governmental and international character with a credit rating of at least “AA–”.
Reserve assets must be denominated in the same currency as the pegged currency.
(ii) MAS proposes to only allow the issuance of SCS that are pegged to the Singapore dollar or Group of Ten (G10) currencies. SCS issuers must obtain independent attestation, such as by external audit firms, that the reserve assets meet the above requirements on a monthly basis. This attestation, including the percentage value of the reserve assets in excess of the par value of outstanding SCS in circulation, must be published on the issuer’s website and submitted to MAS by the end of the following month (for the month being attested). SCS issuers must also appoint an external auditor to conduct an annual audit of its reserve assets and submit the report to MAS in relation to its compliance with MAS’ requirements. SCS issuers must hold all the reserve assets used to back the SCS in circulation in segregated accounts, separate from its own assets which are not reserve assets. The reserve assets must be held with licensed banks, merchant banks, finance companies or capital market services licensees (CMSLs) providing custodial services in Singapore. Where the SCS issuer is a bank in Singapore, the reserve assets can be held under its own custody.
(iii) Timely redemption at par. An SCS issuer must specify and disclose that all the holders of its SCS would have a direct legal right to redeem the SCS for the pegged currency at par value (or any other currencies of equivalent value), and that redemption requests can be made at any time with the SCS issuer. Any conditions that the SCS issuer wishes to impose for redemptions, such as fees and minimum redemption amount, must be reasonable and clearly disclosed on its corporate website and any other communication channels with the public regarding the SCS.
An SCS issuer should return the par value of the SCS to the SCS holder expediently, and in any case, no later than five business days from the date when a legitimate redemption request is received.
A redemption request is generally deemed as legitimate if the SCS holder can meet the SCS issuer’s onboarding requirements, including the applicable customer onboarding rules to mitigate ML/TF risks. During times of stress, a short redemption period requirement may exacerbate the risk of a run on the SCS and the SCS issuer. Where the SCS is used for payments, there may also be broader implications on the users of the SCS. To protect consumers or where it is in the interest of the public, MAS will exercise its powers as needed, such as directing the SCS issuer to liquidate the reserve assets within an appropriate specified period.
(iv) Disclosure requirements. An SCS issuer must publish a white paper on its corporate website, to disclose information such as the description of the SCS, rights and obligations of the SCS issuer and SCS holders, risks that can affect the stability of the SCS value and ability of the SCS issuer to fulfil its obligations etc, and update such information as needed. As a matter of good practice, a factsheet summarising the key information that is relevant to the SCS holders should also be published.
(v) Prudential Requirements. MAS proposes the following prudential requirements:
Base capital – Higher of S$1 million or 50% of annual operating expenses of the SCS issuer.
Solvency – To hold at all times, liquid assets which are valued at higher of 50% of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down.
Business restrictions – An SCS issuer is not allowed to undertake other activities that introduce additional risks to itself. This includes investing in and extending loans to other companies, lending or staking of SCS and other DPTs, and trading of DPTs. This is to ringfence and mitigate risks to the SCS issuer in lieu of a comprehensive risk-based capital regime. Such activities can still be conducted from other related entities (e.g. sister company in which the SCS issuer does not have a stake).
(vi) SCS issued in multiple jurisdictions
The same SCS may be issued in multiple jurisdictions by different entities that may have agreed on common issuance principles, or by other related companies of the same SCS issuer in Singapore. In such cases, it is likely that the SCS could be fungible notwithstanding that it is issued by different legal entities. Correspondingly, the stability of the SCS value will depend on whether other issuing entities are subject to equivalent regulatory requirements that seek to address the same risks.
MAS is only prepared to recognise SCS with multi-jurisdiction issuance as MAS-regulated SCS if there is sufficient assurance that the SCS as a whole is subject to sufficient regulatory oversight. Otherwise, the SCS issuer would only qualify for a licence to offer DPT services and not for SCS issuance service in Singapore.
MAS is thus considering two avenues for multi jurisdiction issued-SCS that are widely used:
1. Require the SCS issuer in Singapore to obtain and submit to MAS an independent attestation on an annual basis that other significant issuers of the SCS are deemed to meet equivalent standards relating to reserve backing and prudential requirements.
2. Establish regulatory cooperation among relevant regulatory bodies of the SCS to exchange information on operations of the SCS.
(vii) Timely transfer
MAS proposes to require DPT service providers which offer the service of arranging for the transmission of MAS-regulated SCS to complete the transfer of SCS from one party to another in no more than three business days from the day the transfer request is received.
(viii) Segregation
MAS also proposes for entities providing services of transmission or custody of MAS-regulated SCS to hold and segregate customers’ MAS-regulated SCS from other customers’ assets as well as its own assets in different custody accounts. This is to mitigate the risk of misuse of customers’ SCS from the commingling of assets.
In its paper, MAS also seeks views whether there were areas relating to SCS not already covered that should be regulated, and whether they should be subject to higher regulatory and supervisory standards to safeguard financial stability risk.
MAS’ consultation paper can be found at https://www.mas.gov.sg/-/media/MAS-Media-Library/publications/consultations/PD/2022/Consultation-on-stablecoin-regulatory-approach_FINALISED.pdf