The Monetary Authority of Singapore (MAS) issued a consultation paper on November 20, 2019, titled “Proposed Regulatory Approach for Derivatives Contracts on Payment Tokens,” seeking feedback on its proposal to allow derivatives contracts that reference payment tokens as underlying assets (Payment Token Derivatives) to be traded on Approved Exchanges and to regulate the activity under the Singapore Securities and Futures Act (SFA). The consultation closes on December 20, 2019.
The trading of the most popular digital tokens, i.e., those that are intended as payment instruments like Bitcoin and Ether, has largely been on unregulated markets, where there have been allegations of fictitious trades, cornering, and market manipulation. In the context of Singapore, unlike derivatives that reference securities tokens, Payment Token Derivatives are currently not regulated under the SFA, unless the payment token is also an “underlying thing” as defined under the SFA, e.g., a unit in a collective investment scheme or a commodity.
There has thus been interest from international institutional investors for a regulated alternative that could mitigate some of these concerns and for Payment Token Derivatives to be listed and traded on Approved Exchanges in Singapore. The MAS proposal will allow Approved Exchanges in Singapore to enable investors to manage their exposure to payment tokens while bringing the activity under regulatory oversight.
MAS therefore proposes to amend the SFA to include payment tokens as “underlying things” in respect of futures contracts and derivatives contracts traded on Approved Exchanges.
Nonetheless, MAS highlighted that it does not regard it as necessary or appropriate at this point to include all Payment Token Derivatives within the regulatory scope of the SFA, as it is of the view that such tokens, as a general asset class, do not pose system risks to the financial system unless they are offered by an entity that is systemically important (such as an Approved Exchange). MAS therefore emphasised that Payment Token Derivatives that are not offered by an Approved Exchange would remain as unregulated products.
MAS observed that Payment Token Derivatives, even if regulated, are not without risks, and MAS does not view Payment Token Derivatives to be suitable for most retail investors to trade, as the underlying payment tokens tend to exhibit high volatility and are intrinsically difficult to value.
In this regard, MAS intends to introduce a number of measures for retail investors who trade in Payment Token Derivatives offered or distributed by financial institutions regulated by MAS; such measures are expected to be in place by June 30, 2020.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers, who are solicitors of Morgan Lewis Stamford LLC, a Singapore law corporation affiliated with Morgan, Lewis & Bockius LLP:
 For context, in the consultation paper, a “payment token” is suggested to refer to any digital representation of value that (a) is expressed as a unit; (b) is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt; and (c) can be transferred, stored, or traded electronically, but does not include any payment token that is a digital representation of value where the value is fixed to any of the following in amounts that are determined at the time of issuance of the payment token and thereafter cannot be changed: (1) a single currency or (2) two or more currencies.
 As defined in Section 2 of the Securities and Futures Act.