Navigating Singapore’s fintech and crypto regulations
Chia Ling Koh and Norvin Chan present pitfalls fintech businesses should be aware of when considering opening a business in Singapore
With Singapore’s status as a fintech and digital assets hub, many companies wish to set up business in Singapore. Despite Singapore’s reputation for ease of doing business, companies are frequently surprised to discover the regulatory landscape is a complex one which requires considerable knowledge to navigate. Below,, we present five pitfalls a new fintech or crypto company needs to keep in mind.
Singapore’s fintech and crypto laws are extremely broad, which means various services are captured by the plain meaning of the legislative text. Additional analysis needs to be given to determine whether the intended offering falls under an exclusion and whether the activity intends to be regulated or will merely be the unfortunate victim of expansive drafting. It is difficult to distill a single formula to determine whether a service is regulated.
The legislation is capable of regulating entities overseas (e.g. an overseas operator offering payment services in Singapore may be regulated) and regulating activities overseas (e.g. a Singapore entity that offers services internationally).
Compounding the broad scope of legislation is that there is no carve-out for incidental services. Hence, a tech-enabled business which offers an incidental payment service will still need to comply with regulations. For instance, if a bricks-and-mortar store sets up an online store and provides a wallet balance with e-money, e-money regulations would apply. The store will then need to figure out whether it can fall under exclusions such as the limited purpose e-money exclusion.
There is no single piece of legislation by which cryptocurrencies and digital assets are regulated. Instead, a cryptocurrency and digital assets provider may potentially be regulated as: (i) a digital payment token service provider under the Payment Services Act; (ii) a digital token provider under the Financial Services and Markets Act; (iii) an offeror of securities or capital market services provider under the Securities and Futures Act, or (iv) a commodity broker under the Commodity Trading Act.
The above reflects an evolutionary and incremental approach by the Monetary Authority of Singapore (MAS) in both the introduction of new laws to comply with Singapore’s international obligations (such as FATF) and the adaption of existing laws to apply to cryptocurrencies and digital assets that have the same nature as existing asset classes.
MAS is constantly calibrating their regulatory response, so players can be caught off guard by sudden reactions due to market developments. Although MAS historically confined itself to discouraging retail speculation in cryptocurrencies, it has now taken a proactive approach. Following retail investors losing money in recent market crashes, MAS is now considering measures for cryptocurrency exchanges such as the implementation of customer access controls such as knowledge tests and prohibiting leverage.
MAS has also become vocal in decrying the unviable use cases and articulating what it believes are the use-cases in crypto (mainly a focus on tokenizing real-world assets, using blockchain technology for settlement and programmable money). It is unclear how MAS will treat license applications that do not fall under its articulated use cases.
On the fintech side, there are encouraging signs of liberalisation such as a proposed increase of limits on e-wallets.
From the contrasting approaches to traditional fintech players vis-à-vis crypto players, it may be gleaned the regulatory attitude is still fundamentally pro-innovation. It is only due to risks materializing that had resulted in a clamp down.
When a business hopes to open in Singapore and obtain a license, regulators expect substantial activities to be carried out, in terms of business functions and compliance. An over-reliance on external advisors or consultants during the license application process is a pitfall as it indicates the client is not prepared to carry out the substantial activities expected. Ideally, a license applicant should be able to assemble the team or at least have key hires in place before embarking on a license application. That will enable the business to navigate the pitfalls discussed in this article.
Chia Ling is the managing partner of OC Queen Street LLC, a member of Osborne Clarke's international legal practice and Norvin Chan is a senior associate at Osborne Clarke's Signapore office osborneclarke.com