SINGAPORE - To put a check on cryptocurrency speculation by retail investors, the Republic’s regulator is proposing a list of rules that will not only make it harder for users to start digital asset trading but also ensure industry players ring-fence this group’s investments.

The proposed measures come on the back of a string of insolvencies of key crypto players such as lender Celsius and hedge fund Three Arrows, who were caught in the crash of stable coin TerraUSD and its sister token Luna.

Besides having to test a customer’s understanding of the possible risks of crypto trading, the Monetary Authority of Singapore (MAS) is proposing that providers of digital payment token (DPT) or crypto services, such as exchanges, not allow retail users to borrow to purchase crypto or accept credit card payments to do so.

Crypto service providers should also not use incentives such as giving away free tokens or gifts to court retail users. Celebrity endorsements are also not allowed.

To differentiate retail investors who made most of their money from crypto speculation from those with a diverse portfolio, MAS has suggested that an individual has to have at least $1.8 million in other assets, be it property, equities or bonds, to be treated as an accredited investor.

This is because an accredited investor is now viewed as someone with at least $2 million in net personal assets. So, the regulator will recognise up to only 10 per cent, or $200,000, of an accredited investor’s net personal assets in crypto.

In a move likely to ruffle feathers, MAS is proposing that crypto companies licensed under the Payment Services Act cannot lend out retail investors’ DPTs at all, whether it is for staking purposes in a decentralised finance protocol or to another crypto company.

Crypto companies will also have to separate customers’ assets from their own assets, introduce risk management controls for tokens held by retail investors and disclose the policies and procedures on how they select and list tokens.

The companies will have to disclose conflicts of interests. For instance, disclosure is needed if a company has financial interest in tokens that are listed on a trading platform, or if a player conducts market-making activities for tokens listed on its trading platform.

They will also have to ensure they put in place adequate complaints handling processes.

Similar to other financial institutions, DPT service providers will have to maintain high availability and recoverability of critical systems, as well as promote fair, transparent trading of tokens.

The proposals are one of two consultation papers published Wednesday by the MAS as it seeks to reduce the risk of consumer harm from cryptocurrency trading.

The other consultation paper focuses on the development of stablecoins as a credible medium of exchange in the digital asset ecosystem.

To do so, MAS will regulate the issuance of stablecoins which are pegged to a single currency where the value of such stablecoins in circulation exceeds $5 million.

These issuers must hold reserve assets such as cash or short-dated sovereign debt securities that are at least equivalent to the full par value or nominal value of the outstanding single-currency stablecoin in circulation. These assets must be denominated in the same currency as the pegged currency.

These stablecoins issued in Singapore can be pegged only to the Singdollar or any Group of Ten currencies, including the United States dollar and Japanese yen.

The company that issues such stablecoins will be required to separate reserves and allow timely redemption at par value.

Stablecoin issuers will be required to publish a white paper disclosing details such as the redemption rights of stablecoin holders.

They must also meet a base capital requirement of $1 million or 50 per cent of annual operating expenses, whichever is higher.

At the same time, they will need to hold liquid assets that are valued at more than of half of their annual operating expenses or an amount needed to achieve recovery or an orderly wind-down.

Ms Ho Hern Shin, MAS deputy managing director for financial supervision, noted that the two sets of proposed measures mark the next milestone in enhancing Singapore’s regulatory approach to foster an innovative and responsible digital asset ecosystem.

“Regulations go hand-in-hand with innovation in financial services. The enhanced regulatory regime for stablecoins aims to support the development of value-adding payment use cases for stablecoins in Singapore.,” she said.

Ms Ho added that MAS will make appropriate adjustments to its regulatory regime to address the associated risks as it explores the potential benefits of tokenisation and distributed ledger technology with industry players.

The suggested measures in the two papers are to be part of the Payment Services Act.

Stakeholders have until Dec 21 to submit their comments on the proposals.

This article was first published in The Straits Times. Permission required for reproduction.