MAS' new regulatory framework for DPTSPs: are they enough for consumer protection?

This week, the Monetary Authority of Singapore (MAS) announced new regulatory requirements for Digital Payment Token Service Providers (DPTSPs).

Such service providers will include cryptocurrency exchanges, payment providers, and anyone else who facilitates the transfer of crypto from one party to the other.

The new regulations would mean that DPTSPs would have to be held in separate wallet addresses, with 90 per cent of customer tokens stored in cold wallets.

For now, however, DPTSPs will not have to engage independent custodians to store customer funds, as there are a limited number of such players in the market. However, service providers will still need to maintain a custody function that is operationally independent from other business units.

Finally, DPTSPs are also banned from facilitating lending and staking for retail customers, but are allowed to do so for accredited investors.

How effective will these regulations be?

Certainly, many of these rules seem to be inspired by the recent crashes that have made news headlines over the past year- FTX’s insolvency being the main one.

After essentially investing and losing their customers’ deposited tokens, FTX went bankrupt, and until today, many are still trying to recover their deposits from the company.

And for those who are already familiar with the traditional finance space, this rule is merely an adaptation of rules already set and accepted by traditional financial institutions- that customer funds and business revenues should be kept separate.

The same goes for the regulations on banning certain services for retail consumers, such as staking and lending, and only allowing accredited investors to invest in such products.

Retail investors are also banned from accessing products in traditional finance such as structured notes and equity linked notes.

In this vein, the new regulations are hardly anything new- it is merely confirmation that the cryptocurrency industry must follow the same rules as traditional finance, and that accredited investors and retail investors should be treated differently.

These safeguards are reasonable- accredited investors are seen as being on more stable financial footing, and being better informed about financial products than retail investors. As such, they are able to access more complex financial products, whether these products are part of traditional finance or cryptocurrency products.

At the same time, ringfencing customer deposits will also mean that if a service provider goes under, customers will probably not have to wait years to get their money back, for reasons beyond their own control.

In some ways, this policy is even more stringent than regulations for other industries. Payments for subscription-based services, for example gym memberships, are not ringfenced, which has led to more than a few scandals over the years.

But, are these safeguards sufficient?

The cryptocurrency world is complex- and even experienced investors may not always understand what they are buying and selling. While layer 1 tokens such as Bitcoin and Ethereum may be easily understood, cryptocurrency derivatives, Non-fungible tokens claiming to provide varied benefits to their holders, and governance tokens are more complicated.

There is also the issue of what these tokens are, and who can be held responsible for issuing them. Is the entire Decentralised Autonomous Organisation responsible for what happens to token holders, and is there a way to hold such an organisation criminally responsible if their actions are criminal? Should all governance token holders be held responsible, or just those who were delegated voting power? Where would such a trial be held, and under which laws and legal procedures? What are the relevant laws and legal precedents?

Regulations around such issues are far less clear, and indeed, still being hotly debated in many different jurisdictions. Are accredited investors in the cryptocurrency space also expected to be legal experts, and be able to navigate and answer such legal questions that have thus far evaded expert consensus.

Assets are a good benchmark- but more can be done.

Accredited investors are, to put it bluntly, people with large amounts of money that they can afford to lose.

In Singapore, these are individuals who have made at least SGD300,000 in the past 12 months, net financial assets of at least SGD 1 million, or net personal assets of at least SGD 2 million, with their primary residence contributing at most SGD 1 million to this total.

It says nothing of what they know about the cryptocurrency space, and if they really understand what they are buying.

Of course, their wealth provides a layer of safety nets because even if they lose their investments, they are not likely to become liabilities to the state, requiring the state to take care of them with cash handouts. But it still represents a loss for Singapore when investors do not do their due diligence and are punished for it.

Wealth should not come with the assumption that they always know what they are doing, especially with an industry that sees new technological innovation and breakthroughs as frequently as the cryptocurrency industry.

As such, aside from ensuring that investors have the requisite funds as safety nets, regulators should also try to ensure that unnecessary losses can be avoided as much as possible, especially losses that arise from a lack of due diligence and wilful ignorance.

Setting up a mandatory cryptocurrency education course, such as what Revolut has done, will not only make blockchain technology and cryptocurrency better understood, but it may also result in more responsible investing and a better understanding of why MAS and other regulators take the stance that they do.

Regulators, at the end of the day, do not regulate because they have nothing better to do, or to hinder industry progress- instead, they regulate because it is necessary to separate the wheat from the chaff, and to protect consumers, sometimes from their own overzealousness and the carelessness that results from such overzealousness.

Yet, regulation also has the unfortunate effect of sometimes rubbing industry leaders the wrong way. Education, and the benefits of such education, may well serve all stakeholders in this ecosystem well.