Nature of Decentralised Finance (DeFi)

How is decentralised finance (DeFi) regulated in Singapore?

Decentralized Finance (DeFi) is a fast-changing market that is being actively monitored by MAS. Apart from trying to warn the public of the risks, MAS has not yet stepped in to ban or restrict DeFi crypto trading unless the activity otherwise falls under the Payment Services Act (PSA) or the Securities and Futures Act (SFA). However, as the volume and impact of DeFi increases, it is more likely MAS will step in.

Decentralised finance (DeFi), is a system in which users conduct financial transactions through a decentralised blockchain network directly with one another using smart contracts, without using financial intermediaries, such as banks, brokerages or centralized exchanges. These smart contracts replicate and replace the roles played by intermediary financial institutions to offer services such as trading, borrowing, lending or insuring. The decentralized nature of the transactions and the lack of regulated intermediaries have the potential to revolutionise and up-end traditional financial markets.

Like many other jurisdictions, Singapore has found it difficult to regulate DeFi because it is decentralized, making it difficult to identify the entities responsible for the trades and activities to hold them accountable. As of 2021, MAS will only regulate DeFi activities if they otherwise fall within activities regulated by the PSA or the SFA and if they can identify the regulated entity responsible for that activity. These regulations include current AML/CFT requirements, which can also apply to transactions between individuals when they interact with regulated entities.

DeFi tokens are regulated by the Securities and Futures Act (SFA) and the Payment Services Act (PSA), both of which came into force in January 2020 to regulate payment services such as e-wallets and cryptocurrency. E-money-based payment services and digital payment token (DPT) services are regulated under the Payment Service Act (PSA). Cryptocurrencies and trades may also be considered to be a” capital market product” subject to regulation under the SFA, and the token issuer is required to hold one or more licenses pertaining to those cryptocurrency activities unless they fall under an SFA exemption.

In Singapore, decentralized exchanges are considered an “organized market” under the SFA (a formal market where buyers/sellers trade according to the exchange’s rules and procedures), and those exchanges are required to apply for MAS approval or recognition to the extent they can be identified. But where the market cannot be identified or linked to a regulated entity, there are currently no general regulations that apply.

Although Singapore does not currently have regulations directly addressing DeFi apart from regulating entities under the SFA and PSA, it is clear that MAS is actively monitoring this activity and is using its regulatory sandboxes to explore and better understand the market. For example, in September 2021, InvestaX launched its exchange in the MAS sandbox. Among its cryptocurrency platforms, InvestaX has a DeFi platform called IX Swap.

MAS has also made it clear that they are monitoring and studying Web 3.0 and DeFi developments closely to better understand the risks and benefits of this new market and that it continues to discourage cryptocurrency trades targeted at retail investors. MAS also recently launched "Project Ubin" and "Partior" to further study blockchain finance and digital currencies.
MAS has also shown a willingness to monitor and possibly limit the DeFi market and other crypto based activities. Recently, MAS issued a warning to Binance for operating in Singapore without a license, so entities involved in the market will likely be subject to further scrutiny.

The components of decentralised finance, namely the offer and issuance of a token and the establishment and operation of an exchange, may be regulated under the Securities and Futures Act. If not, such tokens and exchanges may be regulated under the Payment Services Act.

Decentralised finance ('DeFi') refers to projects or systems which harness digital currencies and blockchain technology to enable peer-to-peer distribution of financial products and services such as lending, derivatives and investments.

DeFi promotes the decentralisation of the traditional financial system and allows consumers and investors to bypass authorities and financial institutions to transact amongst themselves.

Presently, the components of DeFi which may be regulated in Singapore are the token and the exchange for the buying and selling of tokens.

The offer and issuance of a token in Singapore may be regulated by the MAS if the token constitutes a capital markets product under the Securities and Futures Act (SFA). An SFA-compliant prospectus may be required the offer or issue of such a token in Singapore unless the DeFi project comes within an exception under the SFA.

The establishment and operation of an exchange in Singapore which offers tokens that constitute capital markets products will also be regulated under the SFA. Such an exchange must be authorised as an approved exchange or recognised market operator by the MAS before it may operate in Singapore.

Tokens and exchanges which fall outside the scope of the SFA may still be regulated under the Payment Services Act (PSA). A token that is not a capital markets product could still constitute a digital payment token under the PSA.

Any service of dealing in digital payment tokens or facilitating the exchange of digital payment tokens is also regulated under the PSA for anti-money laundering and countering financing of terrorism (AML/CFT) purposes and the provider of such a service will require a payment institution licence.


FinReg business tip

Decentralised finance (DeFi) allows users to conduct financial transactions/activities on the blockchain without any financial intermediaries. As of now, MAS only regulates DeFi activities that fall within scope of the Payment Services Act (PSA) and Securities and Futures Act (SFA), such as DPT services.