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25 August, 2017
Financial technology or “FinTech” is transforming and revolutionising financial services like never before, bringing to bear exciting innovations ranging from robo-advisers to crowdfunding platforms. More recent months have seen a greater degree of prominence given to innovations in the realm of virtual currencies, or what are also referred to as “cryptocurrencies” or “digital currencies” with the likes of “Zcash”, “Monero”, "ethereum", "Litecoins" and of course "Bitcoins" which are being offered and marketed around the globe. This tide of interest has not gone unnoticed by financial regulators. In Singapore, a consumer advisory was recently jointly released by the Monetary Authority of Singapore (the “MAS”) and the Commercial Affairs Department of the Singapore Police Force ("CAD"), warning the public of the risks associated with virtual currencies and investments relating to virtual currencies.
This article seeks to briefly examine the regulatory position and developments for virtual currencies in Singapore.
What are Virtual Currencies?
Virtual currencies can be described as a sub-set, or a type, of digital token, the latter being described as a cryptographically-secured representation of a token-holder's rights to receive a benefit or to perform specified functions. A virtual currency can be used as a medium of exchange, or a unit of account or a store of value, and it can be used, for instance, to purchase goods and services. “Bitcoins” would be a popular example of a digital token.
Are Virtual Currencies, or More Generically, Digital Tokens, Regulated?
The answer to this question depends on the features and the functions of the virtual currency (or digital tokens as a broader and more generic term) in question. The key is to consider whether (i) the features and functions attached to or associated with the digital token; or (ii) the manner in which the digital token is being offered or marketed, might attract the application of local securities or financial regulatory laws.
Since 2014, the MAS has taken the position that virtual currencies per se were neither securities nor legal tender currency, and were therefore not subject to regulation by the MAS. Under the Currency Act (Chapter 69 of Singapore), the right to issue currency notes and coins in Singapore is vested solely in the MAS, and only notes and coins issued by the MAS are recognised as legal tender in Singapore.
More recently in August 2017, MAS released a clarificatory note reiterating the same regulatory position – noting that virtual currencies are to be regarded as a sub-set of digital tokens, and whether regulation applies to the digital token in question will depend on its functions. MAS observed that the functions of digital tokens have evolved beyond being a (mere) virtual currency, and depending on their functions (or the manner in which they are being offered), such tokens may well result in being regulated under our securities laws. This clarification comes in the wake of a perceived rise in the number of such offerings (now commonly referred to initial coin offerings or ICOs) as a means of raising capital in Singapore. The key point made by MAS is that certain digital tokens may represent ownership or a security interest over an issuer’s assets or property, and if so, the offering be considered to be an offer of securities under the Securities and Futures Act (Cap. 289 of Singapore) (“SFA”).
The regulatory approach taken by MAS is not unlike the position taken by the Securities and Exchange Commission (“SEC”) in the US. On 27 July 2017, a press release was issued by the SEC, the gist of which was that offer and sale of digital assets by "virtual" organizations is subject to the federal securities laws1. The release added that “whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction”.
What are the Implications of Dealing in Virtual Currencies (or Digital Tokens for that matter)?
Assuming that the digital token in question has functions or features such that it is capable of being regarded as a regulated (investment or financial) product in Singapore – what would the implications be?
The first and foremost implication would be the offering of such digital tokens, in Singapore, may very well have to be accompanied by a prospectus compliant with prescribed SFA disclosure requirements, unless a legislative exemption is otherwise available. In this regard, the initial coin or token offering would not differ from a conventional initial public offering or IPO of shares, whereby a disclosure document has to be prepared containing such information as an investor and his professional adviser would reasonably require to make an informed assessment. Furthermore, if the offering in question is considered to be an offer of units of a collective investment scheme, as that term is defined under the SFA, the scheme itself may have to be first authorised or recognised by the MAS, unless again, a legislative exemption is otherwise available.
Apart from the above, entities or persons involved in offering or marketing digital tokens must also consider if they might be subject to MAS regulation as intermediaries, particularly for the activity of “dealing in securities”, or for the activity of “marketing of collective investment schemes”.
Needless to say, contravention of local securities or financial regulatory laws may have civil and criminal law consequences for the offenders.
Therefore, just because “plain vanilla” virtual currencies are not regulated per se by the MAS, it does not mean that the intermediaries dealing in or facilitating the trading of virtual currencies operate in an entirely unregulated space – plans have already been rolled out to regulate virtual currency intermediaries. Given the considerable level of anonymity associated with virtual currency transactions, such transactions are particularly vulnerable to be used for money laundering and terrorist financing purposes.
It should also be noted that MAS has in 2016 proposed a new activity-based regulatory framework for payment services, and it is likely that the new regulatory framework, once it comes into effect, will extend to virtual currency intermediaries who buy, sell, or facilitate the exchange of virtual currencies.
Should We be Concerned with These Developments on Digital Tokens?
The short answer is a resounding “yes” – whether from the perspective of the issuer/offeror, or from the perspective of the investor.
From the perspective of the issuer or offeror, it would be advisable to seek professional advice on the legal implications of offering digital tokens or helping another to market such an offering.
From the perspective of the investor, it would be advisable for the investor to look before he leaps. The joint consumer advisory from the MAS and CAD has helpfully included a summary list of risks that an investor ought to be aware of, such as price volatility, lack of sufficient secondary market liquidity to exit an investment, uncertainty as to the authenticity of the issuers and digital tokens concerned, and also difficulties in recovering invested monies should the issuer be based outside Singapore.
Our Thoughts
The regulatory treatment of digital tokens (including virtual currencies) and its participants is likely to adjust and evolve in tandem with developments in this area, and participants and investors would be well placed to exercise caution for the time being. This is nonetheless an exciting and progressive area which merits further attention, given that MAS and various leading and reputable financial institutions have indicated their enthusiasm to adopt distributed ledger technology (a key technology supporting digital tokenization). In November 2016, MAS announced a collaboration project with several banks to evaluate a tokenized form of the Singapore Dollar on a distributed ledger and its potential benefits to Singapore’s financial ecosystem, and it is heartening to note that, more recently in March 2017, MAS has announced the conclusion of proof-of-concept of this project.
1 Press Release titled “SEC Issues Investigative Report Concluding DAO Tokens, a Digital Asset, Were Securities” dated 25 July 2017, obtained from https://www.sec.gov/news/press-release/2017-131 (last accessed: 18 August 2017)
