Understanding the licensing of digital payment tokens under the Payment Service Act regime

Under the Payment Services Act 2019 (the “PS Act”) a digital payment token (“DPT”) “is, or is intended to be, a medium of exchange accepted by the public, or a section of the public, as payment for goods or services or for the discharge of a debt”[1] which “is not denominated in any currency, and is not pegged by its issuer to any currency” and “can be transferred, stored or traded electronically”.

The starting point of the regime is the basis that the PS Act targets digital payment instruments created specifically for the settlement of payments for goods and services. The regime therefore prima facie does not encompass financial businesses that sell digital payment tokens for investment purposes.

However, the PS Act anticipates that DPTs facilities will include marketplaces[2] that allow the buying and selling of DPTs that are not originally intended for the payments of goods and services but are capable of it. The determination of the DPT is in this case a tricky matter. For instance, a digital tokens offering for a token such as Cardano (a kind of digital token) may have been bought in by investors for capital appreciation / investment purposes while being sold off in a secondary market to other users of the token who can use the token to redeem cheap cleaning services. Because of the complex correlations between the investment purposes of the token and the utility purposes of the token, DPTs often land in a grey area of regulatory application.

Fortunately, a framework has been provided for to ensure that DPTs are for the purposes set out under the PS Act. Digital payment token service providers (and applicants for such licence) are required to provide a legal opinion of their assessment for all DPTs, except Bitcoin, Bitcoin Cash, Bitcoin Gold, Bitcoin SV, Ethereum, Ethereum Classic, Litecoin and Ripple[3]. The digital payment token service provider, through the legal opinion, has the burden of ensuring that the DPTs will be used by the customer primarily for payments / the redemption of goods and services.

An applicant is expected to set out clearly in its application, the assessment of the DPT. Within its business plan, it should explain clearly the factors that it has relied on to determine whether a customer that buys a DPT from it does so with the intention of using it for payments for goods and services. The applicant should also address the risks under which a customer will use the DPTs for investment purposes and how that risk is mitigated.

For instance, an applicant proposing to list a DPT for the redemption of cleaning services has limited the maximum DPT value to SGD 100 equivalent on the relevant DPT. Whereas a DPT for the purchase of computers could have a DPT value limit of SGD 5,000 on its relevant DPTs.

A great degree of critical thinking and analytical skills will be required to the limiting of risks for DPTs bought for investment purposes, failing which a DPT may risk judicial reclassifications risk and amount to a security under the Securities and Futures Act.

You may wish to consult one of our experts when crafting risk mitigation mechanics for digital payment tokens offered

[1] PS Act Definition, Digital Payment Token, ss(c)

[2] PS Act, First Schedule, Definitions, digital payment tokens exchange

[3] Form 1 Application for Payment Service License para 7.21 https://www.mas.gov.sg/-/media/MAS/Sectors/Forms-and-Templates/Form-1—Application-for-a-Payment-Service-Provider-Licence.pdf