Singapore is seeking to cement itself as a key player for cryptocurrency-related businesses as financial centres around the world grapple with approaches to handle one of the fastest growing areas of finance. Cryptocurrencies have a place in Singapore's financial sector if these digital assets are regulated, said Monetary Authority of Singapore (MAS) chairman Tharman Shanmugaratnam.

MAS is keeping an "open mind" on cryptocurrencies because the regulator wants technologies and innovation to develop, laying frameworks for activities such as trading, listing, tokenisation and custody.

Singapore has recently granted licences to the brokerage arm of DBS Bank and an Australian cryptocurrency exchange, to provide digital payment token services despite MAS has been warning the public about the risks of trading digital assets. Hence, considerable time will be taken to assess each application to ensure the regulations targeting money laundering and terrorism financing (“ML/TF”) risks are met.

To address the ML/TF risks associated with cryptocurrencies, MAS has taken steps on three fronts.

• Digital payment token service providers, which are entities involved in providing cryptocurrency-related services, need to be licensed by MAS. They must comply with AML/CFT requirements, such as obligations to perform customer due diligence and transaction monitoring. They are also required to file suspicious transactions reports with the Commercial Affairs Department (CAD).
• MAS has stepped up surveillance of the cryptocurrency sector, to identify suspicious networks and higher risk activities for further supervisory scrutiny.
• MAS and the CAD will continue to raise public awareness on the risks of investing in digital payment tokens, through our advisories and public education efforts. These advisories provide consumers with information on how to avoid being cheated or being inadvertently used as mules to carry out money laundering activities.

The crypto assets space is constantly evolving. MAS has been closely monitoring developments and will continue to adapt its rules as needed to ensure that regulation remains effective and commensurate with the risks posed. Investors, on their part, should exercise extreme caution when trading cryptocurrencies. Cryptocurrency funds are not authorised for sale to retail investors in Singapore.

Crypto investment fund

Fund managers entering the crypto space have been looking into establishing ‘crypto-focused’ funds (“Fund”) that invest in cryptocurrencies which offer investors the opportunity to own cryptocurrencies by owning a share in the Fund. A Fund structure will benefit investors as the Fund would act as a proxy for investors which would enable the investors to invest and gain indirect exposure to cryptocurrencies without the challenges of self-custody.

If the Fund intends to also offer cryptocurrency and digital token/fiat exchange related services specific to cryptocurrencies and crypto tokens, it may also then be considered as a “digital payment token service” by the MAS which constitutes a “payment service” under the Payment Services Act.

The legal form for a Fund could be a Variable Capital Company (“VCC”), Unit Trust, Limited Partnership or Limited Liability Company. A currently popular structure is a VCC.

Income Tax

Under the Inland Revenue Authority of Singapore (“IRAS”) Income Tax Treatment of Digital Tokens published on 17 April 2020, if a person is trading in digital tokens and derived gains that are revenue in nature, such gains will be subject to income tax in Singapore. On the other hand, if such gains are capital in nature, they are not subject to income tax in Singapore. The determination of whether the gains are capital or revenue in nature is based on an assessment of the “badges of trade”.

Nevertheless, digital tokens are complex and rapidly evolving into different forms. Taxpayers can expect to continue to face challenges and potential risks when dealing with digital tokens, as well as grappling with increased compliance keeping track and substantiating the acquisition and disposal values of the token assets.

Singapore offers a competitive and transparent tax system with the benefit of no capital gains tax and the possibility of tax exemptions for the fund industry, although do note that cryptocurrencies themselves are not “designated investments” for purposes of fund tax incentives.

Striking a balance between regulation and being an attractive jurisdiction for business, technology and financial communities

Singapore’s approach to and regulatory treatment of cryptocurrency has been open to accepting and recognising crypto-related businesses in Singapore. However, as Singapore’s reputation as a financial centre and fintech hub is built on clarity, transparency and stability, businesses operating in Singapore and fund managers will be bound by MAS’ strict Anti-Money Laundering and Counter Financing of Terrorism regulations. Therefore, a balance must be struck between the regulations aimed against money laundering and the financing of terrorism with transforming Singapore to an attractive jurisdiction for crypto fund managers and a relatively safe jurisdiction for cryptocurrency investors.

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