Financial Services and Markets Act 2022 – Link

There have been several debates on the impact of the Financial Services and Markets Act (“FSM Act”) in recent weeks. These debates followed recent responses from the Monetary Authority of Singapore (“MAS”). The responses relate to Q4 2024 consultations. These covered the proposed regulatory approach and subsidiary regulations for DTSPs under the FSM Act.

We’ve taken some time to review market responses and the primary legislative updates. We also considered the MAS’ inputs and expectations arising therefrom.

The quick take:

If you are an unlicensed/non-exempt DTSP based in Singapore, you may have benefited from regulatory arbitrage. This may have involved providing regulated activities under the SFA, FAA and/or PSA. These activities were provided to customers outside Singapore. These are together known as “the Legislation”. This position has now changed. To be fair, this was always the regulatory expectation. However, the regulatory tightening to this effect has only just occurred. You would likely be subject to the licensing requirement under section 137 of the FSM Act. You must suspend or cease providing Digital Token services outside Singapore by 30 June 2025.

In summary, a license under part 9 of the Financial Services and Markets Act would be required if you are:

1. a Company incorporated in Singapore/ person operating from a place of business in Singapore
2. carrying out regulated activities deemed within the Legislation or “Digital Token” services under Part 1 of the FSM Act
3. providing said services to customers outside of Singapore

A. Implications of the FSM Act for DTSPs in Singapore

The FSM Act significantly overhauls Singapore’s financial regulatory framework. It consolidates and enhances MAS’ powers to address emerging financial sector risks. This legislation introduces several key provisions affecting DTSPs based in Singapore. It also affects those within the FSM Act’s expanded scope.

1. Extraterritorial alignment and enforcement

DTSPs offering services to overseas customers must comply with Singapore’s regulatory framework. They must also comply with the regulatory requirements of the jurisdictions where they offer services. The FSM Act’s alignment with international standards facilitates cross-border regulatory cooperation. This enables MAS to assist domestic authorities and foreign AML/CFT supervisory counterparts in overseeing such services.

2. Enhanced Regulatory Oversight for Digital Token Services

Under the FSM Act, “Digital Token Services” has been expanded to align with the Financial Action Task Force (“FATF”) Recommendations. This broadens the scope of regulated activities to include

1. dealing in Digital Tokens (“DTs”)
2. facilitating the exchange of DTs
3. inducing or attempting to induce any person to enter into agreements for buying or selling DTs
4. accepting DTs for the purposes of transferring or arranging for the transfer of DTs
5. safeguarding or administration of a DT or DT instrument
6. Advisory services relating to the offer or sale of DTs

It is important to note that DTs under the FSM Act include both digital token-versions of Capital Market Products as per the SFA as well as Digital Payment Tokens as per the PSA.

B. Asking the right questions, understanding the right expectations

We have seen many questions arising from the introduction of this phase of the FSM Act. Many of these questions come from individuals, entities and businesses that are unable to get clarity about the nature of their activities and whether said Act would catch these activities. To this effect, we would like to clarify the following:

1. Firstly, is what you are doing deemed to be a “regulated” or “exempt” activity under the Legislation?

2. Based on the attributes of the assets that you are handling, would the asset type fall within the definition of a Capital Markets Product under the SFA or Digital Payment Token (“DPT”) under the PSA?

If you were in Singapore, offering your services to customers in Singapore, and your answer to these 2 questions is “Yes”, you would already need a license, recognition, or a licensing exemption. If your answer is “Yes” but you have not yet obtained a license or exemption, the FSM Act’s licensing requirements would likely catch you.

C. Potential Exemptions

The MAS has defined any technical service provider that supports the provision of DT services to be exempt from licensing. This applies so long as the service provider does not enter into possession of any money or DTs under that DT service.

The exemption extends to

1. the service of processing and storing data;

2. any information technology security, trust or privacy protection service;

3. any data and entity authentication service;

4. any information technology service;

5. the service of providing a communication network; and

6. the service of providing and maintaining any terminal or device used for any digital token service;
7. any digital token service that is provided, in respect of any central bank digital token, by any central bank or financial institution;

8. any digital payment token service that is provided in respect of any limited purpose digital payment token.

D. Contentious Arguments Stemming from the Exemptions

While the FSM Act defines Advisory Services in relation to Digital Tokens, the Legislation does not specifically provide for Advisory services relating to Digital Payment Tokens – though one could argue that the current limb of dealing in DPTs and/or inducing someone to transact in DPTs under the PSA extends to such “advisory” services in relation to DPTs.

So how does this affect specific business types?

1. Regulated Fund Managers providing DPT advisory services

This could be possible if:

1. This does not take away from the “substantive fund management” element of your business, where the far greater portion of assets managed/advised on must comprise of Capital Market Products
2. Such services are incidental to your current business model
3. You can demonstrate your thorough understanding of the risks that the offer of such services brings to your business, and that
   • your internal policies and processes (e.g. Compliance Manual, AML Policy, EWRA) provide for such risks
   • adequate disclosures are made to your investors about such risks (e.g. through your offer documents)

However, do note that you should clearly communicate any variation of your current service offering under your Capital Market License to the Monetary Authority of Singapore prior to the commencement of such activity(ies).

2. Utility Token Issuers

If you are a token-issuing entity based in Singapore, you may continue to do so on the premise that your token falls squarely within the definition of a limited purpose digital payment token under the FSM Act (and the PSA), which therefore exempts you from licensing obligations.

It is, however, recommended that you ensure appropriate AML/CFT measures as defined under PSN02 (and its supplementary guidelines) are followed.

3. Broker-Dealers

If you are a Broker-Dealer for tokenized Capital Markets Products, you would likely need a Dealing in Capital Market Product license. Notwithstanding that certain “incidental” exemptions may apply, if you were also offering DPT brokerage services from the same entity, you would require a Payment Services License for DPT services[1].

For specific permutations on product types – if you are an entity offering DPT Derivatives, the product type itself does not seem to fall under any regulatory provisions thus far. However, it is important to note that the wording in both the FSM Act and the PSA – particularly around “Inducing” and “Dealing” – could suggest that regulators deem the activities relating to such an offer regulated, and therefore the FSM Act could catch you, especially if you provide such services without taking into accord the relevant ML/TF risk exposure. Also note that if the underlying asset is a stablecoin, this too could bring it under the ambit of the FSM Act.

Conclusion

The Financial Services and Markets Act significantly bolsters the MAS’ powers in relation to entities involved in Digital Token services in Singapore. “It emphasizes the need for robust AML/CFT compliance and stringent TRM practices, and the Legislation expands the latter even for existing licensees.”. Such entities must ensure they are fully compliant with these requirements to operate effectively and securely within Singapore’s financial ecosystem.

The main aim of the FSM Act is to prevent such entities from abusing Singapore’s reputation as a financial hub.

If you are concerned about meeting the 30th June deadline or are still unsure whether any of the provisions detailed herein could catch you, feel free to reach out to us at admin@curiaregis.com or visit our website here.

Please note that none of the information shared above is to constitute legal advice, but instead merely represents the opinion of the writer.

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[1] This does not incorporate other regulated elements of the services you carry out, which the exemptions discussed above may or may not cover, such as e-money, domestic and cross-border money transfer services, among others.