Blockchain 2023 Comparisons

Singapore has built upon its strengths as a global financial centre to become a leading global blockchain hub. It is home to a healthy blockchain ecosystem, comprising numerous players at the forefront of trends in areas such as asset tokenisation, cryptocurrency trading and custody, supply chain, insurance, digital identity, mobility and more.

This enviable position has not come about by accident. In response to the increasing relevance of blockchain technology, Singapore has fostered a balanced legal and regulatory regime for the blockchain space that seeks to encourage innovation while protecting participants, investors and the general public. The Monetary Authority of Singapore (MAS) provides clarity and guidance on the application of securities and commodities laws to digital assets, thereby encouraging new investments in financial technologies.

The recent collapse of a number of large players such as FTX, Terraform Labs and Three Arrows Capital has not significantly changed MAS’ regulatory stance. While their collapse has cast the spotlight on new risks that have emerged with the development in blockchain technology, Singapore remains receptive and steadfast in its position to develop Singapore as an innovative and responsible global digital asset hub which enhances efficiency and creates economic value.

Speaking at the Green Shoots Seminar on 29 August 2022, Mr Ravi Menon, Managing Director of the MAS, set out Singapore’s four-pronged approach to develop a digital asset ecosystem:

• explore the potential of distributed ledger technology in promising use cases;
• support the tokenisation of financial and real economy assets;
• enable digital currency connectivity; and
• anchor players with strong value propositions and risk management.

Having considered the new risks posed by the development of digital asset activities, MAS has identified the following five areas of risk in digital assets which it will focus its regulatory approach on:

• money laundering and terrorist financing risks;
• technology and cyber related risks;
• harm to retail investors;
• stability in stablecoins; and
• financial stability risks.

With the above in mind, the MAS had launched two consultations to (i) enhance retail investor protection and business conduct requirements which will be applicable to digital payment token (DPT) service providers, and (ii) introduce new requirements relating to single-currency pegged stablecoin issuance activities. The MAS is reviewing the feedback received and will provide an update in due course.

In addition, the Infocomm Media Development Authority (IMDA) actively invests in the future of blockchain by seeding blockchain challenges and “hackathons” with funding and exposure, spurring innovation in support of Singapore’s “Smart Nation” policy objectives.

Against this backdrop, businesses offering blockchain-based services will have to flexibly adapt and adjust to enhanced regulation and licensing in Singapore, as amendments to existing legislation (the Payment Services Act (PS Act), previously introduced in 2020) and the introduction of new legislation (the Financial Services and Markets Act (FSMA), which was passed into law in April 2022) to regulate the blockchain space are underway (see 2.1 Regulatory Overview and 2.2 International Standards).

The use of blockchain in Singapore runs the full gamut from public to private enterprises, including:

• government registers for non-profit purposes – eg, OpenCerts, which allows employers to verify academic certificates from Singapore’s universities and institutions of higher learning;
• digital platforms to support specific industries – eg, Contour, a blockchain-driven trade finance network led by R3 and comprising eight global banks including HSBC and Standard Chartered, worked with financial institutions to put letters of credit on a distributed ledger and tied up the network’s first fully digital end-to-end secured letter of credit between several organisations in the mining value chain;
• large private enterprises – eg, Senoko Energy, Singapore’s largest energy company, partnered with Electrify, a Singaporean retail electricity marketplace start-up to launch a peer-to-peer energy trading platform – SolarShare; and
• financial services businesses leveraging blockchain in areas such as insurance, lending, asset securitisation and commodities trading – the MAS has licensed and regulated several new digital exchanges utilising blockchain technology to make securities and digital assets publicly available, including a Payment Services Licence (defined in 2.1 Regulatory Overview) for a digital assets exchange set up by Singapore’s DBS Group Holdings, Southeast Asia’s largest bank, which facilitates the issuance and trade of not only cryptocurrencies but also security tokens.

In addition, Singapore has a thriving digital assets trading, custody and investment market, with exchanges, venture capital funds, crypto hedge funds, and decentralised finance (DeFi) projects all contributing to an active market.

The DeFi market continues to develop in Singapore, in part driven by the collapse of multiple centralised digital asset businesses. DeFi projects are growing and being propounded by numerous start-ups and businesses. Such offerings include automated market-making pools, decentralised synthetic investment platforms, diversified lending services and lending-based derivatives, decentralised prediction markets and DeFi token offerings by blockchain asset trading platforms. Investments in such projects continue to grow, as global businesses explore basing their regional operations in Singapore.

The MAS has observed that decentralised exchanges present higher risks of money laundering as they are often unregulated (due to the lack of a central administrator) and may not apply adequate measures for anti-money laundering and counter-financing of terrorism (AML/CFT). However, Singapore has not taken any specific regulatory positions regarding DeFi. Hence, businesses involved in DeFi will have to comply with pre-existing laws and regulations pertaining to the scope of services they offer (see 2.1 Regulatory Overview, 2.2 International Standards and 7.1 Decentralised Finance Platforms).

Among the financial products regulated under the SFA, the MAS has allowed payment token derivatives to be traded on approved exchanges, and such activity will be regulated under the SFA.

Fundamentally, non-fungible tokens (NFTs) are digital assets with a unique digital signature, verified and secured by blockchain technology. “Vanilla” NFTs generally function as immutable digital receipts verifying that their holders own the underlying assets (or a copy thereof).

With the relative lack of regulation of vanilla NFTs – ie, those that do not bear the characteristics of capital markets products (see 3.5 Non-fungible Tokens) – the environment for acquisition and use of NFTs by residents in Singapore is fairly liberal. According to a recent 2021 survey by Finder.com, 6.8% of Singaporeans own NFTs while another 11% plan to acquire NFTs. In the local space, some prominent NFT projects include IreneDAO and Tezarekt. These are projects which go beyond vanilla NFTs and incorporate other elements such as play-to-earn mechanics, decentralised governance structures such as DAOs (as defined in 10. Decentralised Autonomous Organisations (DAOs)) and issuance of other fungible digital assets. However, such projects will still need to assess whether these additional functions cause the projects or their NFTs to be subject to regulation.

There is growing awareness and acceptance of NFTs in Singapore, which are traded on global NFT exchanges such as OpenSea, Rarible and local exchanges such as Mintable. Apart from sales of NFTs, NFTs have also been used to promote social causes in Singapore. NFT charity auctions were hosted on behalf of the National Trades Union Congress (NTUC) U-Care Fund and the United Nations High Commissioner for Refugees, where prominent artwork donors for the charity NFTs included local leaders, such as Speaker of Parliament Tan Chuan Jin. Local artists have also minted NFTs and communities for NFT artists have been gaining traction, including NFT Asia, an online art community promoting NFT artists and collectors, which has grown to over 21,000 followers. Imaginary Ones, an NFT project co-founded by Clement Chia (Cmttat) and David (Gentle Whale), also seeks to use art to spread love, positivity and creativity; building a community with activities geared towards promoting the same. As the project evolved, Imaginary Ones drew the attention of global fashion leader, HUGO BOSS, which culminated in a collaboration which resulted in the launch of a physical store “takeover” at Marina Bay Sands (Singapore). This allowed Imaginary Ones to bring the digital characters which were subject of the NFTs, to life in the real world.

In 2023, OCBC Bank set up a virtual branch on Decentraland, a metaverse platform (OCBCx65Chulia). Using the platform, visitors can open a bank account and apply for a credit card through the bank's website. It also allows visitors to see OCBC's banking products, services, and history.

As large brands make inroads into the space, it seems that NFTs are becoming increasingly mainstream in Singapore.

The SFA and the PS Act

Singapore’s blockchain legal regime generally takes a technology-agnostic approach, focusing on appropriately regulating the underlying activity, rather than blockchain or distributed ledger technology as the enabling technology. As such, there is no specific single piece of legislation governing the use of blockchain or distributed ledger technologies in Singapore. Instead, existing legislation and regulations have been, and are continually being, expanded or clarified to address blockchain or distributed ledger technology-related issues.

Central to this regime is the SFA, which is the main legislation governing the capital markets and financial investments sector in Singapore. The MAS has clarified that offers or issuances of such digital assets will be regulated under the SFA if they have the characteristics of capital markets products, as defined in the SFA. To aid in this analysis, the MAS has helpfully published A Guide to Digital Token Offerings (the MAS Guide), which provides case studies on the features of a digital asset that would result in that digital asset being deemed a capital markets product under the SFA.

Coupled with the SFA is the PS Act, under which companies providing account issuance, domestic money transfers, cross-border money transfers, merchant acquisition, electronic money (e-money) issuance, or DPT or money-changing services in Singapore must, if not exempted, obtain a money-changing, standard payment institution or major payment institution licence (each, a Payment Services Licence). The definition of DPTs under the PS Act would cover most cryptocurrencies and stablecoins in the market today, and many cryptocurrency projects and exchanges would require a Payment Services Licence.

Amendments to the PS Act

To keep pace with changes to international standards and to better mitigate the AML/CFT risks related to DPTs, amendments to the PS Act are underway. The changes widen the existing scope of services involving DPTs, domestic money transfer and cross-border money transfers, as well as expand the powers of the MAS to impose additional licence conditions and user protection measures on specific DPT service providers.

Under the amendments, the scope of regulated DPT services will be expanded to include:

• facilitating the transmission of DPTs from one account to another;
• custodial services for DPTs; and
• facilitating the exchanges of DPTs where the service provider does not come into possession of the moneys or DPTs involved.

Subsequently, these changes will regulate blockchain-related businesses that already offer such services in the market, but are not yet subject to existing laws under the SFA or the PS Act. As at the time of writing (June 2023), the PS (Amendment) Act has been passed and will come into force on a date that is yet to be determined.

As mentioned in 1.1 Evolution of the Blockchain Market, the MAS is also considering a number of measures to enhance retail investor protection and business conduct requirements applicable to DPT service providers regulated under the PS Act. These measures are aimed at addressing concerns that retail customers may not have the financial means to withstand large losses which could arise from speculative trading of DPTs, and address the information disparity that such retail customers may have vis-à-vis DPT service providers.

In preparation for operationalisation of the PS (Amendment) Act, MAS is also consulting on a series of proposals which will affect payment service providers and applicants for a licence under the PS Act. These include the introduction of a six-month transitional exemption period for newly regulated persons under the PS (Amendment) Act to continue operations while they prepare and apply for a licence or variation of the licence under the PS Act (as amended by the PS (Amendment) Act).

AML/CFT

Both the SFA and the PS Act also contain various AML/CFT regulations with which companies need to comply. Such operators may be required to set up cybersecurity systems to reduce technological and cyber-risks (see 4.3 KYC/AML).

DPT services are considered by the MAS to carry higher money laundering and terrorism financing risks due to the anonymity, speed and cross-border nature of their transactions. This view is consistent with the international Financial Action Task Force (FATF) and the MAS has aligned with FATF standards for “virtual asset services providers”, as the PS Act covers entities that perform or facilitate the exchange of digital assets, virtual assets custodial services and financial services related to the offering and sale of virtual assets by introducing AML/CFT requirements for such services. Where companies facilitate the transfer of DPTs or provide custodian wallet services as part of their business, the MAS requires that they apply AML/CFT measures to mitigate the risks posed by such services in line with global FATF standards. These requirements are further detailed in the MAS’s Notice to Payment Services Providers (DPT Service) on Prevention of Money Laundering and Countering the Financing of Terrorism.

FSMA

To fully align itself with ongoing revisions to the FATF standards, Singapore has enacted the FSMA for the financial sector, which will regulate digital token services. The FSMA was passed into law in April 2022 and will come into force on a date that is yet to be determined.

The scope of the FSMA encompasses “digital tokens”, which will include DPTs regulated under the PS Act and digital representations of capital markets products regulated under the SFA. The FSMA intends to broaden the scope and regulatory burden of the AML/CFT requirements for service providers that provide the following services:

• dealing in digital tokens;
• facilitating the exchange of digital tokens;
• accepting digital tokens for the purposes of transferring, or arranging for the transfer of, digital tokens (even where the service provider does not come into possession of the digital tokens);
• inducing or attempting to induce any person to enter, or to offer to enter, into any digital token sale or purchase;
• safeguarding or administration of a digital token or digital token instrument, where the service provider has control over the digital token or the digital token associated with the digital token instrument; and
• advisory services relating to the offer or sale of digital tokens.

To ensure adequate supervisory oversight, the FSMA provides that any entity offering digital token services outside of Singapore from a place of business in Singapore, and any Singapore corporation carrying on a business anywhere in the world that provides any digital token service outside of Singapore, must have their overseas activities held to similar regulatory standards as their Singapore operations. This aligns the position in Singapore with the enhanced FATF standards, which require digital token service providers to at least be licensed in the jurisdiction of their creation to prevent a regulatory lacuna for entities which offer their services outside of their jurisdiction of creation.

The FSMA, in line with international standards, will impose ongoing AML/CFT requirements on licensees and will enhance the MAS’s regulatory oversight over such licensees, given their nexus to Singapore (see 4.3 KYC/AML/Sanctions).

The MAS, Singapore’s central bank and integrated financial regulator, oversees the enforcement of the SFA and the PS Act, as discussed in 2.1 Regulatory Overview, and will also oversee the enforcement of the FSMA once it comes into effect, as discussed in 2.2 International Standards.

Singapore is home to a number of trade groups, such as the Blockchain Association of Singapore, which is designed to be a platform for members to engage with various stakeholders in the scene to discover solutions and promote best practices.

The Quoine Case

The Singapore Court of Appeal case of Quoine Pte Ltd v B2C2 Ltd [2020] SGCA (I) 02 (the Quoine Case) applied existing laws on contract to cryptocurrencies. The court analysed the terms and conditions of the agreement between users of a digital assets exchange and the digital assets exchange operating entity, and recognised that a contractual relationship between buyers and sellers existed when a trade is executed on the digital assets exchange even though that contractual relationship was represented by a smart contract. It was established that even though the contracts between the buyer and seller were smart contracts, ordinary contract principles such as the doctrine of unilateral mistake and equitable mistake at common law still applied. The court then proceeded to analyse the facts of the case utilising traditional legal principles.

The Shiki Entertainment Case

A case currently being litigated involves a company (Shiki Entertainment) suing its landlord for entering its rented industrial unit without notice and cutting off the unit’s power supply following concerns about high electricity consumption. The rented unit was being used as a cryptocurrency mining farm. The case is the first in Singapore to consider lost profits possibly earned from cryptocurrency mining and will raise questions over how such losses can be quantified in terms of fiat currency. At first instance, the Singapore District Court found that the company had failed to prove its claim for damages, given that the company would have suffered the damages for lost profits and income even if the landlord had provided notice. Hence, the Singapore District Court did not have the opportunity to consider how the losses could have been quantified in fiat currency. However, the case is now on appeal to the Singapore High Court.

There has been a prosecution against a person for providing a DPT service without the necessary licence under the PS Act in PP v Lange Vivian [2021] SGMC 11. This was the first prosecution for an offence under section 5 of the PS Act (ie, the offence of carrying on a business of providing any type of payment service under the PS Act without a licence or exemption). The accused in the case had assisted an unidentified person to purchase Bitcoin amounting to a total value of SGD2,780 in exchange for a 10% commission of the transacted monetary value without a relevant licence or exemption under the PS Act. The accused pleaded guilty and the court sentenced her to a term of four weeks’ imprisonment.

Recently, in relation to a claim over stolen cryptocurrencies, the Singapore High Court, in CLM v CLN and others [2022] SGHC 46 (CLM v CLN), granted a proprietary injunction and a worldwide freezing injunction to prevent the dissipation of allegedly stolen cryptocurrencies, against unidentified persons believed to have participated in or assisted with the alleged theft. The Singapore High Court also ordered two cryptocurrency exchanges to provide information and documents relating to the accounts which were credited with some of the allegedly stolen cryptocurrencies. Such interim injunctive reliefs are legal tools that can facilitate the recovery of stolen or hacked cryptocurrencies in Singapore.

On 13 May 2022, the Singapore High Court issued a worldwide proprietary injunction to block any potential sale and ownership transfer of a unique Bored Ape Yacht Club NFT (BAYC No 2162) (BAYC NFT) against an unknown person known as “Chefpierre”. The claimant in this case, Janesh Rajkumar (Rajkumar), had used the BAYC NFT as collateral for a loan on a peer-to-peer lending platform known as NFTfi which functioned as a digital assets lending marketplace that permitted its users to use NFTs as collateral for their loans. When Rajkumar could not repay the loan on time, Chefpierre foreclosed the collateral Rajkumar had put up on the platform (BAYC NFT). Rajkumar alleged that Chefpierre had wrongfully foreclosed the BAYC NFT as he had taken particular care to specify that he was not willing to relinquish ownership of the NFT and would make full repayment of the loan to redeem it. Following an application by Rajkumar, the High Court granted the worldwide proprietary injunction earlier described in this paragraph. As at the time of writing (June 2023), such injunction has not been contested.

The MAS offers its FinTech Regulatory Sandbox to encourage local projects to pursue innovative financial products and services within a secure, efficient, and low-regulatory-pressure environment.

Three options exist under this programme, Sandbox, Sandbox Express and Sandbox Plus. The first is for more complex business models where customisation is required to balance the risks and benefits of the experiment. The second is for activities where risks are low and well understood by the market, and is reliant on disclosures and predetermined rules, providing a faster option for market testing. Sandbox Plus, introduced in January 2022, expands the eligibility criteria to include early adopters of technology innovation and further provides financial grants for first movers in technology innovation.

A successful use case of the Sandbox is HydraX Digital Assets, a Singapore-based digital asset custody provider. HydraX Digital Assets exited the Sandbox on 21 February 2022. As of 22 February 2022, HydraX Digital Assets holds a capital markets services licence for dealing in certain capital markets products and for providing custodial services.

Taxation matters in relation to use of blockchain or cryptocurrencies are covered under existing tax legislation in Singapore, principally the Income Tax Act and the Goods and Services Tax Act. The Inland Revenue Authority of Singapore (IRAS) has also released specific e-tax guides outlining how the legislation applies to blockchain and cryptocurrency matters.

Revenue for Goods or Services Using Cryptocurrency

Businesses that accept cryptocurrency as consideration for goods or services are subject to taxes on their income as set out in the Income Tax Act. These transactions would be considered as barter trade and the relevant revenue based on the value of the goods or services provided. Taxation would be based on net profits (after deducting allowable expenses under the Income Tax Act). Currently, the general tax rate for businesses stands at 17% of taxable income.

Investing and Trading in Cryptocurrency

Individuals or businesses that buy and sell cryptocurrencies as part of their business will be charged income tax on profits derived from trading in cryptocurrency. Profits derived by individuals or businesses which mine and trade cryptocurrency in exchange for money are also subject to income tax, as these would be considered “revenue”.

However, individuals or businesses that invest in cryptocurrency for long-term investment purposes may be exempt from income tax on the disposal of these cryptocurrencies, as these would be considered capital gains rather than revenue. As there are no capital gains taxes in Singapore, these gains are not subject to tax.

Distinguishing these two situations depends on the facts and circumstances of each case. Factors such as purpose, frequency of transactions, and holding periods are considered when determining if such gains from the disposal of cryptocurrencies are taxable.

Taxes on Proceeds of an ICO

Taxes on ICO proceeds are dependent on whether the proceeds are considered as revenue and sourced in Singapore.

Generally, for an ICO of a utility token, ICO proceeds will be treated as deferred revenue (and hence taxable under the Income Tax Act). Whereas for an ICO of a security token, ICO proceeds will be capital in nature and thus not taxable.

To ascertain if the activities giving rise to the ICO proceeds are carried on in Singapore and if the income would be determined to be sourced in Singapore, the following factors (among others) would be considered:

• whether the company has a physical presence in Singapore;
• where and how the marketing and promotion of the ICO is conducted;
• whether the participants in the ICO are predominantly based in or out of Singapore; and
• whether the developers behind the blockchain technology are based in or out of Singapore.

Goods and Services Tax on the Sale of Cryptocurrency

Singapore has a value-added tax regime under the Goods and Services Tax Act, whereby goods and services tax (GST) is levied on the supply of goods and services in Singapore, and the import of goods into Singapore. GST is an indirect tax applied to the selling price of goods and services provided by GST-registered business entities in Singapore. The current rate of GST is 8% but is expected to increase to 9% with effect from 1 January 2024.

With effect from 1 January 2020, the supply of cryptocurrency that falls within the definition of “DPTs” under the Goods and Services Tax Act 1993 (GST Act) is no longer subject to GST. Specifically, the use of cryptocurrency as payment for goods or services will no longer give rise to a supply of such tokens and thus the user need not account for GST on their use. Furthermore, a supply of DPTs in exchange for fiat currency or other DPTs, and the provision of any loan, advance or credit of DPTs will be exempt from GST.

However, uncertainties remain where tokens do not fall within the definition of “DPTs” under the GST Act. In such a scenario, it is possible that GST can apply to the supply of such tokens.

The Singapore government has expressed its intention to support digital innovations such as blockchain. Aside from the MAS, the IMDA also plays a key role in fostering the conditions necessary for eventual mainstream adoption (see 1.1 Evolution of the Blockchain Market).

One example of this is the Singapore Blockchain Innovation Programme (SBIP), a SGD12 million research programme organised by Singapore’s government agencies (Enterprise Singapore, the IMDA, and the National Research Foundation Singapore) and supported by the MAS. SBIP focuses on blockchain technology to develop, commercialise and encourage the adoption of blockchain technology by companies in trade, logistics, and the supply chain.

The MAS had also engaged the industry via Project Ubin, which was a five-phase multi-year project on applying blockchain technology to payments and settlements. Building on Project Ubin, MAS launched Ubin+ in December 2022, a series of central bank digital currency (CBDC) projects in collaboration with international partners to advance cross-border connectivity with wholesale CBDCs.

MAS also partnered with BIS Innovation Hub Centre in Singapore and the central banking community on another wholesale CBDC project entitled Project Dunbar, which developed two prototypes for a shared platform that could enable international settlements using digital currencies issued by multiple central banks.

Under Project Guardian, the MAS is also testing applications of asset tokenisation and DeFi through industry pilots. In November 2022, a live test trade of tokenised government bonds and foreign exchange was carried out on Project Guardian’s public blockchain using liquidity pools comprising of tokenised Singapore government securities bonds, Japanese government bonds, Japanese yen and Singapore dollars.

The nature of digital assets has not yet been legally or judicially defined in Singapore, although the Singapore Court of Appeal in the Quoine Case (see 2.5 Judicial Decisions and Litigation) has suggested that cryptocurrencies could satisfy the definition of property, which was subsequently echoed by the Singapore High Court in CLM v CLN. Thus, the concept of “ownership” of a digital asset under Singapore law still cannot be definitively determined at this time.

Nevertheless, following the approach of the Singapore Court of Appeal in the Quoine Case, it is anticipated that ownership of digital assets will be determined by analogy to other assets. Thus, a person who has acquired knowledge and control of a private key through lawful means would generally be treated as the owner of that digital asset, in the same way that a person lawfully in possession of a tangible asset is presumed to be the owner.

Existing laws would then apply to each fact-specific scenario, for example:

• a person may hold the key on behalf of another, as a custodian or intermediary, in which case ownership may be determined by established laws on agency or trust;
• a digital asset may have multiple keys, in which case ownership may be shared or separated between the holders, perhaps by reference to different functions of the asset;
• a person who has obtained a private key unlawfully, such as through hacking, would not be treated as the lawful owner; or
• in non-anonymous systems where the owners are identified in the transaction ledger, the status of the record (eg, whether treated as definitive or merely evidential) would depend on the rules of the blockchain system that the parties have agreed to.

Fungible digital assets in Singapore can be broadly characterised as follows.

• Security tokens – digital assets which carry security features as shares, debentures, bonds with opportunities to generate income, as well as potential legal liabilities for the issuer.
• Asset-backed tokens – digital assets backed with assets, such as gold, securities, real estate, cash or diamonds.
• Payment tokens – digital assets used for transactions, exchange, assets or value storage, as well as accounting limits.
• Utility tokens – digital assets for supporting services or functionalities on blockchain-based platforms.
• Governance tokens – digital assets which confer on holders the right to vote on decisions and the future trajectory of the projects.
• Hybrid tokens – digital assets sharing two or more different characteristics of the above tokens to varying degrees.

As discussed above (see 2.1 Regulatory Overview), while Singapore does not regulate digital assets generally, digital assets that have certain characteristics may incur regulatory and/or legal liability on the part of the issuer. Each digital asset would have to be examined on a case-by-case basis to determine its specific characteristics and their corresponding regulatory requirements.

Security Tokens

For example, digital assets which are, or are deemed to be, securities or other capital markets products under the SFA will be subject to licensing and prospectus requirements. These include tokens representing interests in:

• a share, where it confers or represents ownership interest in a corporation, represents liability of the token holder in the corporation, and represents mutual covenants with other token holders in the corporation inter se;
• a debenture, where it constitutes or evidences the indebtedness of the issuer of the digital asset in respect of any money that is or may be lent to the issuer by a token holder;
• a unit in a business trust, where it confers or represents ownership interest in the trust property of a business trust;
• a securities-based derivatives contract, which includes any derivatives contract of which the underlying thing is a share, debenture or unit in a business trust; or
• a unit in a collective investment scheme (CIS), where it represents a right or interest in a CIS, or an option to acquire a right or interest in a CIS.

There has been growing interest in offering and trading security tokens in Singapore.

Asset-Backed Tokens

Similarly, asset-backed tokens may also be regulated under the Commodity Trading Act for persons or businesses engaged in the buying and selling of tokens, which may be construed as spot commodity trading.

Payment Tokens

Payment tokens, too, are regulated as DPTs under the PS Act. Under the PS Act, a DPT is defined as “... any digital representation of value (other than an excluded digital representation of value) that: (a) is expressed as a unit; (b) is not denominated in any currency, and is not pegged by its issuer to any currency; (c) 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; (d) can be transferred, stored or traded electronically; and (e) satisfies such other characteristics as the [MAS] may prescribe”. Cryptocurrencies such as bitcoin (BTC) and ether (ETH), as well as stablecoins such as Tether (USDT) and USD Coin (USDC) (see 3.3 Stablecoins), would generally be regarded as DPTs under the PS Act.

Exemptions

It is useful to note here that the following types of digital assets are exempted from regulation under the PS Act:

• “Limited Purpose DPTs”, which refers to payment services involving non-monetary consumer loyalty or reward points or in-game assets or similar digital representations of value, which cannot be returned to the issuer or sold, transferred or exchanged for money; and
• “Central Bank DPTs”, where a central bank or financial institution provides services for dealing in or facilitating the exchange of central bank DPTs (ie, CBDCs).

The PS Act regulates payment services in relation to money, e-money (being a digital representation of currency) and DPTs. Although stablecoins, which are generally understood to be digital assets pegged to fiat currencies, might initially be thought to be “e-money”, the MAS has clarified that most stablecoins would not be regulated as “e-money”. Rather, they may be regulated as “DPTs” instead; see 3.2 Categorisation (Payment Tokens).

Most currency-based and algorithmic stablecoins would not be classified as “e-money”. The MAS did, however, specify that USDT and USDC, both classic examples of stablecoins, would be regulated as DPTs since they fulfil the characteristics of DPTs, as defined at 3.2 Categorisation (Payment Tokens).

Separately, the MAS has also indicated that it intends to expand the current regulatory framework, which primarily addresses money laundering and terrorism financing risks, and technology and cyber risks. This proposed expansion intends to ensure that single-currency pegged stablecoins which value in circulation exceeds SGD5 million, and which are issued by an entity that is based in Singapore, have a high degree of value stability.

Singapore permits the use of cryptocurrencies as a means of payment. There have been instances of M&A transactions and equity investments where the purchase consideration was settled in digital assets, as well as secured financing transactions with security packages that included digital assets. There are no notable limitations on the use of cryptocurrencies for payment, after recent GST reform (see 2.8 Tax Regime).

Singapore law does not specifically regulate the creation, marketing and trading of NFTs at present (see also 1.4 Non-fungible Tokens). The MAS generally takes a technology-neutral approach in regulating NFTs and evaluates the substance and characteristics of the underlying asset when assessing if an NFT comes under the MAS’s regulatory remit. Hence, an NFT that takes on attributes of capital markets products would be regulated under the SFA. For example, if an NFT is structured to represent rights to a portfolio of shares, it will be regulated as a CIS under the SFA.

However, if an NFT has artwork as its underlying asset, then the NFT is not likely to be regulated as a financial product. Instead, general principles of contract and copyright will apply to the creation, sale and trade of such NFTs. Minting of NFTs may be a randomised process, that is, users may not be guaranteed a specific NFT with attributes that can be ascertained on mint date (the revealing of the art underpinning the NFT may also not be simultaneous). Accordingly, this also raises questions as to whether activities associated with such mints are regulated under the new Gambling Control Act.

The supply of NFTs is also considered a taxable supply of services, and hence subject to GST. This is because NFTs are not intended to be fungible, unlike their DPT counterparts.

Digital asset exchanges may be subdivided into the following categories.

• Centralised exchanges – the exchange operator is in full control of order matching, clearing and settlement, and custody.
• Decentralised exchanges – a trust-minimised exchange that does not require a central operator; all processes are executed directly via the blockchain system.
• Hybrid exchanges – which combine aspects of the two.

Presently, regulation of digital asset exchanges depends on the digital assets subject to the exchange services and whether the exchange operates on a centralised or decentralised basis. However, the latter consideration may no longer be a decisive factor due to upcoming amendments to the PS Act (see 2.1 Regulatory Overview).

A non-security cryptocurrency exchange will require a licence under the PS Act. To date, the major digital asset exchanges operating in Singapore have all applied for licences, although most digital asset exchanges are currently operating under an interim exemption from licensing pending the outcome of their licence applications (see 5.2 Initial Exchange Offerings).

Where the digital assets traded on the exchange bear the characteristics of capital markets products, such exchanges are subject to traditional securities law under the SFA. A digital asset exchange for security tokens will require either an Approved Exchange Licence or be recognised as a Recognised Market Operator (see 5.2 Initial Exchange Offerings). Different licensing requirements will apply depending on the scope of services offered and the target audience. To date, there are only four approved exchanges, which can serve retail customers, in Singapore.

Plain vanilla NFTs are generally not regulated in Singapore (see 3.5 Non-Fungible Tokens). Accordingly, NFT exchanges which only list and facilitate the trade in vanilla NFTs are at present not regulated under the SFA and/or the PS Act; although, if there are fiat or DPT on/off ramps, then they may be regulated under the PS Act.

Fiat on/off ramps (ie, businesses facilitating fiat-to-crypto exchanges (or vice-versa)) will be subject to regulation under the SFA and/or the PS Act (see 2.1 Regulatory Overview). They will also be subject to enhanced KYC/AML requirements, as they are considered by the MAS to carry higher money laundering and terrorism financing risks due to the anonymity, speed and cross-border nature of their transactions (see 4.3 KYC/AML/Sanctions).

Businesses are generally obligated under Singapore law to carry out a reasonable standard of KYC and due diligence measures under various pieces of legislation, including the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act, the Terrorism (Suppression of Financing) Act, and the Monetary Authority of Singapore Act (with additional requirements for financial institutions). Businesses should take reasonable steps to satisfy themselves that the property received was not owned or controlled by or on behalf of any terrorist or terrorist entity. It is also mandatory for a person, in the course of their business or employment, to lodge a “Suspicious Transaction Report” if they know or have reason to suspect that any property may be connected to criminal activity. The Terrorism (Suppression of Financing) Act imposes a duty on all to provide information pertaining to terrorism financing to the Commissioner of Police in Singapore, with potential criminal penalties for the failure to do so.

The PS Act places additional AML/CFT requirements on licensees under the PS Act that are DPT service providers who deal in, or facilitate the exchange of, DPTs for fiat currency or other types of DPTs. These measures include policies, procedures and controls in relation to customer due diligence, transaction monitoring, screening, suspicious-transactions reporting and record-keeping.

After the FSMA comes into effect, the AML/CFT requirements presently imposed on PS Act licensees will be extended to businesses operating in Singapore or incorporated in Singapore, even where the regulated digital asset services are provided outside of Singapore. To ensure that there is supervisory oversight, applicants for a licence under the FSMA need to have a permanent place of business in Singapore, and the FSMA imposes controls on changes of ownership and leadership of licensees.

If the digital token in question is a capital markets product as defined in the SFA, the MAS guidelines on KYC, AML/CFT will apply to the issuer instead.

Aside from the abovementioned legislation, Singapore laws prohibit businesses from engaging in any business or commercial activity, or providing any resources and services for the benefit of sanctioned individuals or entities whose names are contained in the list of designated individuals and entities published by the United Nations Security Council. Hence, to the extent there are any transactions in digital assets, businesses should ensure that they are not dealing with sanctioned entities or individuals.

In addition to complying with the aforementioned prohibitions, financial institutions regulated by the MAS (such as DPT service providers) are also required to immediately freeze funds, other financial assets or economic resources of designated individuals and entities.

The MAS is the single regulator of the market for digital assets, and has jurisdiction to enforce the regulations set out in the SFA and the PS Act (see 2.1 Regulatory Overview). It will also have jurisdiction to enforce the regulations set out in the FSMA once it comes into effect (see 2.2 International Standards).

Aside from AML/CFT and KYC measures, the MAS has the power to revoke licences granted under the SFA or the PS Act for licensees or their controllers or directors should they be convicted for an offence involving fraud or dishonesty. SFA licensees involved in false trading, market manipulation, or the sale of securities, securities-based derivatives contracts or units in a CIS may also be subject to criminal and/or civil liability under the SFA.

There are no specific regulations targeting the ability of a digital asset exchange to re-hypothecate to third parties the digital assets they hold for customers. However, digital asset exchanges licensed under the SFA would be required to abide by the MAS guidelines set out for the re-hypothecation of client monies generally.

The MAS requires capital markets intermediaries (including digital asset exchanges under the SFA) to provide risk disclosure to customers and to obtain their consent (excluding customers who are institutional, expert or accredited investors, or related entities of the intermediary) for their assets being mortgaged, charged, re-hypothecated or otherwise used by the intermediary. Furthermore, any sum re-hypothecated may not exceed the sum owed by the customer to the holder. The MAS does not prescribe the form of risk disclosure but encourages industry associations to consider developing standard formats appropriate for their respective industries.

The PS Act also requires entities that require a Major Payment Institution licence to have a clear segregation of customer monies. Such licensee must not withdraw any monies from the customer’s segregated trust account except for the purpose of reimbursing the licensee relevant monies paid to or advanced to the account, and any interest accrued from the relevant money in the segregated trust account. Upcoming PS Act amendments will allow the MAS to prescribe additional licensees or classes of licensees in respect of certain payment services that must safeguard customer assets, instead of having such safeguards apply across every Major Payment Institution (as is presently the case).

Currently, Singapore does not have regulations in force specifically governing online or offline storage solutions for private cryptographic keys that control the ability to give instructions with respect to digital assets. However, such services will be regulated once the amended PS Act and the FSMA come into effect (see 7.3 Custody).

As discussed above, under Singapore’s purpose-based approach, whether ICOs constitute an offer of securities/capital markets products (and will hence be regulated under the SFA) will depend on the nature and characteristics of the digital assets being offered.

In the MAS Guide, digital assets that constitute capital market products are defined as digital tokens representing equity in a corporation, a debenture of the issuer, a securities-based derivatives contract, or a unit in a CIS.

Any offeror of digital assets that constitute securities will be required to file a prospectus, in accordance with the SFA, unless an exemption applies. The exemptions under the SFA include:

• a “small offer” (a personal offer not exceeding SGD5 million in any 12-month period);
• a private placement offer to a maximum of 50 persons within any 12-month period;
• an offer to institutional investors only; and
• an offer to accredited investors only.

In respect of initial exchange offerings, the MAS has observed that one or more of the following types of intermediaries typically facilitate offers or issuance of digital assets:

• a person who operates a platform on which one or more offerors of digital assets may make primary offers or issuances of digital assets (primary platform);
• a person who operates a platform on which digital assets are traded (trading platform); and
• a person who provides financial advice in respect of any digital assets.

Primary platform operators in Singapore that offer digital assets which constitute any kind of capital markets product may be carrying on business in one or more regulated activities under the SFA, and will thus require a licence thereunder, while those which offer digital assets which constitute DPTs as defined in the PS Act may require a licence for providing DPT services.

A person who establishes or operates a trading platform in Singapore in relation to digital assets which constitute securities or futures contracts may also be establishing or operating an organised market. This market must be approved by the MAS as an approved exchange or the operator must be recognised by the MAS as a recognised market operator under the SFA, unless otherwise exempted. Where a person establishes or operates a trading platform in Singapore in relation to digital assets which constitute DPTs as defined under the PS Act, it may be carrying on a business of dealing in, or facilitating the exchange of DPTs and require a licence thereunder.

Once amendments to the PS Act come into effect, decentralised exchanges which do not come into possession of the DPTs subject to trade or any monies, may be carrying on the regulated activity of inducing or attempting to induce a person to enter, or offer to enter, into any DPT sale or purchase.

A person providing financial advice in Singapore for any digital asset that is an investment product must be authorised to do so in respect of that type of financial advisory service by a financial adviser’s licence, or be an exempt financial adviser, under the Financial Advisers Act. This includes a person based overseas who engages in any activity or conduct that is intended to or is likely to induce the public, or a section of the public, in Singapore to use any financial advisory service provided by the person.

Airdrops

An airdrop is a means of distributing digital assets to certain digital asset wallet addresses for free, and therefore could be characterised as a gift of such digital assets and not a sale or purchase transaction. Nonetheless, an airdrop may still be regulated depending on the exact mechanism used and the nature of the digital asset. Any issuer who distributes digital assets via airdrop should therefore ensure that the receipt of tokens via the airdrop is not pegged to the fulfilment of any conditions both before and after the airdrop.

IDOs

Another method of token launch is an initial decentralised exchange offering (IDO), where issuers launch liquidity pools with pre-set token pairs on decentralised exchanges. The liquidity pools will contain the digital asset being offered in the IDO, and any party holding tokens designated in the token pair may exchange such tokens for the digital asset offered in the IDO. Any issuer who distributes digital assets via an IDO should be aware of its AML/CFT obligations (see 4.3 KYC/AML/Sanctions) and may also require a licence under the PS Act if the token subject of the IDO is a DPT.

See 5.1 Initial Coin Offerings.

See 5.2 Initial Exchange Offerings.

The enforceability of smart contracts has not been determined in case law, legal precedent or legislation in Singapore. However, the judgment in the Quoine Case (see 2.5 Judicial Decisions and Litigation) does not preclude a smart contract from being a legally binding contract, provided that the elements typically required to constitute a legally binding contract are present. These elements are offer, acceptance, and the intention to create legal relations.

This approach is supported by the IMDA. In its Consultation Paper on the Review of the Electronic Transactions Act (ETA), the IMDA affirmed that the ETA does not prevent the use and formation of smart contracts, and that a contract by sole virtue of its automatic formation is unlikely to be denied validity or enforceability. The IMDA also pointed out that cryptographic hashes may, at the very least, form possible components of electronic signatures for purposes of party intention and authentication to create a contract.

Formality Requirements

Assuming a smart contract constitutes a legally binding contract under Singapore’s legal system, there may also be various formality requirements which must be fulfilled. For instance, Section 6 of the Civil Law Act prescribes that a contract for sale of immovable property has to be in writing and signed in order to be enforceable. The requirement that the contract be in writing could be challenging to fulfil in the context of a smart contract for sale of immovable property, with the consequence that the enforceability of that smart contract could be uncertain.

It also remains to be judicially determined whether the writing component for smart contracts may be fulfilled, by way of Section 7 of the ETA, which provides that an electronic record will constitute “writing”. An electronic record in turn is defined under the ETA as “a record generated, communicated, received or stored by electronic means in an information system or for transmission from one information system to another”. Thus far, the ETA has only been judicially discussed when applying it to recognising emails as forming a valid and legally enforceable contract, or in recognising that electronic contracts may be formed in the context of internet transactions. It remains unclear if the definition of electronic records under the ETA can be extended to encompass smart contract program codes.

There are no regulations specifically addressing the liability (if any) of developers of blockchain-based networks.

Nevertheless, following the approach of the Singapore Court of Appeal in the Quoine Case (see 2.5 Judicial Decisions and Litigation), we would anticipate that any such liability would be determined by ordinary legal principles, in the first instance with regard to any contractual or agreed relationship between the developers and other participants in the network.

There are no regulations specifically regulating DeFi platforms that match borrowers and lenders of digital assets. However, general laws on the conduct of lending as a business will apply (such as the Moneylenders Act and the Banking Act).

It should be noted that PS Act licensees are prohibited from lending to individuals. This limits PS Act licensees to conducting payment-related activities only, and prevents them from engaging in banking or other regulated activities, such as consumer lending.

Moreover, PS Act licensees that provide an e-money issuance service are specifically prohibited from on-lending customer money or using customer money to materially finance their business activities.

The use of digital assets as security has not been explored in case law, legal precedent or legislation in Singapore.

Nevertheless, following the approach of the Singapore Court of Appeal in the Quoine Case (see 2.5 Judicial Decisions and Litigation), it is anticipated that security over digital assets will be determined by analogy to other assets. Thus, traditional common law forms of security interests such as the assignment, mortgage, charge, and pledge may be considered. Assignments, mortgages or charges could all be applicable to digital assets categorised as securities or currency (when stored in online wallets). Physical digital asset wallets could also be pledged as security, to the extent that such physical wallets can be considered goods or personal chattels.

Regulations specifically governing the custody of digital assets in Singapore have been passed into law but are not yet in force.

Presently, entities providing custody of digital assets classified as “e-money” under the PS Act may be considered as providing an “account issuance service” under the PS Act and thus require a licence. That said, most cryptocurrencies (including stablecoins) would not be considered “e-money” (see 3.3 Stablecoins) and would not be regulated accordingly.

However, once amendments to the PS Act come into effect, the custody of cryptocurrencies that are “DPTs”, including BTC, ETH, USDT and USDC, will be a licensable activity. The scope of regulated DPT services will expand to include any conduct of safeguarding or administration of a DPT, or a situation where the service provider has control over the DPT/DPT instrument (this would include private keys and wallets).

Similarly, services related to the safeguarding or administration of a digital asset, or a situation where the service provider has control over the digital asset/digital asset instrument, would be a regulated service under the FSMA (see 2.2 International Standards). Businesses that are based in Singapore but which offer such services abroad would be required to comply with licensing and regulatory requirements under the FSMA.

Holding custodians of capital markets products on custody is also regulated under the SFA, where “providing custodial services” is a regulated activity in relation to securities, specified securities-based derivatives contracts or units in a CIS. Custodians providing such services would have to hold a capital markets licence and are required to adhere to SFA regulations. Under SFA regulations, other holders of capital markets service licences would be required to maintain a custody account, into which they deposit customers’ assets (including digital assets), or, for the same purpose, an account directed by an accredited investor.

See 8.2 Data Protection.

The main legislation governing privacy and data protection in Singapore is the Personal Data Protection Act (PDPA).

Under the PDPA, companies have an obligation to protect personal data in their possession or control by making reasonable security arrangements to prevent unauthorised access, collection, use, disclosure, copying, modification, disposal or similar risks against that data. Personal data may cover different types of data about an individual, including data from which an individual could be identified, even if that data was false and regardless of the form in which it is stored. Hence, the storage, collection, provision of access to, or otherwise control of personal data belonging to natural persons, whether through the use of blockchain technology or otherwise, could attract PDPA obligations. The reasonableness of security arrangements on an objective basis, which would include people and processes factors, could be relevant in assessing PDPA compliance. This should be considered together with KYC processes.

There has been no case law or enforcement action to date, on the application of the PDPA to blockchain networks. However, it is useful to note that unlike the EU’s General Data Protection Regime (GDPR), the PDPA does not contain a “right to be forgotten”, which is one of the key conflict points between “immutable” blockchain networks and the GDPR. As such, it is anticipated that with careful planning, and the incorporation of “data protection by design” considerations early in the system architecture and design stage, blockchain-based products and services will be able to fully comply with the PDPA.

There are no regulations specifically governing the mining of digital assets in Singapore.

However, miners should be aware of tax liabilities arising from income from mining (see 2.8 Tax Regime). The IRAS has noted that profits derived by businesses which mine and trade digital assets in exchange for money are subject to income tax.

Miners should also be aware of potential SFA or Commodities Trading Act regulation should they run a collective mining pool that aggregates and distributes returns as a result of mining operations. This may be seen as operating a collective investment scheme or a commodities pool.

There are no regulations specifically governing the participation by entities or individuals in a “proof of stake” consensus protocol.

However, companies providing “staking as a service” or “staking pools” may be deemed to be providing financial services, or offering a collective investment scheme under the SFA, and would require an appropriate licence from the MAS.

The DAO framework in Singapore is still in its infancy. There is no specific legislation to characterise DAOs as a new form of legal entity or to grant legal status to DAOs.

As the industry matures, there will likely be further development on the structures and characteristics of DAOs, including potential legal wrappings for a DAO.

There are no fixed standards or guidelines for the governance of DAOs in Singapore. Generally, DAOs are managed by rules encoded in computer code, or smart contracts, built on blockchains. These smart contracts allow the DAO to automate organisational governance and decision-making and therefore operate with token holders’ input in a decentralised manner. The governance processes, such as the issuance of governance tokens and the voting protocols, may be initially determined at the option of the development team behind the DAO and, depending on the DAO’s rules, the DAO token holders after formation.

Such operational processes are not presently regulated, given that the DAO itself is not a recognised legal form. However, without a legal wrapper for the DAO, projects should be mindful of the risks of regulators shoehorning such DAOs into recognised legal entity forms for purposes of regulation.

It can be challenging for DAOs to enter into binding agreements with legal entities, given that the DAO structure raises fundamental questions on the attribution of liability.

To enable DAOs to interact with non-blockchain-native entities, one potential approach is to first establish a legal entity, which then proceeds to offer and issue the DAO’s governance tokens. Rights of token holders can be enshrined in corporate documentation to oblige the legal entity to implement matters decided upon by token holders. The legal entity may then enter into binding contracts, in place of the DAO, with other parties.

Presently, there is much uncertainty surrounding the legal treatment of DAOs in Singapore, and the formation and operation of DAOs is still at a nascent stage. Careful planning at the implementation stage is key to avoiding legal complications in the future, which could be costly.