Leading the US and Hong Kong A detailed explanation of Singapore’s regulatory framework for stablecoin.

Singapore's regulatory framework for stablecoin is explained in detail, leading the US and Hong Kong.

Author: William, Wu Shuo Blockchain

With the development of financial technology and changes in global geopolitics, governments around the world have gradually realized the enormous potential of stablecoins. Countries and regions such as the European Union, the United States, Singapore, and Hong Kong, China have successively launched consultations and legislative activities to seize the initiative in the future. On August 15th, the Monetary Authority of Singapore (MAS) announced the final version of the regulatory framework for stablecoins, becoming one of the first jurisdictions globally to incorporate stablecoins into the local regulatory system. In the near future, Hong Kong, China and the United States will also introduce stablecoin regulatory regulations. Therefore, Singapore’s release of the regulatory framework has significant value and will serve as a template for reference by regulatory agencies in various countries to a certain extent. In this regard, this article will analyze in detail the regulatory framework for stablecoins in Singapore and gain insights into the future development trends of global stablecoin regulation.

1. Key Points of Singapore’s Stablecoin Regulatory Framework

MAS’ earliest regulatory attempt regarding stablecoins can be traced back to the PS Act issued in December 2019, followed by the release of a consultation paper in December 2022, soliciting public opinions on the proposed regulatory framework for stablecoins, and finally completing the final version of the stablecoin regulatory framework on August 15th of this year. Therefore, Singapore’s complete regulatory framework for stablecoins involves the content of the three aforementioned regulatory documents, rather than just one of them. According to my analysis, Singapore’s stablecoin regulatory framework mainly includes the following parts:

Figure 1 Key Points of Singapore’s Stablecoin Regulatory Framework

1. Scope of Application

One point that has attracted market attention in this Singapore’s regulatory framework for stablecoins is the openness of the stablecoin issuance targets. MAS allows the issuance of stablecoins anchored to a single currency [1] (Single-currency stablecoin, abbreviated as SCS), with the anchor currency being the Singapore dollar (SGD) + G10 currencies [2]. Generally speaking, a country’s currency is a symbol of its sovereignty, and other countries have no right to manage it. However, MAS allows stablecoins to be anchored to currencies of other countries, which is a major breakthrough. This shows that MAS has a certain degree of openness and innovation, fully considering the national conditions of G10 countries and communicating with various countries.

Secondly, in terms of the issuers, MAS has made significant adjustments. MAS divides stablecoin issuers into two categories: banks and non-banks. For non-bank issuers, MAS requires stablecoins with a circulation scale of more than SGD 5 million to be included in the stablecoin regulatory framework and to apply for the MPI license under the PS Act; otherwise, they do not fall within the scope of stablecoin regulation and only need to comply with the DPT provisions under the PS Act. As for banks, MAS originally planned to include tokenized deposits in the scope of stablecoins, but the two differ significantly in terms of asset nature (deposits are products under the bank reserve system, not 100% collateralized, and belong to bank liabilities). They were eventually excluded, so banks must also issue stablecoins backed by 100% assets. However, it should be noted that banks do not need to apply for the MPI license. MAS’ explanation is that the Banking Act already requires banks to meet relevant standards.

Figure 2 Issuing Entity Scope Regulations

2. Reserve Management

In terms of reserve management, MAS has made detailed regulations, mainly in the following areas:

First, in terms of asset composition, MAS requires reserves to only be invested in cash, cash equivalents, bonds with a remaining maturity of no more than three months, and has provided detailed qualifications for the issuing entity of the assets: either currency cash issued by the government/central bank, or international institutions rated AA- or above. It is worth noting that MAS has issued restrictive interpretations of cash equivalents: mainly referring to bank deposits, checks, and bills that can be quickly converted into cash, but excluding money market funds. Therefore, stablecoins like USDC that invest 90% of their assets in money market funds, or even stablecoins like USDT that invest in some commercial bills, do not meet MAS regulatory requirements.

Second, in terms of fund custody, MAS requires the issuer to establish a trust and open a segregated account to separate its own assets from reserves; and has also made clear qualifications for the custodian: it must be a financial institution with a custody services license in Singapore, or an overseas institution with a branch in Singapore and a credit rating no lower than A-. Therefore, stablecoin issuers who want to be included in the MAS regulatory framework must collaborate with a local financial institution in Singapore or one that has a branch in Singapore.

Finally, in terms of daily management, MAS requires the daily market value of reserves to be higher than 100% of the SCS circulation scale, and to be redeemed at face value when redeemed, with a redemption period not exceeding 5 days, and monthly audit reports must be published on the official website.

3. Professional Qualifications

What is noteworthy about this regulatory framework is that MAS has made detailed qualifications for stablecoin issuers as part of its prudent supervision. MAS has made three main provisions regarding the qualifications of issuers:

First is the Base Capital Requirement, which is similar to the Basel Accord’s requirement for banks’ own capital. MAS stipulates that the capital of stablecoin issuers must not be less than 1 million Singapore dollars or 50% of annual operating expenses (OPEX).

Second is the Solvency requirement, which requires liquid assets to be higher than 50% of annual operating expenses or to meet the scale needed for normal asset withdrawals, and this scale needs to be independently verified. It should be noted that MAS has made clear provisions on the types of liquid assets, mainly including cash, cash equivalents, government debt claims, large-denomination certificates of deposit, and money market funds.

Finally, there are Business Restriction requirements, which require issuers not to engage in lending, staking, trading, and asset management businesses, and also prohibit issuers from holding shares of any other entity. However, MAS also explicitly states that stablecoin issuers can engage in stablecoin custody and stablecoin transfer to buyers. This effectively restricts stablecoin issuers from engaging in mixed business operations. Furthermore, MAS specifically points out that stablecoin issuers are not allowed to pay interest to users through activities such as lending, staking, and asset management. But other companies can provide similar services for stablecoins, including sister companies in which stablecoin issuers do not have any stake.

4. Other Regulatory Requirements

MAS has also made provisions for information disclosure, qualifications and restrictions on stablecoin intermediaries, network security, and anti-money laundering, but there is nothing noteworthy, so this article does not go into further analysis. Interested readers can refer to the relevant documents.

II. Pros and Cons of Singapore’s Stablecoin Regulatory Framework

The introduction of Singapore’s stablecoin regulatory framework has had a significant impact on the compliant development of the global stablecoin industry, as well as serving as a model and guide for other countries, so there is no need to elaborate further. Here, we mainly focus on several areas that MAS can continue to improve in the future.

In this stablecoin regulatory framework by MAS, several important issues have been put on hold or left ambiguous, which may pose potential risks in the near future.

Firstly, there is the issue of the category of reserves. MAS originally planned for the valuation currency of reserves to be consistent with the anchor currency, meaning that if a Singapore dollar stablecoin is issued, the reserve assets must be Singapore dollar assets rather than US dollar assets. However, this would bring about a serious problem: whether users are concerned about the ability to deposit and withdraw stablecoins in currencies such as the US dollar. If the Singapore dollar stablecoin can only be exchanged for Singapore dollars, then the stablecoin will not have a competitive advantage and will result in a small circulation. Additionally, the types and depth of investable assets for some anchor currencies are very limited, which poses a significant challenge to reserve management. MAS should also be aware of these issues, but it does not explicitly allow reserves to be invested in different currency assets, only reiterating that the issuer needs to control risks and meet the 100% reserve requirement.

Secondly, there is the issue of cross-jurisdictional regulation. MAS proposed two solutions to address this issue: one is for the issuer to submit an annual proof document demonstrating that stablecoin issuance in other regions also meets the same standards, and the other is to establish cooperation with different jurisdictions. However, due to practical factors, neither of the above solutions can be realized, so MAS can only settle for less by requiring stablecoin issuers not to allow cross-jurisdictional issuance in the initial stages. However, some stablecoins have already become global stablecoins, issued in different regions and on different public chains. If issuers comply with the above requirements, they may lose market competitiveness.

Lastly, there is the issue of regulating systemically important stablecoins. MAS provided descriptive explanations of what constitutes systemically important stablecoins in last year’s consultation paper and hoped to regulate them based on the standards of financial market infrastructure. However, due to practical factors, MAS has chosen to shelve the controversy for now and observe the effects later.

Aside from the regulatory content itself, another important question that the market is concerned about is: what are the pros and cons of issuing compliant stablecoins in Singapore?

On one hand, the advantage of compliant stablecoins lies in their compliance. For example, due to their own compliance and security, compliant stablecoins instill greater confidence in users, and furthermore, MAS requires compliant stablecoins to be labeled as “MAS-Regulated Stablecoin” to differentiate them from other stablecoins, which is conducive to the promotion of stablecoins. Additionally, because compliance is more recognized by traditional financial institutions, there are fewer obstacles when depositing and withdrawing funds from banks.

On the other hand, we should also pay attention to the cost issues of compliant stablecoins. Firstly, MAS has clearly defined the qualifications for issuance, with specific requirements for own capital, solvency, and business scope. However, existing stablecoin issuers are not subject to such restrictions. Secondly, there is a fairness issue in the market. MAS states that banks do not need to obtain an MPI license to issue stablecoins, but non-bank issuers need to apply for an MPI license. Currently, the application process for an MPI license takes around 1-2 years, and there are also various qualification requirements for companies. Since the implementation of the PS Act in 2019, there have not been many companies that have obtained an MPI license. Therefore, issuing compliant stablecoins in Singapore requires a significant amount of time, manpower, and resources.

In conclusion, under the current MAS stablecoin regulatory framework, banks or large companies with strong capabilities have a higher possibility of issuing “MAS-Regulated Stablecoin.” The current policies are not particularly friendly towards non-bank small and medium enterprises.

[1] Note: MAS does not allow the issuance of stablecoins pegged to a basket of currencies or stablecoins pegged to digital assets and issued through algorithms.

[2] Note: G10 currencies include the Australian dollar, Canadian dollar, British pound, euro, Japanese yen, New Zealand dollar, Norwegian krone, Swedish krona, Swiss franc, and US dollar.