The Monetary Authority of Singapore ("MAS") has on 20 November 2019, published a consultation paper inviting public feedback on its proposal to include, within the regulatory scope of the Securities and Futures Act (Chapter 289) ("SFA"), derivatives that are based on payment tokens, provided that these are offered by an approved exchange.
In the consultation paper, MAS noted that the popular digital tokens, such as Bitcoin and Ether, are today traded largely on unregulated markets, but regulated alternatives are also beginning to emerge, such as Bitcoin futures that are traded on certain US exchanges. MAS felt that a well-regulated market for derivatives offered the benefit of serving as a reliable reference of value for digital tokens.
Taking into account the interest from international institutional investors and recent inquiries from the industry as to whether derivatives based on payment tokens fell within the regulatory scope of the SFA, MAS is considering bringing within the scope of the SFA, derivatives that are based on payment tokens, at least insofar as such derivatives are offered by an approved exchange under the SFA. MAS said it considers approved exchanges to be suitable because they are subject to stringent regulation and also have the resource and control mechanisms to manage the risks associated with such products.
In putting forward this proposal, MAS emphasised that it did not yet consider that payment token derivatives in general to be suitable to be recognised as a distinct asset class. Thus, payment token derivatives that are not offered on an approved exchange will continue to be classified as an unregulated product and investors who invest or transact in this do so entirely at their own risk.
MAS also emphasised that in general, it does not consider payment token derivatives to be suitable for retail investors. Accordingly, additional measures will be put in place to mitigate the risks for retail investors and to discourage them from transacting in payment token derivatives that are offered or sold by MAS regulated financial institutions. Such measures will include significantly higher margin requirements, as well as mandatory risk warnings and restrictions on advertisements.
Presently, a derivative contract is within the scope of the SFA if its underlying reference (referred to in the SFA as "underlying thing") is a unit in a collective investment scheme, a commodity, a financial instrument (such as an index), the credit of any person or anything else prescribed by MAS.
To give effect to these proposals, MAS is planning to amend the existing Securities and Futures (Prescribed Underlying Thing) Regulations, so that the term "underlying thing" will include payment tokens, in relation to futures contracts that are traded on a market established or operated by an approved exchange. The extended definition of "underlying thing" will not apply to futures contracts that are offered by a recognised market operator.
The consultation closes on 20 December 2019.
A copy of the consultation paper may be found here.
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