Executive Summary
The Monetary Authority of Singapore (“MAS“) has seen growing interest in the issuance and offering of capital markets products (“CMPs“) in the form of digital tokens via the process of tokenisation (“tokenised CMPs“). In order to provide regulatory clarity and foster a responsible digital asset ecosystem, MAS issued the revised Guide on the Tokenisation of Capital Markets Products (“Guide“) (previously known as “Guide on Digital Token Offerings”), providing guidance on areas including the following:
- Whether a digital token is subject to regulation under the SFA as a CMP; and
- The application of securities law (the Securities and Futures Act 2001 (“SFA“) and the Financial Advisers Act 2001 (“FAA“)) and other relevant legislation to (i) the issuances and offerings of tokenised CMPs; and (ii) the entities facilitating activities related to tokenised CMPs (e.g., trading, custody, settlement).
MAS has stated in the Guide that issuers or offerors of digital tokens in Singapore should seek legal advice to determine if their proposed digital tokens fall within the definition of a CMP under the SFA (thereby qualifying as a tokenised CMP) and to ensure that the proposed activities comply with all applicable laws, rules and regulations in Singapore. Our Team is happy to help in this regard – please feel free to reach out to our Contacts.
Scope of Regulation: How MAS Assesses Whether a Digital Token is Subject to Regulation under the SFA as a CMP
MAS adopts a technology-neutral stance, i.e. regulation is based on the economic substance of the token and not the technological form. Based on the principle of “same activity, same risk, same regulatory outcome”, existing legal and regulatory requirements will apply to both tokenised and non-tokenised CMPs. MAS has deliberately avoided labels like “utility token” or “security token” in the Guide.
Assessment Criteria
In assessing whether a digital token would fall within the definition of CMP (and what specific type of CMP that digital token would be classified as, e.g. a security such as a share or debenture; or a unit in a collective investment scheme (“CIS“)), MAS will take a holistic examination of the following:
- Its characteristics, intent and structure; and
- The bundle of rights attaching to or derived from the token.
For further illustration on when a digital token is likely or unlikely to be a CMP under the SFA, please refer to the case studies in Appendix 1 of the Guide. These examples also address financial advisory services related to CMPs.
Application of SFA to Issuances or Offerings of Tokenised CMPs
The same regulatory regime under Part 13 of the SFA applies to offers of tokenised CMPs that constitute securities, securities-based derivatives contracts, or units in a CIS – similar to offers of securities, securities-based derivatives contracts or units in a CIS respectively that are not tokenised. Securities include shares, debentures and units in a business trust.
Prospectus Requirements
Offers of tokenised CMPs (shares, debentures, CIS units, derivatives) must be made in or accompanied by a prospectus that is prepared in accordance with the SFA and is registered with MAS, unless exempted under one of the available prospectus safe harbour exemptions.
Exemptions include where:
- The offer is a small (personal) offer that does not exceed S$5 million (or its equivalent in a foreign currency) within any 12-month period, subject to certain conditions;
- The offer is a private placement offer made to no more than 50 persons within any 12-month period, subject to certain conditions;
- The offer is made to institutional investors only; or
- The offer is made to accredited investors, subject to certain conditions.
These exempted offers are respectively subject to certain conditions which include advertising restrictions.
Offers of units in a CIS are also subject to authorisation or recognition requirements. An authorised CIS or a recognised CIS under the SFA must comply with investment restrictions and business conduct requirements. For details, please refer to the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations 2005, the Code on Collective Investment Schemes and the Practitioner’s Guide to the CIS Regime under the SFA.
Disclosure Requirements
Under section 243 of the SFA, a prospectus for an offer of securities, securities-based derivatives contracts or units in a CIS must disclose all the information that investors and their professional advisers would reasonably require to make an informed assessment of, among other things, the issuer and the product being offered, including the rights and liabilities attaching to the product.
Therefore, a prospectus for an offer of tokenised CMPs that constitute securities, securities-based derivatives contracts or units in a CIS should include information related specifically to the characteristics of and risks arising from the tokenised nature of the CMP.
Issuers of tokenised CMPs should carefully assess and consider the context and specific characteristics of their offering in determining material information that should be disclosed. Information that should be disclosed includes:
- Characteristics of tokenisation / tokenised CMPs
- Technologies underpinning the deployment of the tokenised CMP, such as (i) the types of Distributed Ledger Technology (DLT); (ii) the use and governance of smart contracts; (iii) processes and controls relating to the minting, issuing, transferring, redeeming and burning of tokens; and (iv) key intermediaries involved in the set-up and operation of the DLT network and their roles.
- Rights and liabilities in relation to tokenised CMPs, for instance (i) the CMP’s characteristics, intent and structure; (ii) how ownership rights in the tokenised CMP are recorded; (iii) the rights of the issuer or other entities to amend or override records on the DLT network; (iv) the legal and regulatory frameworks governing the overall arrangement; and (v) the characterisation thereunder.
- Custody of the tokenised CMPs, for example whether held directly by the investor or safeguarded by the issuer, the issuer’s related corporations or a third-party custodian, as well as the custody arrangement where there are assets backing the tokenised CMP.
- Risks relating to tokenisation or tokenised CMPs. These include:
- Technology and cyber risks, for example (i) risks relating to the malfunctioning of the DLT network and/or smart contracts; (ii) risks relating to security breaches which may result in theft or loss of investors’ tokenised CMPs or ownership records; and (iii) risks associated with the use of certain types of blockchains like public-permissionless blockchains.
- Operational risks, for instance arrangement(s) with third-party service providers and risks that may arise in the event of failure of these arrangement(s).
- Legal and regulatory risks, such as (i) risks relating to current and future legal or regulatory frameworks that may impact the issuance, trading or redemption of tokenised CMPs on the DLT network; and (ii) risks to the value of the tokenised CMP as a result of legal or regulatory uncertainties or reforms.
- Custody risks, such as (i) risks relating to the custody arrangements for tokenised CMPs, such as the loss/theft of private key(s) which are used to access such CMPs; and (ii) risks relating to the custody arrangements for assets (if any) backing the tokenised CMPs; as well as how these risks affect investors if materialised.
- Other applicable risks, such as pricing or liquidity risks in relation to the lack of an active trading market for tokenised CMPs.
Offerings of Tokenised CMPs Classified as Complex Products – Distribution Safeguards
Tokenised CMPs are subject to the same complex products framework as non-tokenised CMPs, and will need to be classified as complex or non-complex products. This determination is based on an assessment of the product-specific characteristics exhibited by the CMP, and not whether the CMP is in the form of a digital token.
Complex tokenised CMPs must be sold with enhanced distribution safeguards, including the requirement to assess a customer’s investment knowledge and experience before enabling the customer to invest in tokenised CMPs that are classified as complex products.
Persons Who Must Comply with the Requirements
A holder of a capital markets services licence, person exempted under section 99(1)(a) or (b) of the SFA, and their representatives must accordingly comply with the relevant requirements governing the sale of such investment products as set out in SFA04-N12 Notice on the Sale of Investment Products and similarly, a licensed financial adviser, person exempted under section 20(1)(a) to (e) of the FAA and their representatives with FAA-N16 Notice on Recommendations of Investment Products.
Application of SFA, FAA and AML legislation to Activities Undertaken in Relation to Tokenised CMPs
Activities involving tokenised CMPs may differ from non-tokenised CMPs in the way they are carried out, and may involve new intermediaries and service providers. MAS evaluates the substance of these activities to determine if they are regulated under the SFA and FAA and thereby require these intermediaries and service providers to hold the relevant licences.
Examples of Types of Intermediaries and Service Providers and Licensing Requirements
| Intermediary/Service Provider | Licensing Requirements |
|---|---|
| Person operating a platform on which one or more offerors of tokenised CMPs may make primary offers or issuances of tokenised CMPs (primary market platform) | Where the person is carrying on business in any regulated activity, or holds himself out as carrying on such business, he must hold a capital markets services licence for that regulated activity under the SFA, unless otherwise exempted. |
| Person operating a platform on which tokenised CMPs are traded (trading platform) | A person who establishes or operates an organised market, or holds himself out as operating a market, must be approved by MAS as an approved exchange or recognised by MAS as a recognised market operator under the SFA, unless otherwise exempted. |
| Person providing custody of tokenised CMPs | Where a person is carrying on business in providing custodial services, or holds himself out as carrying on such business, he must hold a capital markets services licence for providing custodial services, unless otherwise exempted. |
| Person providing financial advice in respect of tokenised CMPs | A person carrying on the business of providing financial advisory services in Singapore in respect of any tokenised CMPs must be authorised to do so in respect of that type of financial advisory service by a financial advisor's licence, or be an exempt financial advisor, under the FAA. |
Anti-Money Laundering and Countering the Financing of Terrorism (“AML/CFT“) obligations may also apply to intermediaries and service providers carrying out activities in relation to tokenised CMPs. These AML/CFT requirements include:
- taking appropriate steps to identify, assess and understand their money laundering and terrorism financing (“ML/TF“) risks;
- developing and implementing policies, procedures and controls in accordance with the relevant MAS Notices to effectively manage and mitigate identified risks;
- performing enhanced measures for higher ML/TF risks to effectively manage and mitigate those higher risks;
- monitoring the implementation of those policies, procedures and controls, and enhancing them if necessary; and
- complying with value transfer requirements when effecting the sending of tokenised CMPs, or when receiving tokenised CMPs on the account of the value transfer originator or the value transfer beneficiary, by value transfer.
Additionally, all persons have to comply with the following under other legislation for combating ML/TF:
- Obligation to report suspicious transactions with the Suspicious Transaction Reporting Office, Commercial Affairs Department of the Singapore Police Force under section 45 of the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act 1992; and
- Prohibition against dealing with or providing financial services to designated individuals and entities pursuant to the Terrorism (Suppression of Financing) Act 2002 and various regulations giving effect to United Nations Security Council Resolutions.
Extra-Territoriality Application of Securities Laws
The SFA may apply extra-territorially to issuances, offerings, or activities involving tokenised CMPs if they are conducted partly in Singapore or outside Singapore but have a substantial and reasonably foreseeable effect within Singapore. For details, please refer to the Guidelines on the Application of Section 339 (Extra-Territoriality) of the SFA (Guidelines No. SFA15-G01).
For activities related to tokenised CMPs that involve financial advisory services, the requirements of the FAA apply extra-territorially where a person outside Singapore engages in any activity or conduct that is intended to or likely to induce the public, or a section of the public, in Singapore to use any financial advisory services provided by the person.
Regulatory Sandbox
Any firm that is applying technology in an innovative way to conduct activities that are regulated by MAS under the SFA and/or FAA can apply for the regulatory sandbox. Please refer to the evaluation criteria outlined in the FinTech Regulatory Sandbox Guidelines. For approved applications, MAS will provide the appropriate regulatory support by relaxing specific legal and regulatory requirements prescribed by MAS, which the applicant would otherwise be subject to, for the duration of the sandbox.
If you have any queries on the above, please reach out to our Team set out on this page or contact Knowledge Management at [email protected].
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