Cryptocurrencies are at the forefront of financial innovation, and involve an increasing number of industry players, start-ups and businesses. Many central banks have warned against the use of these products, especially by non-professional investors. Few jurisdictions recognise them as currencies, but, equally, few jurisdictions have banned their use as financial assets. It would be prudent for India to evaluate how other jurisdictions, such as Singapore, have regulated cryptocurrencies without impeding financial, technological innovation.
Singapore has welcomed emerging technologies like cryptocurrency and blockchain, emerging as a global leader in the mainstream adoption of digital currencies. The country offers a favourable tax regime, which has also boosted the crypto industry and has built a balanced regulatory and legal environment for cryptocurrencies. It enhanced the Payment Services Act 2019 (PSA), which now provides that any entity that facilitates the transmission, exchange or storage of digital payments tokens requires a licence to operate, and is subject to expanded rules and regulations promulgated by the Central Bank of Singapore.
The Monetary Authority of Singapore (MAS) has applied the Securities and Futures Act (Cap. 289) (SFA) to public offerings or issues of digital tokens, and, in its Guide to Digital Token Offerings, states that it will regulate offers or issues of digital tokens to the public if such tokens are capital market products. Any offer of digital tokens to the public, which constitutes securities, securities-based derivatives contracts or units in a collective investment scheme, requires compliance with the SFA. Such regulation extends to the preparation of prospectuses and registration of the offers with the MAS.
Digital tokens are usually issued in a primary market on a platform through which multiple offers of digital tokens can be made or issued. Issuing or offering digital tokens by an entity operating in a primary market in Singapore is considered an issue or offer of a capital market product, requiring that entity to obtain a capital market services licence. The PSA regulates entities inside and outside Singapore, which offer services in Singapore, and regulates both traditional and cryptocurrency payments and exchanges. A cryptocurrency business must obtain a payment institution licence in order to operate and has to meet PSA money laundering compliance standards.
The PSA defines virtual currencies as digital payments tokens (DPT), which mean any digital representations of value that are expressed as units that are not denominated in any currency, and can be transferred, stored or traded electronically and fulfil certain conditions prescribed by the MAS.
On a more positive note, the MAS has since 2016 partnered with the banking and technology industries in Project Ubin, exploring how blockchain and distributed ledger technology may be used to clear and settle payments and securities.
In December 2019, the MAS released guidelines on anti-money laundering and countering the financing of terrorism (AML/CFT) for DPT service providers, to take effect in January 2020. They required DPT service providers to prevent money laundering and the financing of terrorism, and to set up robust controls to detect any such instances. All DPT payment service providers must implement measures as a part of their internal AML/CFT policies. These include customer due diligence by verifying customers’ identities and businesses, monitoring their transactions, checking their customers against United Nations sanctions lists and maintaining detailed records of customers’ activities. Suspicious transactions have to be reported to the MAS.
Given that cryptocurrencies are widely used in India, the country should consider how to leverage the ever-growing crypto market to fuel its growth and improve its credentials as a digital superpower. A well-thought-out framework of crypto industry regulation will significantly improve the financial infrastructure as a whole, safeguard national security, deter financial fraud, attract international capital and create more employment. This will drive the nation to become a global powerhouse.
Anu Tiwari and Anindita Bhowmik are partners at Cyril Amarchand Mangaldas.
Dipti Bedi, consultant, Ritu Sajnani, principal associate designate, and Shubhi Maheshwari, associate, assisted with the article