MAS hopes to strengthen the regulation of DTSPs that are based in Singapore but do not conduct substantial business locally.

Written by: Aiying

The Monetary Authority of Singapore (MAS) recently released proposed regulatory updates for digital token service providers (DTSPs). This move has sparked widespread attention and discussion in the Web3 industry. Aiying, a consulting firm focused on Web3 compliance services, has conducted an in-depth analysis of the background, content, and potential impacts of these new MAS regulations. This interpretation explores the possible effects of these regulations on the layout and development of Web3 enterprises in Singapore and the Asia-Pacific region.

I. MAS's New Regulations: Targeting "Shell" DTSPs

On October 4, MAS published proposed regulatory updates regarding the licensing of digital token service providers (DTSPs), particularly targeting so-called "shell" DTSPs. The new regulations signify a significant increase in compliance thresholds and indicate that Singapore's regulation of the crypto industry will become stricter. Since 2020, Singapore has screened DTSPs through stringent anti-money laundering (AML) and counter-terrorism financing (CFT) rules, and this consultation raises higher requirements for compliance and the rationality of business models, especially for companies that do not conduct substantial business locally.

Reference: Singapore's 2024 Anti-Money Laundering Risk Assessment Report — Internal and External Money Laundering Challenges, Common Money Laundering Techniques, and Money Laundering Risks Across Financial Sectors

According to the Financial Services and Markets Bill (FSMB), MAS aims to enhance regulation of DTSPs that are based in Singapore but do not conduct substantial business locally. These so-called "shell" DTSPs could potentially be used for illegal activities such as money laundering. The new regulations from MAS indicate their high regard for risk management and maintaining the reputation of Singapore's financial system, and they plan to conduct stricter reviews of these DTSPs.

II. Key Legislation Related to Digital Token Service Providers and Their Relationships

Before understanding MAS's new regulations, it is necessary to grasp the relevant legislation concerning DTSPs and their interrelationships.

1. Financial Services and Markets Bill (FSMB): This bill was passed in 2022, but the specific implementation and applicable details are still under MAS's public consultation and preparation. The aim is to establish a legal framework for regulating individuals, partnerships, and companies providing digital token services. The FSMB expands the definition of digital token services, covering a broader range of business activities and authorizing MAS to regulate DTSPs that, while based in Singapore, do not have substantial operations locally.
2. Payment Services Act (PS Act): This act regulates digital payment tokens (such as cryptocurrencies) and payment service providers, ensuring the safe operation of these services in Singapore. For DTSPs providing payment services in Singapore, the PS Act has detailed requirements for their licenses and compliance. For more details, please read the Comprehensive Interpretation of Singapore's Payment Business Regulatory Framework and Virtual Asset DPT License Requirements.
3. Securities and Futures Act (SFA): This act primarily targets the trading and regulation of capital market products, covering digital assets such as tokenized securities. The SFA also applies to DTSPs involved in securities-related activities.

These three acts complement each other, forming a compliance requirement framework for DTSPs operating in Singapore. In simple terms, the FSMB provides an overarching regulatory framework for digital token services, acting like a large umbrella covering all related services, while the PS Act and SFA provide more detailed guidance and requirements for different types of specific businesses (such as payments and securities). This combination ensures that DTSPs operating in Singapore have both macro regulatory standards and targeted, practical operational guidelines, making regulation both comprehensive and specific.

III. New Requirements Standards of the Financial Services and Markets Bill

From MAS's consultation document, DTSPs seeking to obtain a license must meet a series of specific requirements, including but not limited to the following:

1. Basic Capital Requirement: DTSPs must hold at least SGD 250,000 in basic capital to demonstrate their financial stability and operational commitment.
2. Local Compliance Team: DTSPs must establish a compliance team in Singapore, including at least one resident executive director and partner, to ensure actual management and compliance oversight capabilities locally.
3. Independent Audit Mechanism: DTSPs need to undergo independent audits covering aspects such as cybersecurity and financial compliance, and regularly submit audit reports to demonstrate compliance with regulatory standards.
4. Penetration Testing and Cybersecurity Requirements: Companies must conduct penetration testing and remediate all high-risk security vulnerabilities to ensure the security of their technical platforms and data integrity.
5. Independent Compliance Function: DTSPs must establish an independent compliance function in Singapore, led by a qualified compliance officer, to ensure the independence and effectiveness of compliance work.
6. Audit Arrangements: Adequate audit arrangements must be established to assess and ensure the effectiveness of compliance controls. Audits must be independent and commensurate with the scale, nature, and complexity of the business.
7. Office Location Requirements: Companies must have a permanent office in Singapore to facilitate MAS's on-site inspections and regulatory oversight.

These measures undoubtedly increase compliance costs, and for those companies that do not intend to conduct substantial business in Singapore, MAS will also conduct in-depth reviews of the rationality of their business models. This strict licensing system is clearly aimed at increasing transparency and ensuring the legality and compliance of fund flows, but it also adds to the compliance burden of Web3 enterprises. Particularly for Web3 companies expanding globally, whether Singapore's new regulations remain attractive is a key question. The various requirements proposed by MAS may lead many companies to reassess their strategy of establishing a base in Singapore.

IV. What Should Enterprises Prepare?

Aiying suggests that in facing these new regulations, enterprises should focus on the following points:

1. Establishment of Compliance Teams: According to MAS's requirements, DTSPs must establish compliance teams in Singapore, led by suitably qualified compliance officers. Therefore, enterprises should plan their compliance structure early, especially in recruiting and training local compliance personnel.
2. Auditing and Cybersecurity: MAS emphasizes the importance of penetration testing and auditing. Enterprises should ensure that their cybersecurity systems meet MAS standards and verify the effectiveness of compliance controls through independent audits.
3. Rational Business Model Design: For enterprises wishing to obtain a license in Singapore but primarily operating in other regions, they must be able to reasonably explain the necessity and credibility of their business model to MAS to gain approval.
4. Capital Preparation and Risk Assessment: Enterprises should ensure compliance with the minimum capital requirement of SGD 250,000 while conducting thorough risk assessments to address potential future regulatory changes.

V. Specific Implementation Timeline and Transition Policies

The public consultation on these new guidelines and requirements by MAS will continue until November 4. Although the specific date for finalizing these measures has not yet been clarified, MAS has indicated that once the measures are finalized, the public will have only about four weeks to implement the new measures. At that time, any DTSP operating in Singapore without MAS licensing must cease or suspend their business in Singapore.

MAS emphasizes that these new measures are crucial for safeguarding the integrity of Singapore's financial system and aligning with the evolving international digital asset standards. For observers in the crypto asset industry, the key question is whether these stringent new regulations will attract DTSPs to seek compliant operations in Singapore or deter some innovators due to excessive compliance costs.

This issue also exists in the context of the Asia-Pacific region, particularly in Hong Kong. In recent years, Hong Kong has actively engaged in the digital asset space, establishing regulatory sandboxes to support stablecoin issuers and financial institutions exploring tokenization use cases, clearly stating that digital asset innovation is a significant driver of growth in its financial sector. The choices made by Web3 institutions in the Asia-Pacific and globally regarding compliance architecture are particularly important for long-term development, and Aiying will continue to provide professional and practical insights.

FSMB Bill: https://www.mas.gov.sg/-/media/mas-media-library/publications/consultations/amld/2024/dtsp-consultation---final-for-publication.pdf

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