The Monetary Authority of Singapore (MAS) recently issued a consultation paper setting out its proposed regulatory approach for derivatives contracts that reference payment tokens as underlying assets (Payment Token Derivatives).

What is this approach meant to address?

A well-regulated market for derivatives – particularly one anchored by institutional investors with sophisticated risk management and investment strategies – can serve as a more reliable reference of value for payment tokens. MAS proposes to clarify the regulatory position in relation to Payment Token Derivatives (which are currently unregulated other than in respect of futures contracts) and to adopt an approach that seeks to allow innovation to co-exist in a regulatory environment with high standards.

How are payment tokens to be defined?

Payment Tokens are proposed to be defined as digital representations of value that:

  1. are expressed as a unit;
  2. are, or are 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
  3. can be transferred, stored or traded electronically.

Payment Tokens are proposed to exclude digital representations of value where the value is fixed to a single currency or two or more currencies, in amounts that are determined at the time of issuance of the payment token and cannot be changed thereafter (as these should not be subject to volatility in the same manner).

What is the proposed approach?

MAS is currently proposing to bifurcate its approach to Payment Token Derivatives as follows:

  1. it will regulate Payment Token Derivatives that are offered by Approved Exchanges.  MAS regulates Approved Exchanges as systemically important facilities and will maintain effective oversight over all products offered on such Approved Exchanges; and
  2. it does not intend to regulate Payment Token Derivatives that are not offered on Approved Exchanges.  Such Payment Token Derivatives will therefore continue to be unregulated products, but will become subject to the additional requirements in respect of retail investors as set out below.

Additional requirements in relation to retail investors trading in Payment Token Derivatives

MAS’ view is that Payment Token Derivatives are not suitable for most retail investors to trade given their high volatility and difficulty to value.  To discourage retail investors MAS thus intends to introduce additional measures requiring financial institutions regulated by MAS to collect from retail investors 1.5 times the standard amount of margin required for contracts offered by Approved Exchanges.

This will apply in respect of trading by retail investors of Payment Token Derivatives offered on Approved Exchanges, as well as over-the-counter Payment Token Derivatives entered into with MAS’ regulated financial institutions.

The additional measures will also be extended to Payment Token Derivatives-linked securities and similar structured products, although how they will operate in that context is yet to be fleshed out.

MAS expects to have these measures in place by 30 June 2020.

How are other jurisdictions dealing with similar issues?

The UK’s Financial Conduct Authority has proposed a ban on the sale of derivatives referencing certain crypto-assets to retail investors due to the extreme volatility of crypto-asset prices movements, prevalence of market abuse and inadequate understanding of crypto-assets by retail investors.