KEY TAKEAWAYS
-  There has been rapid growth in new types of payment services. Of particular interest of the Monetary Authority of Singapore are e-money issuance services and digital payment token services.

-  The Payment Services Act, which came into effect in January 2020, is  a forward-looking and flexible framework for the regulation of payment systems and payment service providers in Singapore.

- Recent developments and the FTX scandal, point to the need for regulation to keep up with technological advancements. Industry experts must step up, to guide regulation.

-  Retail investors must practise caution when engaging with new types of payment services.

There has been rapid growth in new types of payment services. Of particular interest to the Monetary Authority Singapore (MAS) are the e-money issuance services and digital payment token (“DPT”) services.

E-money, according to the Payment Services Act (the “Act”), includes a prepayment of an electronically stored monetary value for the purpose of future payment transactions via a payment account. E-money is stored in an e-wallet. An example of e-money stored in an e-wallet is the monetary value in a Grabpay account or the monetary value in a YouTrip account.

Retail customers are increasingly turning to e-payment. From the S$1.9 billion in retail payments via e-money in 2020, the figure grew to S$2.8 billion in 2022. During the same period (December 2020 to December 2022), the total assets of non-bank financial institutions increased from S$17.6 billion to S$18.8 billion. E-money was introduced as a category in MAS statistics from 2020 onwards.

Another type of payment service is DPT. Some examples of DPT are Bitcoins, Ether, Litecoin, Dash, Monero, Ripple and Zcash.

According to a poll by fintech comparison website Finder.com, nearly one in six Singaporeans surveyed owns DPT as of 2021. There has also been a 16% growth in the quarter-on-quarter application for payment service licences, of which a third were for DPT services.
 

REGULATION TO KEEP US WITH TECHNOLOGICAL DEVELOPMENT 

This growth in demand for alternative forms of payment, as well as the growth in the supply of payment service providers, has necessitated a need for updated legislation by the regulators. This resulted in the introduction of the Act in January 2020.

The objective of the Act is to provide for more regulatory certainty with regard to payment and protection of consumers, while allowing for the growth of payment services in a controlled manner. It also facilitates the expansion of regulatory scope to include novel types of payment services like e-money issuance, and DPT services. As well, the Act includes merchant acquisition, which was previously out of the scope of previous pieces of legislation (that is, the Money-Changing and Remittance Businesses Act (MCRBA), and Payment Systems (Oversight) Act (PSOA)). The Act also provides a regulatory structure that can be tailored to suit the needs of the services offered by the provider.

On 3 July 2023, MAS announced the requirements for DPT service providers to transfer the crypto assets and DPT to a statutory trust before the end of the year for safekeeping purposes. Additionally, it has restricted the activities of DPT service providers in two areas, namely retail investor lending of tokens, and staking of tokens.

RECENT DEVELOPMENTS AND FTX SCANDAL

The recent FTX scandal that occurred in 2022 only serves to reinforce the point of the Payment Services Act. FTX was a well-known cryptocurrency exchange which had allowed customers to deposit funds. The FTX scandal stemmed from the inadequate disclosure of related-party balances, in the form of FTX-issued tokens by a sister firm, Alameda Research. Previously unknown to customers of FTX, it was revealed that Alameda Research had held an FTX-issued token, FTT. The sale of FTT by a rival firm and various other investors led to a fall in the price of the token. This fall in the price of FTT tokens had led to large withdrawals from FTX, which eventually led to the suspension of customer withdrawals by FTX due to liquidity issues. It emerged that FTX had also engaged in unauthorised lending of customers’ funds in an attempt to conceal the losses.

The Act serves to prevent any similar situation from happening in a local context. There have been proposed amendments to ensure that customers’ funds are held by a custodian. This prevents unauthorised use of customers’ funds as in the case of FTX. It also requires DPT service providers to disclose the risks to customers of engaging with a DPT service provider to hold their assets, allowing the customers to make a more informed decision.

MAS has also released notices related to the Act. For example, MAS Notice PSN08, specifically under Annex A2, requires the DPT service provider to warn customers that they should be familiar with the DPT creation process, and the potential for the DPT to be held or transferred by the DPT service provider. This would help to prevent a situation where consumers are uninformed that a DPT service provider and related entities are holding their own DPT (such as Alameda Research holding FTT tokens, which was unknown to the public).
 

US REGULATORS GOING AFTER BINANCE

Recently, another cryptocurrency exchange, Binance, had been charged by the Securities and Exchange Commission, for “operating as an unregistered exchange”, allowing the unauthorised “sale of crypto assets”, allowing US investors to access its website when it should not have been accessible to US investors, and misleading investors. The Act serves as a deterrent for cryptocurrency exchanges breaching similar laws here, by imposing harsh penalties on individuals who have a large amount of authority within the organisation, such as a fine ranging from S$50,000 to S$100,000 and/or an imprisonment term of two years.

Entities would not be able to operate a cryptocurrency exchange in Singapore unless they have been approved or have submitted a licence application to MAS, thus protecting Singapore investors.
 

INDUSTRY EXPERTS TO GUIDE REGULATION

As this is a rapidly developing segment of legislation, with the Act itself being effective on 28 January 2020, and updates to the Act occurring annually since, industry experts would have a large role to play in shaping the legislation.

As with any new good or service introduced into a system, it is always a case of caveat emptor. Retail investors should exercise caution and ensure that they are informed of the risks when engaging with these new types of payment services.

This article was originally published on Chartered Accountants LAB.
Source article: https://ca-lab.isca.org.sg/insights/the-changing-landscape-of-payment-methods/