Given the proliferation of digital assets, this article seeks to give a general overview of the types of exchanges which facilitate public access to digital assets as well as consider the Singapore regulatory implications associated with establishing and/or operating such exchanges.

1. Preface

In the early days of the digital asset age, public fascination was high but acquiring tokens such as Bitcoin proved to be less straightforward often involving a series of hopeful wire transfers followed by an indeterminate waiting period for the conveyance of the digital asset into the owner's blockchain wallet. Service providers keen to improve this user experience explored methods including physical vending machines but the breakthrough undoubtedly came in the form of the introduction of a third-party intermediary in the trading process.

2. Centralised Exchanges

Centrally-operated digital asset exchanges ("CEXs") have no doubt contributed to the rise and mass adoption of digital assets like Bitcoin and Ethereum by effecting the seamless exchange of fiat and digital assets through the utilisation of sleek user interfaces.

CEXs, like traditional stock exchanges, generally screen digital assets prior to 'listing' and provide similar overall trading experiences by utilising order books, providing/procuring liquidity, custodising assets as well as tending to trade settlement. Newer features include margin, options and derivatives trading. CEXs have also prioritised the development of robust security measures (such as two-factor authentication) to protect the digital assets they custodise. CEXs may also issue a native token to serve as a medium of exchange as part of the trade settlement process (e.g. BNB to the Binance platform).

Like traditional financial institutions, CEXs would typically be required to be regulated and subject to specific anti-money laundering/countering the financing of terrorism ("AML/CFT") requirements. In considering the appropriate regulatory regime, CEXs must consider factors such as:

  1. the classification of digital assets traded on exchange;
  2. whether the CEX operates as an 'organised market' (as defined in the First Schedule of the Securities and Futures Act (Cap. 289) ("SFA") with regard to factors such as,
    1. product classification
    2. regularity of transactions
    3. centralised interaction of bids and offers
    4. reasonable expectation of trade conclusion, whether on or off-platform; and
  3. whether the CEX performs other functions (e.g. if users are able to pre-fund their accounts to acquire digital assets, if the exchange provides any advice in respect of the digital assets, primary issuance of tokens by the CEX etc).

Generally, where the digital assets correspond to capital markets products falling within the SFA regime (e.g. securities, derivatives contracts or units in a collective investment scheme), the CEX may need to be regulated under the SFA depending on the actual activity conducted as well as the profile of its clientele, which may be a combination of one or more of the following (unless an exemption applies): Approved Exchange/Recognised Market Operator and/or Capital Markets Services Licence for Dealing in Capital Markets Products and/or the Provision of Custodial Services. The concurrent provision of services such as giving advice concerning the digital assets may also attract regulation under the Financial Advisers Act (Cap. 110). The CEX should also be mindful that any primary offer of such digital assets must also comply with prospectus requirements under Part XIII of the SFA unless an exemption can be relied upon.

Where the digital assets constitute commodities (e.g. where the digital asset represents any produce, item, goods or article such as gold and/or precious metals) the CEX would have to consider if its activity amounts to spot commodity trading governed by the Commodity Trading Act (Cap. 48A).

Where such digital assets consist purely of digital payment tokens within the meaning of the Payment Services Act 2019 (Act 2 of 2019) ("PSA"), the CEX may need to be licensed as a standard or major payment institution for the provision of digital payment token services under the PSA. Based on statistics released by the Monetary Authority of Singapore ("MAS"), approximately 35% of the payment service provider licence applications received by it relate to the provision of digital payment token services, which is indicative of the broader interest in providing such services.  

Finally, operators of such exchanges incorporated in Singapore but who carry on their activities outside of Singapore should also note the potential impact of the proposed Omnibus Act for the Financial Sector (Consultation paper issued by the MAS on 21 July 2021).

3. Decentralised Exchanges

Decentralised exchanges ("DEXs") have emerged as an alternative in tandem with a push towards decentralised finance ("DeFi") initiatives, and these exchanges allow for digital asset trades to be effected directly between users (i.e. peer-to-peer) through self-executing smart contracts.

DEX protocols utilise smart contracts so that transactions between users automatically conclude so long as prescribed conditions are satisfied, with each self-executing transaction recorded on the blockchain. While the interface and user experience may resemble CEXs, there are several key differences such as the absence of custodisation of digital assets on the platform and the retention of private keys to the asset-holding digital wallets by the user. Also, trades on DEXs are restricted to digital asset trading pairs with no option for fiat settlement although a wide range of digital assets can be traded through a DEX even in the absence of high trading volumes as long as buyer and seller can be matched. DEXs are usually built on the Ethereum blockchain and instead of brokerage fees charged by an exchange operator, users pay a transaction (or 'gas') fee which is calculated based on the computational power required to complete the transaction. Gas fees usually accrue to the miners who validate the transaction.

The regulation of DEXs is less clear at this stage as apart from the foregoing key characteristics, DEXs can and do employ vastly different types of infrastructure and regard must be had to factors such as the types of digital assets made available, the extent of involvement (i.e. degree of decentralisation) as well as the actual activities conducted by the DEX. The considerations and regulatory analysis for CEXs would likewise apply here, except that special regard should be had for the following:

  1. the current scope of PSA regulation for providing a digital payment token service captures any service of dealing in or facilitating the exchange of digital payment tokens. While DEXs operate like a digital payment token exchange, given the absence of custodisation or possession (on-exchange) of any digital assets or moneys, DEXs are unlikely to be considered to be providing the service of 'facilitating the exchange of digital payment tokens'; and
  2. the consideration of novel issues such as the application of the current regulatory regime to a truly decentralised DEX1.

Ultimately, any determination must necessarily be guided by the facts and each DEX should also factor in the following developments when considering the regulatory implications of their activities:

  1. proposed amendments to the PSA passed by Parliament on 4 January 2021 (but are not yet in effect) which, amongst other things, expand2 the regulatory scope of digital payment token service providers to those who facilitate the transmission of digital payment tokens from one account to another, as well as those who 'actively facilitate' the exchange of digital payment tokens in exchange for money or other digital payment tokens even if the entity does not come into possession of the money/digital payment tokens. Such 'active facilitation' would include any service surrounding inducing or attempting to induce any person to enter into such digital payment token transaction;
  2. the type of digital assets tradeable on the DEX protocol and in particular, whether stablecoins3 are utilised. Not all stablecoins fall neatly within the existing definitions of 'e-money'4 or 'digital payment tokens' under the PSA. There are increasing regulatory concerns surrounding stablecoins due to adoption rates and the lack of transparency surrounding the reserves backing this class of digital assets. MAS had on 23 December 2019 issued a consultation paper soliciting for views on, amongst other things, the relevancy of the current definitions of 'e-money' and 'digital payment tokens' in light of the evolution of stablecoins; and
  3. whether the DEX performs other functions or carries out other activities; for example, the utilisation of 'liquidity pools'.

4. Closing Thoughts

CEXs continue to dominate global digital asset trading activity. However, DEXs are still developing at a rapid pace and are undoubtedly part of one of the fastest-growing sectors within the financial technology/blockchain ecosystem. CEXs have also embraced DeFi initiatives in order to better serve their users by incorporating or acquiring DeFi functionalities (such as wallets or blockchain relayers) which interact with the CEX.

Given the evolving regulatory environment, entities that seek to operate in this space must be mindful of the key regulatory drivers, and look to develop as well as institute controls in tandem with innovation to anticipate AML/CFT and technology risks based on their business models.


1 Supposing the DEX consisted purely of a protocol written by anonymous developers.

2 These amendments were made in line with the FATF's Guidance for a Risk-Based Approach to Virtual Assets and Virtual Asset Service Providers revised in June 2019.

3 Stablecoins are digital assets designed to maintain a stable value relative to a specified asset or object (e.g. the US Dollar, or the price of gold).

4 For example, Tether (or USDT) is a stablecoin pegged to the value of the U.S. Dollar but does not represent a contractual right, claim or guarantee that its issuer, Tether Limited, will redeem or exchange Tether for U.S. Dollars and would not be 'e-money' within the meaning of the PSA.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.