MAS confirms regulatory approach for derivative contracts on payment tokens.

By Farhana Sharmeen and Marc Jia Renn Tan

On 15 May 2020, the Monetary Authority of Singapore (the MAS) issued its response to feedback about its proposed regulatory approach for derivative contracts that reference payment tokens as underlying assets (Payment Token Derivatives), confirming that it will regulate Payment Token Derivatives offered to Singapore investors through approved exchanges. (See MAS’ current list of approved exchanges.) The MAS considers it crucial that it has effective oversight of products offered on approved exchanges due to the systemic importance of such trading facilities and the risk of contagion to the wider financial system.

Payment Token Derivatives not offered through approved exchanges (including overseas exchanges) will not be prohibited and will not be regulated by the MAS. The MAS considers this necessary to prevent any misplaced confidence in such highly volatile products that could lead to a wider offering to retail investors.

The above regulatory scope is also reflected in the Securities and Futures (Prescribed Underlying Thing) Regulations 2020, which came into effect on 18 May 2020.

Definition of payment token

A payment token is any digital representation of value that meets all of the following conditions:

  • Is expressed as a unit
  • Has a value not permanently fixed by such payment token issuer to one or more currencies
  • Is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt
  • Can be transferred, stored, or traded electronically

Measures for retail investors

In its response, the MAS also reaffirmed its view that Payment Token Derivatives are not suitable for most retail investors and expects the following measures to be in place by 30 June 2020:

  • Requiring MAS-regulated financial institutions to collect from retail investors 1.5 times the standard amount of margin required for Payment Token Derivatives contracts offered by approved exchanges, subject to a floor of 50%
  • Advising retail investors not to trade with unregulated entities, and, if they do so, they forgo the protection provided by regulatory safeguards and trade at their own risk
  • Increasing consumer education efforts (g., via MoneySENSE) to caution investors against the high risks of trading Payment Token Derivatives and dealing with unregulated entities

The MAS decided against setting a high minimum investment amount for Payment Token Derivatives, as this could have the unintended consequence of pushing investors to allocate more money to such volatile products to meet the minimum amount. MAS also noted that respondents’ suggestions to require retail investors to trade on a pre-funded basis or disallowing retail investors from trading such products were too heavy-handed and not commensurate with the current levels of risks to retail investors.

In accordance with its general stance of not endorsing specific products, the MAS will not publish a list of regulated derivatives of tokens. Instead, interested persons are to assess if their activities fall within regulatory scope and if they are in compliance with regulatory requirements.

Looking ahead

The MAS will continue to monitor industry developments in assessing both the effectiveness of the above measures and the need for further measures in the forms consultation respondents have suggested. The MAS is also expected to issue its response to feedback received on its proposed regulatory approach on the scope of e-money and digital payment tokens, in view of the emerging asset class of “stablecoins”, following a consultation paper published on 23 December 2019.