Singapore: Tightening Scrutiny Of Virtual Asset Service Providers (VASPs)

A key purpose of the PSA was to bring a measure of regulation to the cryptocurrency space in Singapore, ie to “introduce a regulatory framework for Digital Payment Token (DPT) services.”[2] However, the PSA’s regulation of DPT services was relatively directed and narrow; the aim was to manage the money laundering risks and terrorism financing risks that came with cryptocurrency, given their decentralised nature and the ability to transact cross-borders with little identifying information.

This was made clear by Singapore’s Parliament at the time. Insofar as DPTs were concerned, consumer protection regulation was not the focus of the PSA – first, because at the time, the use of DPTs in Singapore was low compared to countries like the US, Japan, and South Korea; second, because regulation from a consumer protection standpoint could have an unintended legitimising effect on DPTs. The concern was that if government registration for cryptocurrency-related initiatives, such as crowdfunding via initial coin offerings (ICOs), were allowed, this could give the public the perception that the government was encouraging or legitimising the same.[3]

These concerns were not unfounded. The potential for cryptocurrency to facilitate money laundering activity in Singapore was brought to the forefront in 2023, when authorities uncovered a S$2.8 billion laundering operation involving foreign nationals. A portion of the monies allegedly being laundered involved cryptocurrency assets. While some of the tainted assets were seized, other cryptocurrency was spirited away, even as the wallet account holders were already being detained by law enforcement.[4]

As to the worry of a false sense of security, some of the most devastating fraudulent schemes in the crypto space have been in the form of ICOs. In 2021, the US Securities and Exchange Commission sued a VASP, BitConnect, and its founder for over US$2 billion, accusing them of, among other things, fraud against investors, which, in some measure, began guised as an ICO.[5]

Strengthening MAS’s Investigative And Supervisory Powers

This then was the backdrop to the recent tabling in January 2024 of the Financial Institutions (Miscellaneous Amendments) Bill 2024 (FIMA Bill) before the Singapore Parliament.[6] On its face, the purpose of the FIMA Bill is to standardise and consolidate the Monetary Authority of Singapore’s (MAS) regulatory powers across various statutes.

Presently, the extent of MAS’s regulatory and investigatory reach differs across various financial regulatory statutes; for example, the Securities and Futures Act (SFA) and the Financial Advisers Act 2001 (FAA) include more far-reaching powers. The FIMA Bill seeks to give MAS similarly strong regulatory powers across all the various statutes, including the PSA. The legislative intention is to enhance MAS’s investigative powers, and expand its oversight of unregulated business (including in the crypto space) conducted by CMSL.

Amendments to the SFA as part of the FIMA Bill would clarify that MAS may, if it deems “necessary or expedient in the interests of the public or a section of the public, or for the protection of investors,” issue specific directions relating to the conduct of “additional business by any holder of a capital markets services licence”.[7]

In this regard, the FIMA Bill would make it clear that:

1. An “additional business” includes a business dealing in arrangements that are “not traded on an organised market that is established or operated by an approved exchange”, under which the value of the arrangement is determined by reference to “the value or amount of one or more payment tokens”, a payment token being a digital representation of value which is not permanently fixed to a currency.[8]
2. In issuing the abovementioned directions, MAS must have regard to the need to avoid or reduce any risk (including but not limited to asset risk, liquidity risk, market risk and technology risk) that has arisen from the conduct of such additional business.[9]
3. MAS can issue directions on a wide range of matters, including regulating the standard to be maintained by a CMSL holder in respect of the conduct and risk management of any additional business, and even to direct a maximum cap on the amount of capital or financial resources that may be maintained by a CMSL.[10]

The relevant clauses are broadly worded. The upshot would be an amended SFA that is able to more effectively manage and mitigate the risks that CMSLs (typically broker-dealers, corporate finance advisers, REIT managers, amongst others) create when they conduct unregulated businesses alongside their regulated businesses.

For example, MAS identified “bitcoin futures and other payment token derivatives traded on overseas exchanges” as types of such unregulated business carried out by CMSLs, which can impact on their ability to honour their obligations to clients with respect to their regulated activities, in turn impacting the effectiveness of MAS’s consumer protection initiatives in other financial service products.[11]

That said, the FIMA Bill’s reach is evidently much wider than the regulation of just Bitcoin futures trading. So long as a CMSL is involved in any cryptocurrency-related business, it would appear that such activity will fall within the ambit of regulation by the MAS.

This appears to represent a distinct evolution from the government’s earlier perspective of shying away from focusing too heavily on the strengthening consumer protection with regard to DPTs through regulation. Insofar as cryptocurrency offers (and crypto-related business generally) might appear alongside other well-regulated financial offerings, the Government appears to recognise that the benefits of regulation outweigh the negatives of any perception that such regulation might be viewed as implicit endorsement of unregulated cryptocurrency business.

After all, cryptocurrency investment literacy among retail investors would likely have increased in the past years, aided by the sizeable fluctuations in market value of well-known cryptocurrency tokens as well as high-profile mishaps in the space, one notable example being the spectacular collapse of the cryptocurrency exchange, FTX.

Insofar as the PSA is concerned, while the Government’s push to strengthen MAS’ anti-money laundering/terrorism financing capabilities evidently remains at the forefront of the FIMA Bill’s efforts, increased consumer protection from ‘rogue’ VASPs appears to be an intended knock-on effect of the expansion of MAS’s regulatory purview.

Both the SFA and FAA already allow for MAS to pass on evidence it has obtained in the course of investigations under that relevant legislation to the authorities for use in criminal proceedings, and vice versa.[12]

Upon the passing of the FIMA Bill, similar provisions will be added to the PSA allowing for the cross-transfer of evidence between the MAS, the Police, the Commercial Affairs Department (the CAD)  and the Public Prosecutor.[13] Express clarification that evidence first obtained by the MAS would be admissible in criminal proceedings is included in the FIMA Bill.[14] This is significant in the context of the PSA, which governs the licencing regime for VASPs in Singapore – in other words, documents which may implicate VASPs (whether in a civil or criminal context) are most likely to be first obtained through the powers under the PSA.

Ultimately, the authors’ view is that one of the most significant threats to DPT retail investors remains large, seemingly ‘too-big-to-fail’ VASPs, who are willing to wade into grey-area practices that might in a traditional context skirt close to conduct encompassing fraud by false representation, a criminal breach of trust, or cheating, all of which are Penal Code offences.

Insofar as a VASP of some size intends to carry on business in Singapore, it might hold Major Payment Institution licences under the PSA. While the PSA’s primary focus may continue to be the strengthening Singapore’s anti-money laundering/terrorist financing regime, the enablement of cross-sharing of information obtained by the MAS with the Police, CAD, and the Public Prosecutor, will ensure that swift investigations can be conducted into criminally suspect behaviour by such a VASP, which is ultimately beneficial to the average retail investor.

The ready hammer of swift and efficient criminal proceedings against errant VASPs is made even more apparent with some of the FIMA Bill’s other proposed amendments to the PSA:

1. MAS investigators will be given powers to enter premises without a Court warrant in connection with an investigation [15] to ensure, among other things, compliance with the PSA and/or written directions [16] issued pursuant to the PSA.
2. MAS will be able to obtain a Court warrant to seize any book or computer containing information which, among other things, is relevant to an abovementioned investigation.

These proposed amendments give the provisions allowing for a cross-transfer of evidence between MAS and the authorities a stronger and more practical bite.

Future Possibilities

The evolution of the legislative framework applicable to VASPs and other service providers, and the underlying premise and objectives of the relevant laws, would also be likely to have an impact on how the Courts resolve cryptocurrency-related disputes in general.

In Rio Christofle v Tan Chun Chuen Malcolm [2023] 5 SLR 684, the claimant alleged that he had entered into a contract with the respondent, for the latter to purchase Bitcoins from him in exchange for S$320,000. The transaction soured for various reasons, leaving the claimant high and dry, with neither Bitcoin nor payment.

One of the arguments advanced by the respondent in Rio Christofle was that the claimant was not entitled to legally enforce the alleged contract between them because it was contrary to Section 5 of the PSA, and thus illegal. The relevant provision essentially states that a person must not carry on a business of providing any type of payment service in Singapore without the required licence to do so, and that a contravention of the same makes such person liable for a criminal offence.

In rejecting the respondent’s argument, the Singapore High Court ruled that the alleged agreement did not have an illegal object, because amongst other things, the PSA’s purpose is to tackle the “significant money laundering and terrorism financing risks” arising from “the anonymous and borderless nature of the transactions” of such transactions, and it was clear that Section 5 of the PSA “does not impliedly prohibit contracts relating to the sale and purchase of cryptocurrency.”[17]

It is unlikely that the Court’s decision in Rio Christofle would change drastically in the face of the Government’s subtle policy shift from a purely anti-money laundering/terrorist financing capability regulation toward a gentle introduction to consumer-protective DPT regulation. However, more pronounced efforts or further amendments to the PSA, or other cryptocurrency-related regulation, and accompanying government commentary on these intended changes, could result in the Courts emphasising this protective approach in future decisions, including in the interpretation of the types of DPT transactions which are permitted, and those which are not.

1 Payment Services Bill; Singapore Parliamentary Debates, Official Report (14 January 2019) vol 94 (Ong Ye Kung, Minister for Education)

2 DPTs are the term used in Singaporean legislation for cryptocurrency dealing or exchange services

3 Payment Services Bill; Singapore Parliamentary Debates, Official Report (14 January 2019) vol 94 (Ong Ye Kung, Minister for Education)

4 https://www.straitstimes.com/singapore/courts-crime/over-38-million-in-cryptocurrency-withdrawn-from-alleged-money-launderer-s-account-while-in-remand

5 https://www.wsj.com/articles/sec-sues-bitconnect-and-founder-alleging-massive-cryptocurrency-scam-of-world-wide-investors-11630535853

6 https://www.mas.gov.sg/news/speeches/2024/explanatory-brief-the-financial-institutions-miscellaneous-amendments-bill-2024

7 FIMA Bill at s 64(a) [see (2A)]

8 FIMA Bill at s 64(a) [see (2D)]

9 FIMA Bill at s 64(a) [see (2B)]

10 FIMA Bill at s 64(a) [see (2C)]

11 https://www.mas.gov.sg/news/speeches/2024/explanatory-brief-the-financial-institutions-miscellaneous-amendments-bill-2024

12 For example, Section 168B of the SFA empowers MAS to provide any book, document, written record of any examination or other information obtained by it in the exercise of its supervisory and investigatory powers pursuant in the SFA to a police officer, an officer of the Commercial Affairs Department or the Public Prosecutor.

13 FIMA Bill at s 31 [see (76U)]

14 FIMA Bill at s 31 [see (76T)]

15 FIMA Bill at s 31 [see (76M)]

16 FIMA Bill at s 31 [see (76B)]

17 Rio Christofle at [55] to [56]. As an aside, it bears noting that the High Court eventually dismissed the claim on other grounds.

Paul Loy
Paul is a Partner at WongPartnership LLP in Singapore, where he works in the Specialist & Private Client Disputes and the White Collar & Enforcement Practices. He has an active dispute resolution practice dealing with both commercial disputes, including shareholder / partnership and contractual disputes, as well as criminal law matters involving corruption, fraud and other white collar crime. He has dealt with cryptocurrency-related matters both in the context of civil court disputes as well as criminal and regulatory investigations. Paul has appeared before all levels of the Singapore courts. He serves as an advocacy trainer for the Bar course in Singapore, and is a Contributing Editor to Singapore Civil Procedure, the leading title on the civil Rules of Court in Singapore.

Samuel Navindran
Samuel is a Senior Associate in WongPartnership LLP’s Disputes Group. Samuel’s main areas of practice are in commercial litigation, white-collar crime, and construction/projects disputes, and he has appeared with his colleagues in all levels of the Supreme Court of Singapore. Samuel was admitted to the Singapore Bar in 2020, having graduated from the National University of Singapore in 2019, appearing on the Dean’s List in his final academic year.