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What the Singapore Payment Services Act means for Fintech and Crypto Businesses

Flag Theory Weekly Letter – Monday January 21st, 2019

Singapore is one of the most important financial centers worldwide and the Asian hub for the Fintech Industry.

Businesses innovating in the financial services industry are setting up there due to a number of reasons.

Singapore is one of the best places worldwide to start and do business for tech-related projects with a relatively low-tax regime, several tax and governmental incentives, and a vibrant venture fundraising landscape.

It also has a legal system derived from English common law, which is very scrupulous in respect of private property, and an an independent judicial system that provides legal certainty – the rule of law applies to legal and contractual procedures.

Finally – the financial services regulator and central bank, Monetary Authority of Singapore (MAS), is one of the most receptive, well-educated and pro-innovation regulators worldwide.

Currently, Singapore is adjusting its current regulatory framework with intentions to maintain their competitive edge over other jurisdictions by providing further legal certainty to emerging fintech business models.

In our previous letter, we were discussing that Singapore is planning to introduce a new market operator regime that may provide more flexibility and licensing opportunities to start-ups operating private securities markets, blockchain-based exchanges and p2p trading platforms.

A few weeks ago, we also commented that a new fund framework passed into law by the Parliament would create a new corporate structure suited for investment funds – the Variable Capital Companies Act (VCCA).

MAS also provided some clarity for ICOs, issuing guidelines for crypto token issuers – where a token could be considered a payment token, utility token or security token depending on its specific features and uses. Consequently, nearly 10% of all ICOs worldwide have taken place through a Singapore legal entity.

The Payment Services Act

The most recent regulatory development was just last week – the Singapore Parliament passed new legislation, the Payment Services Act, that will regulate companies providing payment services, including e-money issuers, wallets, merchant acquirers, money transmitters, money exchanges and cryptocurrency exchanges, among others. The new framework will come into force during the second half of 2019.

The Payment Services Act replaces the existing Payment Systems (Oversight) Act 2006 and the Money-Changing and Remittance Business Act 1979, and brings all payment service providers under a single legal framework, in addition to regulating new business models such as cryptocurrency exchange services.

The regulator has taken a risk-based approach when it comes to the licensing regime – depending on the business volume threshold, companies will be subject to a different licensing tier and more stringent or lighter regulatory requirements. There will be three types of licenses:

  • Money-Changing License
  • Standard Payment Institution License
  • Major Payment Institution License

The money-changing license will entitle its holder to provide fiat currency exchange services, ie, the business of buying and selling currency notes.

Payment Institution License

For its part, companies providing one or more of the following payment services will need to be licensed as a Standard Payment Institution.

  • account issuance services
  • domestic money transfer services
  • cross-border money transfer services
  • merchant acquisition services
  • e-money issuance services
  • digital payment token services

Standard Payment Institutions will be also entitled to provide currency exchange services without additional licensing requirements.

A Major Payment Institution License will be required if the average, over a year, of the total value of all payment transactions in one month exceeds SGD 3 million (or its equivalent in a foreign currency); or SGD 6 million (or its equivalent in another currency), for 2 or more of those payment services.

If the company provides e-money issuance services, and the average, over a year, of the total value in one day of all specified e-money float exceeds SGD 5 million (or its equivalent in another currency) – it will also be required to hold a Major Payment Institution license.

Major Payment Institutions will be subject to stricter licensing and ongoing requirements.

For instance, Standard Payments Institutions will need to maintain at least SGD 100,000 core capital, while for Major Payment Institutions it will be SGD 250,000.

Major Payment Institutions will also be required to maintain security of a certain amount with the regulator and comply with certain user protection measures such as having customer funds deposited in trust accounts.  

All Payment Institutions will be subject to AML/CTF regulations, certain corporate governance conditions, and cybersecurity requirements to address any technology risk.

Other requirements will apply such as safeguarding their e-money float by having the equivalent amount of funds covered in a bank in Singapore or appointing an independent auditor.

Note that Payment Institutions are not allowed to provide any lending services and must not use any customer money, or any interest earned on any customer money, to finance any activity of any business carried on by the license holder.

In order to grant a license, the MAS will assess whether the applicant meets the guidelines on fit and proper criteria, its financial situation and resources and whether the company is able to fulfill operational requirements and has in place the proper risk mitigation measures such as those to address money laundering or security risks.

An applicant must have a permanent place of business, or a registered office in Singapore, and have at least a Singaporean citizen or permanent resident as executive director. Note that a mere nominee may not suffice to fulfill this requirement.

Licensing and ongoing operating requirement details will be published in further sub-regulations.

Note that businesses regulated under the Insurance Act, the Trust Companies Act, the Financial Advisers Act, or the Securities and Futures Act, such as a Capital Markets License holder, might not be required to obtain a Payment Institution license if they provide certain payment services that are considered incidental or necessary to conduct its business.

Next, we review what this new payment services legal framework means for certain fintech and crypto businesses.

E-Wallets and other Stored Value Facilities

In the previous legislation, e-wallets were not specifically regulated – some were regulated for providing a stored value facility or, if applicable, additional services provided such as money remittance. Under the new legislation, e-wallets will be regulated as providing account issuance services – including payment accounts, multi-purpose stored value cards or non-bank issued credit cards, among others.

In the current legislation, operators of stored value facilities (SVF) – defined as a mean of storing value and making payments up to the amount of stored value and where payments are executed by the SVF operator rather than the customer – are required to obtain approval from the MAS if they are holding SGD 30 million or more in stored value, meanwhile, others are just subject to certain certain notification requirements and certain customer due diligence and anti-money laundering adherence requirements.

With the new legislation, all SVF operators will be regulated as providing e-money issuance services.

Existing licensed SVF operators may not need to re-apply for a license but will have 6 months after the Payment Services Act come into force to inform the M.A.S. of the specific activities that they are carrying out.

Existing exempted SVF operators that are under the SGD 30 million threshold will have a 6-month grace period to apply for a license and will be allowed to keep operating until MAS approves or rejects the license application.

Payment Operators, Merchant Acquirers and Money Transmitters

In the previous legal framework, activities such as money transmitters receiving funds from one person or entity for transmission to another person or entity were generally regulated as remittance businesses under the Money-changing and Remittance Businesses Act – which only covered outward remittances to other jurisdictions.

With the entry into force of the Payment Services Act, businesses providing both inbound and outbound remittances will be regulated as providing cross-border money transfer services.

For its part, businesses accepting funds in order to enable certain local payment transactions will be regulated as providing domestic money transfer services.

Merchant acquirers and merchant payment processors were also not specifically regulated, and were licensed in case they were providing certain remittance or currency exchange services.

With the new legislation, any company providing payment processing or payment gateways for merchants – providing the service of accepting and processing a payment transaction for a merchant under a contract – regardless of whether the company holds the funds any time or not, will be required to be licensed as a Payment Institution providing merchant acquisition services.

Currently, MAS regulates certain payment systems that are of significant importance in Singapore’s financial system as a designated payment system under the Payment Systems (Oversight) Act (PSOA). This practice will continue in a similar fashion under the new legislation.

Cryptocurrency Exchanges and Brokers

Cryptocurrency exchanges and other Singapore businesses dealing with bitcoin, utility tokens or payment tokens, were not regulated per se, although they were obliged to comply with AML/CTF requirements and to report suspicious transactions to the Suspicious Transactions Reporting Office.

In the new legislation, ‘digital payment tokens’ are defined as any digital representation of value that is expressed as a unit; is not denominated in any currency, and is not pegged by its issuer to any currency; 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; and can be transferred, stored or traded electronically.

Bitcoin and cryptocurrencies – other than securities tokens and other asset-backed tokens – clearly fall under this definition.

Businesses facilitating the exchange of cryptocurrencies will be subject to be licensed as a Payment Institutions providing digital payment token services. Companies that are in the business of buying and selling cryptocurrencies will also be regulated.

A cryptocurrency exchange is considered a facility (whether electronic or otherwise), where offers or invitations to buy or sell any digital payment token in exchange for fiat money or any other digital payment token are regularly made on a centralised basis and those offers or invitations are intended, or may reasonably be expected, to result (whether directly or indirectly) in the acceptance of those offers.

Existing crypto exchanges will be given six months after the Payment Services Act comes into force to apply for a license and comply with the new regime.

Note that the legislation does not apply to businesses accepting crypto as a means of payment for the provision of goods or services. It also does not apply for token issuers or securities token exchanges. As we commented last week, securities token exchanges fall under the Securities and Futures Act and would be regulated as Recognized Market Operators (RMO).

Note that the new Payment Services Act defines emoney as any electronically stored monetary value that is denominated in any currency, or pegged by its issuer to any currency and represents a claim on its issuer – Companies issuing stablecoins pegged to fiat might be regarded as providing e-money issuance services under the new legislation, depending on the features of the stablecoin and how it is structured.

The Bottom Line

Singapore is taking steps to keep its position as one the largest financial hubs internationally by embracing financial technology innovation by enacting new legislation and updating its existing legal frameworks such as the Variable Capital Company Act or the revised securities market operator regime under the Securities and Futures Act, and the Payment Services Act to accommodate new financial services business models.

The new Payment Services Act will bring regulatory supervision to certain financial service activities that were not previously regulated in Singapore – we see this as a positive movement towards more legal certainty.

In addition, fintech businesses are highly dependent of the banking sector – this new licensing regime may facilitate fintech businesses to easily access traditional financial services. This is of special importance for blockchain and cryptocurrency-related companies, such as exchanges, which, at the time of writing, are facing significant challenges to open accounts in Singaporean banks.

The regulatory landscape is adapting to the advent of these new financial services business models. However, some countries are doing it more quickly than others and some have even enabled a regulatory sandbox – some are more restrictive, some are more flexible.

At Flag Theory, together with our legal counsel & partners, we can help you compare and navigate the regulatory landscape of the most attractive jurisdictions worldwide and help you decide on the most suitable corporate structure and jurisdiction to set up your fintech or crypto/blockchain business. We can also assist you with incorporations, any licensing process and covering your financial services needs such as segregated bank accounts to hold your customers’ funds. Contact us today, it will be a pleasure to assist you.