2020 is a year of continuous progress in the blockchain industry. Not only has there been breakthroughs in technology and applications, but the regulatory policies of various countries on encrypted assets are also constantly improving. Among all encrypted assets, stablecoins are stable in price and have unique advantages in point-to-point payments, micropayments, and smart contract programming, and have a greater impact on financial stability. Although it will not become a substitute for sovereign currencies, stablecoins are developing very rapidly and will receive more attention from regulators. This article reviews and sorts out the regulatory policies for crypto assets in 2020, including Singapore, Hong Kong, the European Union and Japan, with a focus on the regulatory policies for stablecoins and related services.
Singapore Payment Services Act
In January 2019, the Payment Service Act (PSA, Payment Service Act) passed the review of the Singapore Parliament, was formally enacted, and was officially implemented on January 28, 2020. This bill will replace the “Money-changing and Remittance Businesses Act” (MCRBA, Money-changing and Remittance Businesses Act) and the “Payment Systems (Oversight) Act” (PSOA, Payment Systems (Oversight) Act), as well as some other payment-related bills Make corrections.
The Payment Services Act includes two parallel regulatory frameworks. The “designated system” mainly targets large-scale payment systems. Similar to the designated payment system in PSOA, the Monetary Authority of Singapore (MAS) can designate a regulated payment system to maintain financial stability and maintain public confidence. The “license system” is a regulatory framework set up to respond more flexibly to market changes.
(1) Types of services
The “Payment Services Act” includes account issuance services, domestic remittance services, cross-border remittance services, payment digital currency services, electronic currency issuance services, merchant acquiring services, and currency exchange services into the scope of supervision. Service providers can choose to provide one of them Or multiple services.
1. Account issuance service
Account issuance service refers to anyone in Singapore providing payment account issuance, or any service related to the business required to operate payment account, such as depositing or withdrawing funds into payment account (excluding domestic remittance and cross-border remittance).
2. Domestic remittance service
Domestic remittance service refers to the provision of local fund remittance services in Singapore. In the domestic remittance service, the sender and recipient are both in Singapore and neither are financial institutions. The service provider receives the remitter’s funds and executes or arranges for the execution of remittance transactions, including payment transactions performed through payment accounts, direct debit services through payment accounts, and credit transaction services through payment accounts.
3. Cross-border remittance services
Cross-border remittance service refers to the provision of inward and outward remittance services between Singapore and other countries or regions. The service provider receives the remitter’s funds and executes or arranges to execute the remittance transaction to users outside Singapore, or the service provider collects remittance from abroad for anyone in Singapore.
4. Payment type digital currency service
Payment-type digital currency services mainly include two types. One is to provide services related to payment-type digital currency transactions, and the other is to provide any service that facilitates payment-type digital currency transactions. The “Payment Services Act” defines payment digital currencies as follows. Payment type digital currency refers to the digital representation of value and needs to meet the following conditions: the value is expressed as a unit; it is not priced in any currency, and the issuer cannot anchor it with any currency; it has become or intends to become the public or part The medium of exchange accepted by the public, used to pay for goods or services, to pay off debts; to transfer, store or trade in electronic form; to meet other characteristics specified by MAS.
5. Electronic currency issuance service
Electronic money issuance service is to issue electronic money to anyone and allow them to conduct payment transactions. The definition of electronic money in the Payment Services Act is as follows. Electronic currency refers to any currency value stored in electronic form and needs to meet the following conditions: in a certain currency, the issuer can anchor the value of electronic currency with other currencies; payment has been made in advance for users to make payment transactions; payment The object cannot be the issuer of electronic money; electronic money represents a creditor’s rights of the issuer.
6. Merchant acquiring service
Merchant acquiring service means that the service provider receives and processes payment transactions for the merchant according to the contract with the merchant. In the merchant acquiring service, the merchant is registered or operated in Singapore, or the service provider signs a contract with the merchant in Singapore.
7. Currency Exchange Service
Currency exchange services refer to service providers providing services related to the buying and selling of foreign currencies.
(2) License application
Service providers will apply for licenses based on their business model and the relationship between the above seven services. Currently, there are currency exchange licenses, standard payment institution licenses and large payment institution licenses.
The currency exchange license is limited to currency exchange services and is applicable to service providers that provide currency exchange. Because the business scale of the business itself is small and the risks involved are also low, MAS mainly supervises the money laundering and terrorist financing risks of service providers. The standard payment institution license is applicable to the business model of any combination of the above seven services, but the total amount of business is limited, the application requirements are low, and the service provider is subject to a low degree of supervision. Large payment institution licenses are applicable to all businesses that exceed the quota set by the “standard payment institution” licenses. Because of the larger amounts involved and higher risks, they are subject to the strictest supervision and large service providers can apply for use. If there are changes in future business requirements, the licensee can apply for a license change so that the new business can meet the payment service or license requirements when the new business is running.
MAS officially implemented the “Payment Services Act” on January 28, 2020, and required all service providers to provide license application filing documents on time. At the same time, MAS also provides specific requirements for the qualifications of service providers, including the structure of the company’s main body and management personnel, industry competitiveness, office or registered address, basic capital, guarantee funds, and audit status.
(3) Changes brought about by the “Payment Services Act”
First, the “Payment Services Act” integrates and improves the existing “Currency Exchange and Remittance Business Law” and “Payment System Supervision Law”. The two parallel regulatory frameworks, the designated system and the license system, also refer to existing regulatory thinking. . The difference is that the “Payment Services Act” has a broader scope of supervision, including domestic remittance services, merchant acquiring services, and payment-based digital currency services.
Second, domestic remittance services and cross-border remittance services will effectively replace MCRBA’s supervision of remittance business. It should be pointed out that domestic remittances are not regulated in the MCRBA, but domestic remittance services need to comply with the regulatory requirements of the Payment Services Act.
Third, the electronic currency issuance service will effectively replace the PSOA’s supervision of stored value payment facilities (SVF, Stored Value Facility). As can be seen from the above definition, SVF and e-money have similarities and obvious differences. Both SVF and e-money can be the monetary value stored in electronic form, and there is an advance payment, but e-money does not stipulate payment for goods or services. For example, if a merchant sends this electronically stored value to users, then by definition, it belongs to e-money but not SVF.
Fourth, payment-type digital currency service providers (such as digital currency exchanges, wallets, and OTC platforms) will be regulated and must apply for relevant licenses in accordance with the requirements of MAS and comply with anti-money laundering and anti-terrorist financing requirements. It should be noted that the definition of payment-based digital currency in the Payment Services Act requires that no currency can be anchored, so stable currencies such as Libra are not within the scope of this type of supervision.
Fifth, the threshold for payment institutions protected by the Payment Services Act will be lowered, and the average daily floating amount will be reduced from S$30 million to S$5 million. This means that if the daily average floating amount exceeds S$5 million, any electronic currency held by payment institutions will be fully protected. If the average daily floating amount does not exceed S$5 million, the electronic money held by payment institutions will not be fully protected, and payment institutions need to make appropriate information disclosures to consumers. Lowering the threshold means that the number of guaranteed payment institutions will increase, but these payment institutions must meet compliance requirements. Small payment institutions will not be protected, but they will have fewer compliance requirements and will not hinder their business development due to excessive supervision.
Sixth, the “Payment Services Act” has taken prevention and control measures against major risks in the payment system, including prevention and control of customer fund loss, prevention and control of money laundering and terrorist financing risks, and prevention, control and resolution of technical risks The lack of interoperability between different payment schemes.
Hong Kong’s regulation of crypto assets
(1) Regulatory agency
The Securities and Futures Commission of Hong Kong (SFC, Securities and Futures Commission) is responsible for overseeing the operation of Hong Kong’s securities and futures markets, and is also the main regulatory agency for encrypted assets. SFC’s regulatory objectives include: maintaining and promoting the fairness, efficiency, competitiveness, transparency and order of the securities and futures industry; improving public understanding of the operation and functions of the securities and futures industry; providing protection to the public who invest in or hold financial products ; Minimize criminal and misconduct in the securities and futures industry; reduce systemic risks in the securities and futures industry; take appropriate steps related to the securities and futures industry to assist the Financial Secretary in maintaining Hong Kong’s financial stability.
The Hong Kong Monetary Authority (HKMA, Hong Kong Monetary Authority) is responsible for Hong Kong’s financial policy, banking and currency management, and acts like a central bank. The main functions of HKMA include: maintaining currency stability within the framework of the linked exchange rate system; promoting the financial system, including the stability and soundness of the banking system; assisting in consolidating Hong Kong’s status as an international financial center, including maintaining and developing Hong Kong’s financial infrastructure and managing exchange funds .
In addition to SFC and HKMA, other institutions such as the Hong Kong Insurance Authority (HKIA) will also conduct coordinated supervision of encrypted assets. At present, these regulatory agencies use “sandbox supervision” to test and supervise encrypted assets and blockchain technology in a controlled environment.
(2) Supervision policy
In Hong Kong, encrypted assets are mainly divided into security-based encrypted assets, functional encrypted assets and virtual commodities (such as Bitcoin). For different types of encrypted assets, Hong Kong regulators have adopted different regulatory policies. SFC’s interpretation of security-type encrypted assets is: representing equity (the right to receive dividends and the right to participate in the distribution of remaining assets when the company is liquidated); representing debentures (the issuer can hold tokens on a specified date or at the time of redemption) People repay the investment principal and pay them interest); can be used to obtain the income of the “collective investment plan”.
Hong Kong does not have legislation specifically for encrypted assets and related businesses, but the previous regulations made by relevant laws, such as anti-money laundering, anti-fraud, and anti-terrorist financing, must be complied with. In addition, as the influence of encrypted assets continues to increase, regulators have successively introduced a series of regulatory policies to better protect the interests of investors. Regulatory policies related to crypto assets mainly include the following: 1. “Securities and Futures Ordinance”; 2. “Statement on Initial Token Issuance” (issued in September 2017); 3. “To Licensed Corporations and Registration Institutional Circular: Regarding Bitcoin Futures Contracts and Investment Products Related to Encrypted Assets” (released in December 2017); 4. “Regarding supervision of management companies, fund distributors and trading platform operators of virtual asset portfolios Framework Statement (issued in November 2018); 5. “Statement on the Issuance of Security Tokens” (issued in March 2019); 6. “Applicable to licensed corporations that manage investment portfolios in virtual assets “Standard Terms and Conditions of China” (issued in October 2019); 7. “Warning on Virtual Asset Futures Contracts” and “Position Paper: Regulating Virtual Asset Trading Platforms” (issued in November 2019).
(3) Relevant licenses
SFC stipulates a total of 12 types of regulated activities, that is, to engage in the following 12 types of related activities, you must obtain the corresponding licenses and accept supervision in order to legally carry out corresponding financial activities in Hong Kong. Among them, the 11th and 12th licenses related to OTC derivatives have not yet been implemented.
According to the current regulatory framework, licenses related to trading platforms, funds and fund management platforms related to crypto assets mainly include Type 1, Type 4, Type 7 and Type 9 regulatory licenses. For example, funds and sales platforms that invest in virtual assets need to hold Type 1 licenses, and asset management platforms need to hold Type 9 licenses.
European Commission’s proposal for stablecoin regulation
On September 24, 2020, the European Commission (EC, European Commission) issued a proposal on the regulation of crypto assets, covering the parts not included in the existing EU financial services bill, and providing the crypto asset market within the EU Complete legal framework. In addition to providing regulatory guidance for crypto asset market participants, encouraging innovation is also one of the goals of the proposal. Consistency and proportionality are thoughts throughout the entire regulatory program. Due to its particularity, stablecoins are easy to expand in scale compared to other encrypted assets, which will cause greater risks to investors and the financial system, cause financial stability and monetary sovereignty issues, and affect the transmission of monetary policy, so it is stable Coins, especially key stablecoins, will be subject to stricter supervision.
(1) Regulatory agency
Each member state shall appoint its own institutions that perform the functions of supervision over stablecoins and notify the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA). If multiple regulatory agencies are involved, a contact point for cross-border administrative collaboration must also be designated.
Regulators have sufficient regulatory powers over the issuance of stablecoins and encrypted asset service providers, including requiring the regulated party to provide additional information, delaying or prohibiting the issuance of stablecoins and trading permits or related applications by service providers. Regulators also have the power to punish violations and announce to the public the issuers of stablecoins that fail to fulfill their obligations.
EBA and ESMA, as highly professional institutions, will be responsible for the formulation of draft technical standards that do not involve policies. For example, the relevant standard format and process of the applicant for issuing asset-related tokens, the type of assets invested by the issuer, and the calculation method of the issuer’s capital requirements.
EBA will also be responsible for judging whether stablecoins are key stablecoins. The criteria are: 1. The number of users, investors, and participating third-party entities is not less than two million; 2. The total value or market value of the issued token (if any ) Not less than one billion euros; 3. The daily transfer amount is not less than 500,000 euros or the transfer amount is not less than 100 million euros; 4. The value of reserve assets is not less than one billion euros; 5. In cross-border activities It is of greater importance. The number of member states involved in the use of tokens as cross-border payments and transfers is not less than seven; 6. Stable coins and their issuers are considered to be related to the financial system. As long as three of the above conditions are met, it can be judged as a key stable currency by EBA. In addition, issuers can also actively apply to be classified as key stablecoin projects.
If a stablecoin is judged to be a key stablecoin according to the above-mentioned criteria, its supervision will be delegated to the EBA. The EBA will establish a regulatory association with members including all key stablecoin-related entities and regulatory agencies related to encrypted asset service providers (for e-money token, the corresponding regulatory agency is the regulatory agency under the 2009/110/EC Directive). Information will be exchanged to promote cooperation. EBA will collect fees from key stablecoin issuers to pay for expenses, and the fees are proportional to the size of the stablecoin’s reserve assets.
(2) Specific requirements for stable currency issuance
For stablecoin issuers, the first principle to follow is that they cannot be issued to the public within the EU or seek to trade on trading platforms before obtaining the authorization of the supervisory authority of the home country member state (ie, where the office is registered), and only Only legal entities established within the EU can be authorized. Before issuing to the public or seeking transactions, regulatory agencies need to be notified, and documents containing information to be disclosed, that is, white papers, must be published. The information must be presented in a fair, clear and non-misleading manner. For information provided by the public, stablecoin issuers and management agencies should apply the civil liability management rules. According to the different definitions of stablecoins, the regulators’ requirements for information disclosure and the obligations of the issuer will also be different.
1. Requirements for asset-related tokens
Asset-related token is an encrypted asset that refers to multiple legal currencies, one or more commodities, one or more encrypted assets, or a combination of them to maintain its own value.
Before issuing asset-related tokens, the issuer must be authorized by the regulatory agencies of the home country’s member states. The relevant application materials include the applicant’s information, white papers, descriptions of related businesses and obligations, etc. If the asset-related token is related to the currency in the EU, the regulator needs to consult the relevant opinions of the EBA, ESMA, the European Central Bank (ECB) and the central bank of the country that issued the currency before approving or rejecting it. When approved by regulatory agencies, this encrypted asset is valid throughout the European Union and can also be traded on an encrypted asset platform.
For encrypted assets, the basic information that needs to be disclosed includes: basic information of the issuer, project-related information, information about issuance to the public or platform transactions, rights and obligations related to encrypted assets, underlying technology, and risks. When it comes to asset-related tokens, the white paper also needs to add: the issuer’s management plan, token value stabilization mechanism, reserve asset investment strategy, reserve asset custody plan, etc. If the issuer does not provide direct claims or redemption rights to the holders on the reserve assets, the white paper should have a clear warning about this, and it should also be reminded in marketing.
There are also information disclosure requirements for the corresponding reserve assets, including the number of tokens in circulation and the value and composition of the reserve assets. The issuer needs to update the website at least once a month. Regardless of whether these crypto assets are being traded, the issuer must disclose important events that may affect the value of the token or reserve assets.
The issuer of asset-related tokens must act honestly, fairly and professionally. The issuer must take the best interests of the token holder as the starting point and establish a transparent and efficient complaint handling process. The issuer should also formulate corresponding identification and management plans for conflicts of interest that may arise from the relationship between managers, shareholders, users and third-party service providers. The issuer should formulate an orderly gradual liquidation plan to ensure that the issuer protects the rights and interests of token holders during the process of suspension of operations or legal bankruptcy.
The issuer needs to develop a robust management plan, including a clearly defined organizational structure, procedures for monitoring and reporting related risks, and a sound internal management mechanism. The requirement for the issuer’s own funds is at least 350,000 Euros and at least 2% of the average amount of reserve assets within six months. If it is defined as a key asset-related token, its own funds need to account for at least 3% of the reserve assets, and the issuer is required to pay more attention to risk management. The relevant management members of the issuer also need to have a good reputation and ability in terms of qualifications, experience and technology, and have the time and ability to perform their functions.
To maintain the stability of the value of the token, the issuer of asset-related tokens needs to ensure that there are sufficient asset reserves behind it. Issuers need to take prudent measures for the management of reserve assets to ensure that the creation and destruction of tokens correspond to the increase and decrease of reserve assets. The issuer should describe in detail the content related to the stability mechanism, especially the composition and distribution of reserve assets, the assessment of reserve asset risks, the process of token creation and destruction, the investment plan and investment principles of reserve assets, and the process of token purchase and redemption. The token issuer must ensure that the reserve assets are isolated from its own assets and can quickly access the reserve assets to meet the holder’s redemption request. Reserve assets should be kept by credit institutions and encrypted asset service providers. The issuer is responsible for selecting and appointing to ensure that the custodian has the necessary professional knowledge and good market reputation.
Reserve assets should be invested in safe and low-risk assets that can be liquidated with minimal price impact. All gains or losses arising from the investment should be borne by the issuer. In order to ensure that asset-related tokens are mainly used for transactions rather than value storage tools, neither the issuer nor the encrypted asset service provider will distribute interest to users who hold the token.
For issuers of key asset-related tokens, they should formulate strict liquidity management strategies to ensure that the entire system can still operate normally under liquidity tight conditions.
2. Requirements for e-money token
e-money token is an encrypted asset that anchors a single legal currency to maintain its own value and is mainly used for trading. Since the definition of e-money token is similar to that of e-money, the regulatory requirements for e-money token also draw on the relevant content of e-money.
The white paper of the e-money token should include information about the issuer and the project, relevant information for public offerings or transactions on the platform, e-money token-related rights and obligations, underlying technology and risks. The white paper should clearly state that e-money token holders have the right to redeem e-money tokens at face value at any time.
The issuing institution of the e-money token should be a credit institution under the 2013/36/EU directive or an electronic money institution under the 2009/110/EC directive, and they should comply with the relevant operating requirements of the 2009/110/EC directive. The issuer should give the holder the right to redeem the token at the face value at any time, and the issuer can charge the redeemer during the redemption process. Similarly, neither the issuer of e-money token nor the encrypted asset service provider will distribute interest to users who hold the token. The issuer should invest the funds exchanged through the e-money token in the same currency as the e-money token to avoid cross-currency risks.
If it is defined as a key e-money token, the custody and investment rules of its reserve funds may not need to refer to the relevant content of Article 7 of the 2009/110/EC Directive, but refer to the requirements of key asset-related tokens, including the establishment of an orderly Gradual liquidation plan, etc.
Amendments to Japan’s “Payment Services Act”
The amendment to the Payment Services Act (PSA) proposed by the Financial Services Agency (FSA) of Japan on May 31, 2019 was passed and will be implemented on May 1, 2020. The amendment adds activities related to crypto assets, including crypto asset custody services and crypto asset trading service providers, and further expands the scope of supervision.
The Payment Services Act contains the following important changes, including the scope of providing encrypted asset custody services, additional requirements for registration as an encrypted asset trading service provider, requirements, requirements and prohibited actions related to customer assets, margin trading regulations, Advertising and marketing restrictions, etc.
(1) Encrypted asset custody service
The revised PSA has added new supervision to crypto assets providing custody service providers. Previously, it only supervised people who were engaged in the sale and purchase or acted as an intermediary to sell and purchase crypto assets. If the private key held by the service provider is sufficient to transfer the customer’s encrypted assets for itself or the subcontractors and related service providers, or the customer’s encrypted assets can be actively transferred without the customer’s involvement, it can be regarded as engaging in encrypted asset custody services, which requires a basis PSA to register. If a multi-signature signature system is adopted or the private key is divided into several parts, the service provider and its subcontractors do not hold or control the necessary part of the private key, and they may not be regarded as “managing” the customer’s encrypted assets.
(2) Encrypted asset trading service provider
The revised PSA puts forward more requirements on crypto asset trading service providers. At the time of registration, applicants who hold 10% or more of the voting rights need to disclose to the FSA. PSA has put forward more requirements in terms of managing customer assets. If the customer’s assets are cash, the service provider must be separated from its own cash and kept in a trust account opened by a licensed trust, and the beneficiary is the service provider’s customer. The agent representing the beneficiary must be designated by the crypto asset trading service provider, and at least one of them must be a lawyer, an accountant, or a professional designated by the FSA. Trust assets can invest in low-risk financial products under strict restrictions. If the crypto asset trading service provider’s license is revoked, the assets become insolvent or the business exits, the trust assets will benefit the beneficiaries. On each working day, the service provider needs to compare the total amount of customer cash held with the outstanding trust assets. If there is a shortage, it must adjust the amount of trust assets within two working days to make it equal to or greater than the cash held by the user.
If the customer’s assets are encrypted assets, the service provider must also be separated from its own assets and stored in a cold wallet or similar place. PSA defines cold wallets and similar places as: recording information on electronic devices, electromagnetic media, or other media including paper, while ensuring that these media are never connected to the Internet, or using other methods to ensure the same level of security. If you want to ensure that the transaction service can proceed smoothly, you can keep encrypted assets outside the cold wallet, but it must not exceed 5% of the total value of all customers’ encrypted assets under custody. At the same time, the service provider needs to isolate the same type and number of encrypted assets. In separate cold wallets or similar places, customers have priority over other creditors.
Encrypted asset transaction service providers need to manage the above-mentioned cash and encrypted assets, and audit them by an accounting firm every year. In the contract, the service provider needs to develop an emergency plan and be prepared for the failure to provide services.
The revised PSA also adds additional requirements and prohibited behaviors for encrypted asset trading service providers, which are similar to the requirements of the Financial Instruments and Trading Law on securities dealers or foreign exchange product dealers. The requirements include providing customers with the latest prices of other customer orders and the quotation information of the Japan Virtual Currency Exchange Association; if the service provider acts as a counterparty to the customer in the transaction, it needs to notify the customer and explain such behavior in writing; the service provider must adopt a strategy Detect conflicts of interest in the aforementioned transactions; service providers must take measures to detect and suspend improper transactions, etc. Prohibited behaviors include providing unreasonable and undocumented information; manipulating or assisting in manipulating market prices; disseminating or using non-public materials and information that affect investment decisions; preemptive transactions, etc.
For margin trading conducted by encrypted asset trading service providers, PSA has formulated similar and stricter requirements than foreign exchange dealers. Including the disclosure and explanation of transaction terms and incidental risks, the mandatory obligation to receive margin (the minimum amount is not less than 50% of the transaction value), etc.
Regarding the advertising and marketing of encrypted asset trading service providers, PSA requires the following information to be specified: company name; the advertiser is a registered encrypted asset trading service provider and provides a registration number; encrypted assets are not “currency”; it is for users to decide whether to participate The nature of crypto assets that have a significant impact on transactions. These properties refer to the facts and reasons why customers suffer losses due to fluctuations in the value of crypto assets; crypto assets can only be used for payment when the counterparty agrees to accept crypto assets as payment.
Thinking and summary
From the above discussion, it can be seen that the officially promulgated bills and amendments have filled the regulatory gap of encrypted assets and have clear regulatory requirements for new things such as stablecoins, encrypted asset payments, and encrypted asset transactions. This is of great significance to the improvement of regulatory policies in the field of encrypted assets. Regulatory policies are an important factor in determining the development direction of the blockchain industry.
The blockchain industry is still an emerging industry, and relatively moderate supervision will bring room for the development of blockchain and encrypted assets. These regulatory bills all take the protection of investors’ interests as the starting point to protect the stability of the financial system. Licenses and permits are necessary for services related to encrypted assets, and related services can only be conducted through review. Supervision embodies the principle of proportionality of risks. If related businesses pose higher risks to financial stability, the requirements will be stricter.
It is expected that more countries will improve the regulatory regulations on encrypted assets in the future, which is related to the accelerated penetration of encrypted assets and is also to prevent regulatory arbitrage. The borderless nature of encrypted assets gives it a great advantage in cross-border transactions, and it is also a challenge to supervision. A sound supervision system also requires cooperation between countries, countries and international organizations.
