Singapore Payment Service Act application on Crypto-currency and fintech business
Technologies are affecting our daily lives and the Singaporean government perceived the importance of financial technologies that are transforming the worldwide payments and potential risks that new payment systems bring about. Thus, the updated legal framework in the field of payment systems had long been in the regulator’s “to-do” list. The legislative body of Singapore passed the Payment Services Act on January 14, 2019 (hereinafter:- “PSA”), with the aim to adjoin crypto exchange providers and dealers under the supervision of the Monetary Authority of Singapore (hereinafter:-”MAS”), central bank and financial regulator. The Act established a flexible framework for payment service providers and certainty for consumer protection, at the same time aims to encourage innovation, progress in the payment systems and FinTech sector. This article will discuss the key changes brought by the new legal regime which directly affects virtual assets business.
Registration / Licensing requirement
Under the new regime, entities providing payment services must hold a license which allows them to carry out relevant business activities of certain payment services. The PSA regulates seven broad category of money business services:
- account issuance;
- domestic money transfers;
- cross border money transfers;
- merchant acquisition;
- e-money issuance;
- digital payment token;
This article will mainly focus on digital payment tokens and e‑money issuance services. PSA defines the ‘digital payment token’ as any digital representation of value expressed as a unit, not denominated in any currency or pegged by its issuer to any currency, intended to be a medium of exchange accepted by the public and can be transferred, stored or traded electronically.
Correspondingly, e-money is defined as electronically stored monetary value denominated in a currency or pegged by its issuer to a currency, and has been paid for in advance to enable the making of payments, and is accepted by a person other than its issuer and represents a claim on its issuer.
There are three types of licenses available for applying: the standard payment institution licence, the major payment institution licence and the money-changing licence. Cryptocurrency and fintech activities fall under standard and major payment institution licenses.
Service providers which are willing to engage in any payment service providers can apply to MAS to apply for standard payment institution license. Certain financial threshold is established to be eligible for a standard payment license. Holders of subject license can only accept, process or execute payment transactions per calendar year, on average amount not exceeding:
- $3 million (or its equivalent in a foreign currency), for any one of those payment services; or
- $6 million (or its equivalent in a foreign currency), for 2 or more of those payment services.
Should the service providers exceed this amount, they must apply for a major payment institution license. Major license holders are subject to stricter regulation as their operations pose higher risks to the general public. To be more precise, under PSA major payment institutions are required to ensure an undertaking or guarantee by any Singaporean bank or financial institute to have full accountability for customers’ money and a deposit in a trust account along with any other safeguards specified by MAS.
Moreover, major payment institution’s licence is required when the financial service provider conducts a business of:
- one or more payment services per month exceed $3 million (or equivalent in foreign currency) for a single payment service or $6 million (or equivalent in foreign currency) for 2 or more of the payment services for payment services;
- e-money account issuance service and the average over a calendar year of total value in one day of all e-money stored in any payment account exceeds $5 million (or equivalent in foreign currency);
- e-money issuance service and the average over a calendar year of the total value in one day of all specified e-money issued by the licensee exceeds $5 million (or equivalent in foreign currency).
With an established threshold for standard payment institutions, MAS aims to build a flexible legal regime which maintains supporting emerging businesses and encourages innovation within the sector. This way, small e-money and digital token issuers with less than average $5 million daily float can have an access to the market without having to worry about heavy regulatory burdens as opposed to other major payment institutes.
Risk management requirements
The act lays a foundation for MAS to act as a supervisor on cybersecurity and anti money laundering and countering the financing of terrorism (Hereinafter:- “AML/CFT”) issues. While reviewing applications, MAS carefully examines several factors, such as applicant’s awareness of AML/CFT risks, technological risks overlooked by business models, and appropriate control and risk mitigation tools to address those risks.
Licensees have a statutory duty to take necessary AML/CFT measures and have internal policies in place. Moreover, the licensees ought to establish cybersecurity procedures to minimize technological and cyber risks. The main objective of these compliance measures is to protect consumers against financial loss and businesses against insolvency.
Linking today with future
The new act brought an increasing interest into the financial services business, as it provided clarity to basic concepts of e-wallet, virtual currency exchanges and digital payment tokens. Although to date, the consumer risks are relatively low owing to the rate of cryptocurrency use among Singaporeans. But as the number of companies applying for a license is growing (480 applications filed until July 2021), industry players might introduce new products and services to attract customers, which might result in some subsidiary legislation in the near future.
The content of this article is intended to provide a general guide to the subject matter, not be considered as a legal consultation.
Author: Ganna Voievodina, a licensed attorney,
СЕО and co-founder of Manimama Legal & Growth Agency