Crypto retail investors to take risk test, barred from borrowing under proposed rules by MAS

Crypto firms will have to separate customers’ assets from their own assets. PHOTO: REUTERS

SINGAPORE - Singapore plans to rein in cryptocurrency speculation by retail investors by making it harder for them to start trading digital assets. Industry players will also have to ensure that the investments of retail investors are ring-fenced.

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, which were caught in the crash of stablecoin TerraUSD and its sister token Luna. Many retail investors got burnt in the process.

The Monetary Authority of Singapore (MAS) is now proposing that providers of digital payment token (DPT), or crypto services, must test a customer’s understanding of the possible risks of crypto trading before allowing them to invest.

Retail users must also not be allowed to borrow or use credit cards to purchase crypto.

Crypto service providers should also not use incentives such as giving away free tokens or gifts to court retail users. Celebrity endorsements should also not be 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, whether these are property, equities or bonds, to be treated as an accredited investor.

Currently, an accredited investor is someone with at least $2 million in net personal assets. Under the proposed rule, the regulator will recognise up to only 10 per cent, or $200,000, of the investor’s net personal assets in crypto.

In a move likely to ruffle feathers, given that lending is profitable, MAS is proposing that crypto companies licensed under the Payment Services Act cannot lend out retail investors’ DPTs at all. Crypto firms sometimes earn large amounts of interest by lending such DPTs to other players – a process known in the industry as staking – for example.

Another sticky problem is that crypto companies will also have to separate customers’ assets from their own assets – a practice that is not widely adopted.

The firms will also have to introduce risk management controls for tokens held by all 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 form one of two consultation papers published on Wednesday by MAS as it seeks to reduce the risk of consumer harm from crypto trading.

“Trading in cryptocurrencies or DPTs is highly risky and not suitable for the general public. However, cryptocurrencies play a supporting role in the broader digital asset ecosystem, and it would not be feasible to ban them,” MAS said on Wednesday. It added that the measures are meant to reduce the risk to consumers from speculative trading in crypto, so DPT service providers have to ensure proper business conduct and adequate risk disclosure. 

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The co-chairman of the Blockchain Association Singapore, Mr Chia Hock Lai, described the proposed measures as “comprehensive” but added that there needs to be a calibrated approach as the measures could have a knock-on effect and “we might run the risk of over-regulating”.

“For example, implementing a risk awareness test should negate the need to bar credit card payments and provision of incentives to retail customers,” he said.

Mr Chia noted that Singapore is not known to be a major hub for the retail crypto trading scene and he does not expect a significant impact on volumes at exchanges.

But he warned that “if all the proposals are implemented, it could be deemed as excessive by the industry”.

Some players say that separating their assets from those of their investors would force them to overhaul their business structures and “dramatically increase” costs.

Independent Reserve managing director Raks Sondhi said, however, that his exchange was prepared for the proposals and already isolates investors’ assets and does not do any lending.

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

The suggested measures in the two papers are to be part of the Payment Services Act, and stakeholders have until Dec 21 to submit their comments on the proposals.

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Singapore's financial regulator MAS is proposing a list of rules that will make it harder for consumers to buy and sell ...

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