The Monetary Authority of Singapore is weighing up ways of regulating the money laundering/terrorist finance risks associated with activities involving digital tokens that do not function solely as virtual currencies, with initial coin offerings or ICOs among its main targets.

In a recent press release it tried to quell doubts - although it did not say whose doubts - that it is capable of regulating the offer or issuance of digital tokens in its jurisdiction they constitute products regulated under the Securities and Futures Act (Cap. 289).

The reason for the MAS’s apparent insecurity over the matter is unknown, but it claims that its 'clarification' about its capacity to regulate these products has something to do with a recent increase in the number of initial coin (or token) offerings (ICOs) in Singapore as a means of raising funds. Many ICOs depend on HNW investors.

A digital token is a cryptographically-secured representation of a token-holder's rights to receive a benefit or to perform specified functions. A virtual currency is one particular type of digital token, which typically functions as a medium of exchange, a unit of account or a store of value.

The MAS is worried about the vulnerability of ICOs to money launderers and terrorist financiers because the transactions are anonymous and people find it easy to raise large sums of monies in this way in a short period of time. It has told the public in the past that virtual currencies per se are not regulated, while maintaining that intermediaries in virtual currencies should be regulated for ML/TF risks. It is therefore weighing up ways of regulating ML/TF risks associated with activities involving digital tokens that do not function solely as virtual currencies.

Its decision not to regulate virtual currencies is similar to that of most jurisdictions, but it is jittery over the idea that digital tokens have evolved to become more than virtual currency. They may now, for example, represent ownership or a security interest over an issuer’s assets or property and may therefore be considered an offer of shares or units in a collective investment scheme under the Securities and Futures Act (SFA). They may also represent a debt owed by an issuer and thus be classed as a debenture according to the terms of that Act.

In cases where digital tokens might be 'securities' according to the Act, issuers of such tokens could be obliged to approach the regulator and "lodge and register" prospecti before offering the tokens, although the regulator is holding out the possibility of some kind of exemption. In a grammatically odd corner of its press release, the regulator uses the conditional tense as though it is unacquained with the law about which it is writing: "Issuers or intermediaries of such tokens would also be subject to licensing requirements under the Securities and Futures Act and Financial Advisers Act or FAA (Cap. 110), unless exempted, and the applicable requirements on anti-money laundering and countering the financing of terrorism. In addition, platforms facilitating secondary trading of such tokens would also have to be approved or recognised by MAS as an approved exchange or recognised market operator respectively under the SFA."

The types of digital token offered in Singapore and elsewhere vary widely. Some offers may be subject to the SFA while others may not be. The regulator, still giving off a distinct impression of indecision and uncertainty, is asking all issuers of digital tokens, intermediaries facilitating or giving advice about an offer of digital tokens, and platforms that want to host trading in digital tokens to take legal advice. It is also asking them to get in touch with it "where appropriate."

About a month ago the regulator published released a consultative paper, proposing to help firms move into the realm of digital advisory services (also known as robo-advice) by recognising the unique characteristics of digital platforms.  

Financial institutions regulated under the SFA and the FAA can already provide digital advisory services, and some have started to do so. Digital advisers may operate with a fund management licence or a licence for dealing in securities under the SFA, or a financial adviser’s licence under the FAA, depending on their business models and the specific activities that they undertake. The MAS has recently received indications of interest from new businesses in this area that want to service HNW investors. To make life easier for them, it intends to refine its licensing and business conduct requirements.

The paper suggests that digital advisers that operate as fund managers under the SFA ought to be allowed to offer their services to retail investors even if they do not meet the 'track record' requirement, as long as they meet certain safeguards. These safeguards include: an agreement to offer diversified portfolios of non-complex assets; the appointment of management teams with relevant collective experience in fund management and technology; and independent audits for every digital advisory business within one year after 'D-Day.'

The MAS also wants to allow digital advisers that operate as financial advisers under the FAA to help their clients execute their investment transactions (perhaps by passing their trade orders to brokerage firms) and to be allowed to re-balance their clients’ investment portfolios in collective investment schemes without the need for any additional licences under the SFA. It even wants to make this licensing exemption available to non-digital advisors. Once again, in keeping with its tentative approach to the whole subject, it wants to allow this on a case-by-case basis. It is also proposing that if a licensed and exempt financial advisory firm proffers advice on overseas-listed investment products, it ought to have to send risk warning statements to its customers.

Third, digital advisers ought to be able to seek exemption from the FAA requirement to collect the full suite of information on the financial circumstances of a client, such as income level and financial commitments, "if they can satisfactorily mitigate the risks of providing inadequate advice based on limited client information."