Legal issues and trends in Singapore Crypto Scene – Publications

Singapore has become a popular destination for new and existing cryptocurrency funds, just in time for the upcoming “cryptocurrency winter”. This LawFlash puts the spotlight on trends and legal issues that companies should be aware of when they want to set up cryptocurrency funds or businesses or use digital assets in this area.

STRUCTURES FOR CRYPTOMIDS

Variable Capital Company (VCC) is a relatively new and currently popular corporate fund corporate structure in Singapore. A VCC can function as a single independent fund or as an umbrella fund with several sub-funds, each with different investment strategies and a portfolio of segregated assets and liabilities.

Another popular fund is the limited partnership, which consists of a limited partnership agreement between at least one commander (GP) and one limited partner (LP). The GPs are the units that run the fund and the LPs are the investors. Limited Partnerships Act 2008 of Singapore (LPA) regulates the establishment of limited partnerships.

Funds structured as limited liability companies in Singapore are incorporated under the Companies Act 1967 of Singapore (Companies Act), where investors will subscribe for shares in the fund company and become shareholders. If a fund is structured as a company in Singapore, it will typically be in the form of a private limited company. However, the corporation is a less common structure for funds domiciled in Singapore today.

CRYPT EXCHANGE

Starting with the general decline in cryptocurrency prices and accelerated by the Terra / Luna saga, the estimated total market value of cryptocurrencies has fallen from USD 3 trillion to below USD 1 trillion in the last seven months. The eruption of over $ 2 trillion in value has put a huge strain on cryptocurrency exchanges and trading platforms. These exchanges are not only platforms and marketplaces for cryptocurrency trading, but also act as both borrowers and lenders to individuals or other exchanges in what was a burgeoning decentralized financial industry (DeFi). The interconnection of cryptocurrency exchanges due to their DeFi role through interconnected lending and lending schemes has made some exchanges susceptible to counterparty risk and margin calls from other exchanges.

The ability of exchanges to manage these risks, which includes (1) the ability to reduce counterparty risk; (2) the ability to manage trade and withdrawals from customers; (3) the ability to coordinate the same across different regulatory environments; and (4) the ability to raise new capital in an environment of rising interest rates will determine the success of such a business in coping with the “crypto winter.”

The spotlight has therefore been on the various terms that govern the relationship between the stock exchanges and their customers / counterparties. If an exchange’s terms and conditions allow the exchange to treat custodial assets as its own assets to handle as such, and thus treat custodial relationships as a debtor-creditor relationship between the exchange / custodian and the customer (instead of a transfer or bail of property), customers will only be general unsecured creditors of the exchange, only entitled to a proportionate distribution of the exchange’s remaining assets after any secured or priority creditors have been repaid in an insolvency situation. Even if the inventory was eventually considered the customers’ property, the customers would still experience extended disruptions in access to their inventories.

Related to this is whether the terms allow the exchange / custodian to lend or provide collateral over cryptocurrencies to or for the benefit of third parties, and the exact terms for it. Another issue that is increasingly in the spotlight is the interplay between these contract terms when users or customers switch between different accounts or sub-wallets in an exchange’s digital user interface, especially if the exchange / custodian can actually mix the customer’s holdings with others’ holdings. customers, or even their own, in a single crypto wallet controlled solely by the stock exchange.

SINGAPORE INCOME TAX TREATMENT

As cryptocurrency-related investments become more widespread, those who gain from the sale of digital tokens should be aware of the potential tax liability that may arise. Although Singapore does not have a capital gains tax, it is a common misconception that such gains must be tax-free. The burden of income tax in Singapore is supported by the distinction between income and capital, where only gains of an income nature are taxable in Singapore. However, a gain in capital value does not necessarily mean that it will be considered a capital gain (and thus not taxable). Relevant factors such as intention or purpose, length of inventory and frequency of transactions are typically considered, and it is not only those who trade in digital tokens that are to be taxed on the profits. Ultimately, it depends on the facts and circumstances of each case.

More and more employers are also considering the use of digital tokens (eg Bitcoins) as employment allowance. A practical assessment in principle is whether the remuneration should be limited by a fixed amount to be paid by digital chips, or a fixed number of digital chips that fluctuate in value over time. Usually, payments with digital tokens with a moratorium period will not be taxed until it is revoked. It should also be noted that the income tax treatment of one digital token may differ from another depending on its nature and use.

COMPLIANCE WITH REGULATIONS

In Singapore, the type of regulations that apply to cryptocurrencies (and whether they apply at all) and whether such businesses must be licensed depend on the business activities being considered and the type of crypto assets involved. Crypto products and services come in a variety of forms and are constantly evolving, and there is no “crypto license” that applies universally. Different laws may apply to different crypto products and services, depending on the scope of the product or service offered. Therefore, the specific regulatory authority that regulates the activities of the crypto product or service will vary depending on the scope of the product or service. For example, companies such as:

• trade in or offer digital exchanges or custodian services for digital tokens that are considered securities, must be licensed (or exempt from licensing) in accordance with the Securities and Futures Act 2001 in Singapore and may be subject to the prospectus requirements in such action if offer / sell such securities;
• · Offer financial advisory services related to various types of cryptocurrencies may be required to be licensed (or exempt from licensing) under the Financial Advisors Act 2001 in Singapore;
• · Offer services related to digital payments (including digital payment symbols or money), or offer payment system services, must be licensed (or exempt from licensing) in accordance with the Payment Services Act 2019 in Singapore; and
• · Operating in Singapore is also required to comply with Singapore’s laws and regulations in relation to combating money laundering and terrorist financing.

Even where an action has been taken outside of Singapore, Singapore’s licensing requirements will continue to apply if the conduct has a “significant and reasonably foreseeable” effect in Singapore.

One license that is currently sought after in Singapore is the large payment institution license under the Payment Services Act 2019 in Singapore. This license allows holders to offer various crypto services on a larger scale in Singapore. The Monetary Authority of Singapore has thoroughly reviewed hundreds of applications for such licenses, and as of June 22, only a total of 14 licenses and approvals in principle have been granted to providers of digital payment tokens (including stablecoin players, crypto) exchanges and traditional financial institutions) .

As the ill-fated crypto market triggers prominent players in the crypto industry, including companies based here, becoming insolvent, several security measures are being considered by Singapore to protect consumers. These may include restricting retail participation and imposing rules on the use of leverage, or borrowed capital in transactions in cryptocurrencies.

CONTACTS

If you have any questions or would like more information about the issues discussed in this LawFlash, please contact one of the following Morgan Lewis attorneys, who are directors of Morgan Lewis Stamford LLC, a Singapore law firm affiliated with Morgan, Lewis & Bockius LLP:

Singapore
Daniel Chia
Wai Ming Yap
Sin Teck Lim
Vanessa Ng
Kai Lee Lau