Singapore Moves Ahead With New Digital Asset Custody, Segregation Proposals

July 6, 2023
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Singapore’s central bank has published its response to consultation feedback on new proposals for digital asset custody and segregation rules, following in the footsteps of other regulators globally.

Singapore’s central bank has published its response to consultation feedback on new proposals for digital asset custody and segregation rules, following in the footsteps of other regulators globally.

In October last year, the Monetary Authority of Singapore (MAS) published a consultation paper setting out proposed regulatory measures for digital assets service providers, referred to in Singapore as “digital payment token” (DPT) services.

The proposals are aimed at both licensed and exempt businesses that offer DPT services under the 2019 Payment Services Act (PS Act), and some proposals have now been adopted by way of an MAS consultation response.

After a year of high-profile bankruptcies among digital asset service providers, the MAS has adopted several proposals designed to safeguard customers’ digital assets.

In response to its proposal that digital asset service providers should segregate their own digital assets from those of their customers, the MAS said that “most” respondents agreed with this proposal.

It argued that customer asset segregation is badly needed in the digital asset world to mitigate the risk of loss or misuse, and to facilitate safe return in the event of insolvency.

The central bank also toyed with the idea of requiring digital asset service providers to employ an “independent custodian” to hold customers’ digital assets, but this proposal was rejected following feedback.

According to the MAS, there is currently a “limited” number of custodians that could offer such a service, and a requirement to use a third-party custodian would place greater demands on digital asset service providers than their counterparts in the capital markets.

Instead, it stuck with its original proposal that service providers must segregate customers’ digital assets from their own by using separate blockchain addresses.

These addresses do not necessarily need to be one address per customer, however, with firms allowed to commingle multiple customers’ digital assets into one or more “aggregated pools”.

In effect, the MAS noted that these requirements will bring digital asset service providers into a similar framework as the capital markets intermediaries, who under the 2001 Securities and Futures Act must also deposit customers’ assets into a trust account.

Safeguarding of customers’ moneys

Similarly, to safeguard customers’ fiat currency, the MAS proposed that digital asset firms should face the same rules as that of traditional payment service providers (PSPs) under the PS Act.

Digital asset service providers must safeguard “customers’ moneys” by obtaining an undertaking or guarantee from a safeguarding institution, or by depositing these moneys in a trust account at a safeguarding institution.

Under the PS Act, licensed banks, merchant banks, financial guarantee insurers or financial service firms may act as safeguarding institutions.

In consultation feedback, some respondents had argued that digital asset service providers should be able to use overseas safeguarding institutions for ease of transaction in non-Singapore dollar currencies.

However, the MAS said it will proceed with its original proposal to extend the same PS Act requirements that PSPs face to digital asset firms.

“Customers’ moneys will be required to be safeguarded with financial institutions in Singapore, which will facilitate the recovery of customers’ moneys in the event of insolvency,” it said.

No more staking or lending

One of the key proposals made by the MAS was a prohibition on digital asset service providers from lending out retail customers' digital assets or using them for "staking" purposes, even with the customers' consent.

The MAS said most respondents "generally" did not support this prohibition, but after considering the feedback, the MAS will proceed with this prohibition.

Its main reasons were the likelihood that these services will be used to facilitate fraud and market abuse, and that retail customers often do not understand the complex lending and staking agreements that they sign up to.

"MAS has observed from recent collapses of crypto-asset lending and staking programmes involving retail customers globally that the lending and staking of customers’ assets continue to be a source of significant consumer harm," it said, "as customers’ assets that they had expected to be returned to them could no longer be recovered."

For non-retail investors, they will remain outside the scope of this prohibition.

Reconciliation requirements

Other proposals with which the MAS will proceed include “daily reconciliation” of customers’ digital assets and moneys by digital asset service providers.

The “majority” of respondents supported this proposal, although some respondents took issue with the frequency of reconciliation required. Some argued it was too high, while others argued that reconciliation should be done in “real time”.

Ultimately, the MAS said it believes that daily reconciliation strikes the best balance between practicality and security.

As per its original proposal, reconciliation must be performed at the entity level rather than the group level, for greater clarity and visibility.

Moreover, the rules as proposed are already applied to capital markets intermediaries under the Securities and Futures (Licensing and Conduct of Business) Regulations.

Alongside the reconciliation requirement, digital asset service providers must keep transaction records and maintain separate books and records for each individual customer at all times.

This should include the amount and type of digital assets deposited with the provider, all of their movements to and from the customer’s custody account, and the names of the safeguarding institutions used.

Auditors in force

All of the above proposed rules — on segregation, custody, recordkeeping and reconciliation — will be enforced in the first instance by independent auditors.

All digital asset service providers must provide independent audits of their compliance with the newly adopted above rules.

This is in addition to annual audits of their compliance with existing requirements outlined under the PS Act.

All of the proposals adopted in principle by the MAS have been published in a new consultation on amendments to the 2019 Payment Services Regulations, which will be open for feedback until August 3.

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