Analysis of New Regulations by the Monetary Authority of Singapore Strengthening the Fight against Shell Cryptocurrency Institutions

MAS hopes to strengthen the regulation of DTSPs based in Singapore but not conducting substantial business locally.
Article by: Aiying
The Monetary Authority of Singapore (MAS) recently released proposed regulatory updates for Digital Token Service Providers (DTSPs), which have sparked wide attention and discussion in the Web3 industry. As a consulting firm specializing in Web3 compliance services, Aiying deeply analyzes the background, content, and potential impact of MAS’s new regulations. This article interprets the potential effects of these new regulations on the layout and development of Web3 companies in Singapore and the Asia-Pacific region.
I. MAS’s New Regulations: Combating “Shell-Type” DTSPs
MAS issued proposed regulatory updates on October 4th regarding the licensing of Digital Token Service Providers (DTSPs), specifically targeting so-called “shell-type” DTSPs. The new regulations signify significantly higher compliance thresholds and suggest that Singapore’s regulation of the crypto industry will become stricter. Since 2020, Singapore has used stringent Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) rules to screen DTSPs. However, this consultation proposes higher requirements in terms of compliance and the rationale behind business models, particularly for companies that do not conduct substantial business locally.
Reference:
Singapore’s “2024 Money Laundering Risk Assessment Report” – Internal and external money laundering challenges, common money laundering methods, money laundering risks in various financial sectors
Under the Financial Services and Markets Act (FSMA), MAS intends to strengthen the regulation of DTSPs based in Singapore but not conducting substantial business locally, known as “shell-type” DTSPs. These so-called “shell-type” DTSPs could be used for illegal activities such as money laundering. MAS’s new regulations demonstrate their high regard for risk management and maintaining the reputation of Singapore’s financial system, and they plan to conduct stricter scrutiny of these DTSPs.
II. Key Acts Related to Digital Token Service Providers and Their Relationships
Before understanding MAS’s new regulations, it is necessary to understand the relevant acts that involve DTSPs and their relationships.
Financial Services and Markets Act (FSMA): This act was passed in 2022, but the specific implementation and applicability details are still under MAS’s public consultation and preparation. Its purpose is to establish a legal framework for regulating individuals, partners, and companies providing digital token services. The FSMA expands the definition of digital token services to cover a broader range of commercial activities and authorizes MAS to regulate DTSPs based in Singapore but without substantial business locally.
Payment Services Act (PS Act): This act regulates digital payment tokens (such as cryptocurrencies) and payment service providers to ensure the safe operation of these services in Singapore. For DTSPs that provide payment services in Singapore, the PS Act has detailed requirements for licenses and compliance. For more details, please refer to the article “【In-depth Analysis】Comprehensive Interpretation of Singapore’s Payment Business Regulatory Framework and Virtual Asset DPT License Requirements.”
Securities and Futures Act (SFA): This act primarily focuses on the trading and regulation of capital market products, including tokenized securities and other digital assets. The SFA also applies to DTSPs involved in securities-related activities.
These three acts complement each other and form a framework of compliance requirements for DTSPs operating in Singapore. In simple terms, the FSMA provides an overall regulatory framework for digital token services, like a big umbrella covering all related services, while the PS Act and SFA provide more detailed guidance and requirements for specific types of businesses (such as payment and securities).
This combination ensures that DTSPs in Singapore are subject to both macro-level regulatory standards and targeted and practical operational guidelines, making the regulation comprehensive and specific.
III. New Requirements under the Financial Services and Markets Act
Based on MAS’s consultation document, DTSPs seeking licenses must meet a series of specific requirements, including but not limited to the following:
Minimum Capital Requirements: DTSPs must hold a minimum capital of SGD 250,000 to demonstrate their financial stability and operational commitment.
Local Compliance Team: DTSPs must establish a compliance team in Singapore, including at least one resident executive director and partner, to ensure actual management and compliance supervision locally.
Independent Audit Mechanism: DTSPs need to undergo independent audits covering aspects such as network security and financial compliance, and regularly submit audit reports to demonstrate compliance with regulatory standards.
Penetration Testing and Network Security Requirements: Companies need to perform penetration testing and remediate all high-risk security vulnerabilities to ensure the security and data integrity of their technical platforms.
Independent Compliance Function: DTSPs must establish an independent compliance function in Singapore, led by a compliance officer from the management team with appropriate qualifications, to ensure the independence and effectiveness of compliance work.
Audit Arrangements: Sufficient audit arrangements must be established to assess and ensure the effectiveness of compliance controls. Audits must be independent and commensurate with the business’s scale, nature, and complexity.
Office Space Requirements: Companies must have a permanent office space in Singapore for ease of on-site inspections and regulatory supervision by MAS.
These measures undoubtedly increase compliance costs, and MAS will also conduct in-depth reviews of the business models of companies that do not intend to conduct substantial business in Singapore. This strict licensing regime aims to increase transparency and ensure the legality and compliance of fund flows, but it also adds to the compliance burden of Web3 companies. Specifically, for Web3 companies expanding globally, whether Singapore’s new regulations remain attractive is a key question.
The various requirements proposed by MAS may lead many companies to reevaluate their strategies for establishing a presence in Singapore.
IV. What Preparations Should Companies Make?
Aiying recommends that companies focus on the following points when facing these new regulations:
Establishment of Compliance Teams: According to MAS’s requirements, DTSPs must establish compliance teams in Singapore led by compliance officers with appropriate qualifications. Therefore, companies should plan compliance architecture as early as possible, especially the recruitment and training of local compliance personnel.
Audits and Network Security: MAS emphasizes the importance of penetration testing and audits. Companies should ensure that their network security systems comply with MAS’s standards and verify the effectiveness of compliance controls through independent audits.
Designing Reasonable Business Models: For companies that wish to obtain licenses in Singapore but have their main business operations in other regions, they must be able to reasonably explain to MAS the necessity and credibility of their business models in order to obtain approval.
Capital Preparation and Risk Assessment: Companies should ensure compliance with the minimum capital requirement of SGD 250,000 and conduct sufficient risk assessments to prepare for possible future regulatory changes.
V. Specific Implementation Date and Transition Policy
The public consultation on these new guidelines and requirements by MAS will continue until November 4th. Although the specific dates for the implementation of these measures have not been determined, MAS states that once the measures are finalized, the public will have approximately four weeks to implement them. At that time, any DTSP operating in Singapore without an MAS license must cease or suspend its operations in Singapore.
MAS emphasizes that these new measures are crucial for safeguarding the integrity of Singapore’s financial system and maintaining consistency with evolving international digital asset standards. The key question for observers of the crypto asset industry is whether these strict new regulations will attract DTSPs to seek compliant operations in Singapore or deter some innovators due to high compliance costs.
This issue also exists in the context of the Asia-Pacific region, particularly in Hong Kong. In recent years, Hong Kong has demonstrated active performance in the digital asset field, establishing regulatory sandboxes to support stablecoin issuers and financial institutions exploring tokenization use cases, and explicitly stating that digital asset innovation is a significant driving force for its financial industry’s growth. The choices made by Web3 institutions in the Asia-Pacific region and even globally regarding compliance architecture are crucial for long-term development, and Aiying will continue to provide professional and practical experiences to share with everyone.
FSMA Act: https://www.mas.gov.sg/-/media/mas-media-library/publications/consultations/amld/2024/dtsp-consultation—final-for-publication.pdf