The MAS Proposes New Measures to Regulate Stablecoin Issuers

On 26th October 2022, the Monetary Authority of Singapore (MAS) issued a consultation paper proposing a framework to regulate stablecoin issuers and intermediaries. To ensure a high degree of value stability in the market, the MAS has proposed to specifically regulate single-currency pegged stablecoins. The objective of the value stability mechanism is to maintain the price stability of stablecoins close to $1 U.S. dollar.

The Financial Stability Board (FSB) defines stablecoins as crypto-assets that aim to maintain a stable value relative to a specified asset (typically a unit of fiat currency or commodity), a pool or a basket of assets. The FSB is an international body that monitors and makes recommendations about the global financial system.

The MAS considers stablecoins to be a credible digital medium of exchange, provided they are well-regulated and are backed by regulations that assure a high degree of value stability. Predominantly, stablecoins are categorized into the following:

• Fiat-backed stablecoins- Fiat-backed stablecoins are digital assets that maintain financial reserves in fiat currency held by regulated institutions like banks. Some popular fiat-backed stablecoins include USD Coin(USDC) and Tether. 
• Crypto-collateralized stablecoins- Crypto-collateralized stablecoins use other cryptocurrencies as their collateral. For example, Wrapped BTC is a stablecoin backed by Bitcoin and is issued on the Ethereum blockchain. 
• Algorithmic stablecoins- Algorithmic stablecoins rely upon a specific algorithm that pegs itself to a physical currency. Essentially, algorithmic stablecoins are decentralized and usually do not have any collateral backing, they instead rely on algorithms to maintain their peg.  Some examples of algorithmic stablecoins are DAI, and TerraUSD (UST).

The MAS has proposed to regulate the fiat-backed stablecoins, whereas, other types of stablecoins, such as algorithmic stablecoins, or stablecoins that are unbacked or backed by other assets will continue to be treated as Digital Payment Tokens (DPT) as they are considered more susceptible to volatility in value.

Seeking to extend beyond the current regulatory framework, which focuses largely on money laundering, terrorism financing, and technology risks, the MAS now aims to bring stablecoins under its regulatory purview to ensure a high degree of value stability in the market.

To this end, MAS seeks to create a specific regulatory framework for stablecoins and related intermediaries under the Payment Services Act 2019, which will regulate the issuance of single-currency pegged stablecoins (SCS) like the USD Coin (USDC). Non- SCS will continue to be subject to the existing DPT regime.

Proposed Regulatory Approach for the SCS Issuers

According to the proposed framework, SCS issuers must hold reserve assets in cash, cash equivalent, or short-dated sovereign debt securities that are at least equivalent to 100% of the par value of the coins in circulation.

In particular, stablecoins issued in Singapore can only be pegged to Singapore’s native currency or any other Group of Ten (G10) currency.

The MAS is also planning to introduce a new regulatory activity to be known as the “Stablecoin Issuance Service” under the Payment Services Act, 2019. Entities based in Singapore that control the supply, minting, or burning of SCS, will fall under this new category and will have to, therefore, abide by the regulatory obligations mentioned in this framework.

Regulations for bank issuers: Banks in Singapore will be allowed to issue stablecoins. Owing to the fact that banks are already subject to the stringent risk-based capital and liquidity, ML/TF, technology risk management, and other requirements under the Banking Act, they will have no reserve backing and prudential requirements imposed on them when they issue SCS by tokenizing liabilities of the banks.

Furthermore, banks in Singapore can also choose to issue SCS by managing the underlying reserve assets such that they are segregated from the rest of the banks’ assets, and SCS holders have claims only on specific pools of segregated reserve assets. Such SCS issued by banks will also be recognized as MAS-regulated SCS.

Regulations for non-bank issuers: If the SCS in circulation exceeds or is anticipated to exceed SGD $5 million, then the issuer will have to obtain a Major Payment Institution (MPI) license to be recognized as an issuer of MAS-regulated SCS.

SCS issuers that do not exceed the size threshold for MPI will only need to obtain a Standard Payment Institution (SPI) license in order to provide regulated DPT services. Since they not be subjected to additional requirements imposed upon SCS issuers, consequently, they will also not be recognized as issuers of MAS-regulated SCS. To this end, they may not be subjected to requirements to address the promise of peg and stability in the value of the SCS issued. Nevertheless, any SCS issuer that wishes to be recognized as an issuer of MAS-regulated SCS may apply for an MPI license and be subject to its additional requirements and regulations.

Base capitals: Issuers must meet a base capital requirement of higher than SGD $1 million or 50% of the annual operating expenses of the issuer.

Solvency: To hold at all times, liquid assets which are valued at higher of 50% of annual operating expenses or an amount assessed by the SCS issuer to be needed to achieve recovery or an orderly wind-down.

Restrictions on SCS issuers: An SCS issuer is restricted from undertaking any other activity that introduces additional risks to itself. This includes investing in and extending loans to other companies, lending or staking of SCS and other DPTs, and trading of DPTs. Such activities can be conducted from other related entities (e.g. sister companies in which the SCS issuer does not have a stake).

Requirements to maintain a high degree of value stability of SCS

MAS proposes the following requirements with respect to reserve assets:

• Reserve assets must be valued on a marked-to-market basis daily and be equivalent to at least 100% of the par value of the outstanding SCS in circulation (including those held by the issuer) at all times. 
• Reserve assets can only be held in the form of cash, cash equivalents, or debt securities with no more than three months residual maturity and are issued by (i) the central bank of the pegged currency; or (ii) organizations that are of both a governmental and international character with a credit rating of at least “AA–”.
• Reserve assets must be denominated in the same currency as the pegged currency. 

Redemption requirements: – A regulated SCS issuer must specify and disclose that all the holders of its SCS would have a direct legal right to redeem the SCS for the pegged currency at par value (or any other currencies of equivalent value), and that redemption requests can be made at any time with the SCS issuer. Any conditions that the SCS issuer wishes to impose for redemptions, such as fees and minimum redemption amount, must be reasonable and clearly disclosed on its corporate website and any other communication channels with the public regarding the SCS. (“Regulated SCS issuers” refers to bank issuers as well as non-bank issuers regulated for SCS issuance under the Payment Services Act ).

Disclosure requirements: An SCS issuer must publish a white paper on its official website, to disclose information such as the description of the SCS, rights, and obligations of the SCS issuer and SCS holders, risks that can affect the stability of the SCS value and ability of the SCS issuer to fulfill its obligations, etc, and update all such information whenever required.

MAS does not intend to prohibit any form of stablecoins, including those which are issued overseas, to be used or offered by a DPT service provider in Singapore. However, MAS proposes measures to help users distinguish between SCS which are issued in Singapore and regulated by MAS, from the other stablecoins. This will allow users to make informed decisions on the risks of adopting different stablecoins. On the digital payments front, DPT service providers should ensure proper business conduct and adequate risk disclosure.

Although silent about unbacked stablecoins or stablecoins backed by other assets, MAS is seeking views and recommendations on single-currency pegged stablecoin regulations and is taking relevant steps to enhance its regulatory frameworks. 

Further, MAS invites comments on the proposed regulations from interested parties. The consultation will be closed on 21st December 2022 at 11:59 PM. Please submit your comments on the regulations following the link below: https://form.gov.sg/#!/6358a8580fbd0600113d66bd