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 A Facilitative Model for Cryptocurrency Regulation

CLEAR AND TARGETED REGULATION for Digital currency

The emergence of new technologies, with accompanying new markets and new market actors, has always posed challenging issues for regulation. While it is said that technological innovation “disrupts” and transforms markets and industries, the effects ofsuch disruptions invariably extend also to the regulatory and legal spheres. Pertinent legal issues raised by such technological disruption often encompass the uncertainty ofapplicability of existing rules and the potential need for new rules to ban, restrict, or encourage the new technology.


The cryptocurrency industry has had to grapple with much regulatory uncertainty of late, which has not been helped by some ofthe recent negative press coverage, including news surrounding the failure of Mt. Gox—at the time, the world’s largest Bitcoin exchange—and the disappearance of 844,000 Bitcoins (worth about US $480 million)


held by it. In addition, Bitcoin’s early association with the Silk Road marketplace, and its use for trading in illicit goods, also helped foster an impression among laypersons that Bitcoin and other cryptocurrencies were somehow less than legitimate and less than legal. Even if this was not actually correct in most jurisdictions, which do not ban the use of Bitcoin or other cryptocurrencies, mixed signals and divergent proposals from regulators in jurisdictions around the world have further contributed to an uncertain regulatory environment.


Such uncertainty has tangible negative effects. Uncertain regulatory treatment makes
it difficult for cryptocurrency start-ups to access funding and to establish banking relationships. Regulatory uncertainty impedes the flow of institutional money and muchneeded investment capital into the cryptocurrency industry. Consumers also tend to be wary given the uncertain legal status ofcryptocurrencies and the lack ofendorsement or backing by any government.


Clear and targeted regulations can do much to remedy this and clarify the legal environment, providing the framework for wider adoption ofcryptocurrencies by businesses and consumers. Targeted laws addressing specifically identified cryptocurrency risks or regulatory interests are appropriate and consistent with the facilitative framework: targeted cryptocurrency regulation would ensure that products or practices that are harmful are appropriately contained while at the same time preserve the benefits of innovation and allow new business models to experiment, compete fairly, and flourish. This section explores these issues in the Singapore context, with three specific areas of regulatory focus:
(1) AML/CTF,
(2) securities and financial regulation,
(3) theft, misappropriation, and fraud.


It aims to capture a snapshot of the salient concerns in each area, although a full treatment ofthe issues raised will not be possible given the prevailing constraints of time and space.

Antimoney laundering and counter-terrorist financing

In March 2014, the MAS announced that it would be taking a “targeted regulatory approach” to regulating virtual currencies (which include cryptocurrencies), in order to “specifically address money laundering and terrorist financing risks.” This is within its mandate as central bank and financial regulator to issue regulations in the area of AML/CTF, as expressly authorized by Section 27B of the MAS Act.

Justification for AML/CTF regulation

Decentralized cryptocurrency systems have obvious and real AML/CTF risks because they are convertible to real fiat currency and characterized by a high degree of
anonymity—certainly a higher degree of anonymity than traditional payment methods such as credit cards. The Bitcoin protocol does not require identification of participants and is not set up to monitor suspicious transaction patterns.


This system has been more accurately described as “partially anonymous,” because although the trail of all transactions made from all accounts can be seen on the “blockchain,” nothing in the system allows one to tie specific accounts or transactions to real-world individuals.


The upshot is that cryptocurrencies such as Bitcoin permit completely anonymous transfers on a peer-to-peer basis, with no requirement for the sender and recipient to be identified, and the decentralized nature ofthe network means that no one individual or entity can be singled out easily for investigation or asset seizure. AML/CTF risks are also particularly heightened because ofthe global reach ofcryptocurrencies through the Internet, which allows them to be used to make almost instantaneous cross-border transfers that are difficult to detect and trace.


There is thus a clear and present justification for AML/CTF regulation of cryptocurrencies. Indeed, many jurisdictions have imposed or are exploring regulations in this regard. The question is not, then, whether or not to impose AML/CTF regulation, but what kind ofAML/CTF regulation is appropriate.

AML/CTF regulation in Singapore

Like most developed jurisdictions, Singapore’s AML/CTF regime involves a two-prong regulatory strategy, involving criminal sanction for offenses on the one hand and prevention through a regulatory licensing regime on the other. Thus, at least two types ofissues are implicated in considering AML/CTF regulation for cryptocurrencies: first, in relation to AML/CTF offenses and sanctions, whether the existing rules and regulations extend to cryptocurrency-related transactions, and, second, in relation to licensing regimes, which entities should be subject to money transmission licensing requirements and what rules or regulations should apply to such licensed cryptocurrency entities.


On the first issue, the governing AML/CTF statutes in Singapore are the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (the “CDSA”) and the Terrorism (Suppression of Financing) Act (TSOFA). Both statutes are drafted in technologically neutral terms and adopt very broad, all-encompassing definitions of “property” that are likely to cover cryptocurrencies and cryptocurrency transaction.


The CDSA sets out four types ofmoney laundering offenses, namely, directly or indirectly acquiring, possessing, using, concealing, or transferring property that represents the benefits ofdrug trafficking or criminal conduct; assisting another person in doing the former; failing to disclose or report any knowledge or suspicion to the Suspicious Transactions Reporting Office (STRO) that any property represents the proceeds of drug trafficking or criminal conduct; and tipping off and disclosing information likely to prejudice an investigation under the Act (CDSA). These offenses will likely apply in the context of cryptocurrencies and cryptocurrency transactions: the Act defines “property” as “money and all other property, movable or immovable, including things in action and other intangible or incorporeal property” (CDSA).


Similarly, the TSOFA sets out a number ofterrorism financing offenses, namely, providing or collecting property for terrorist acts; making available, using, or possessing property for terrorist purposes; direct or indirect dealing with property ofterrorists; failing to disclose information about transactions involving property belonging to any terrorist or terrorist entity; and tipping offand disclosing information likely to prejudice an investigation under the Act (TSOFA). Like the CDSA, the TSOFA is also likely to apply to cryptocurrencies and cryptocurrency transactions, as it adopts a similarly broad definition of“property” as “assets ofevery kind, whether tangible or intangible, movable or immovable, however acquired” (TSOFA). 


On the second issue, the MAS had announced in March 2014 that it would be introducing regulations for “virtual currency intermediaries that buy, sell, or facilitate the exchange of virtual currencies for real currencies,” to require them to verify customer identities and report suspicious transactions to the STRO. No regulations have been formally introduced as of the time of writing of this chapter, but it is anticipated that the regulations would cover a number of existing and future cryptocurrency businesses.


As discussed above, a licensing regime for AML/CTF regulation is justified considering the risks posed by decentralization and anonymity. Licensing requirements can establish accountability structures and allocate responsibility for the policing of the decentralized cryptocurrency network for AML/CTF activity. This will boost consumer and institutional confidence in cryptocurrencies. At the same time, such licensing and accompanying regulation will mean increased costs of compliance for businesses and may have the unintended effect ofincreasing barriers to entry and punishing smaller businesses and start-ups—an outcome inimical to promoting innovation in the cryptocurrency industry.


A thoughtful balancing of costs and benefits is therefore necessary in deciding which entities to license and what regulations to impose on licensed entities. Regulators will need to weigh the potential costs and calibrate any proposed regulation accordingly, in order not to stifle innovation and the potential economic and productivity benefits of a thriving cryptocurrency industry. This is well encapsulated by the “risk-based approach” recommended by the Financial Action Task Force (FATF)—an intergovernmental standard setting and body, ofwhich Singapore is a member state, with an AML/ CTF mandate—which counsels in favor ofapplying preventive measures that “are commensurate to the nature of risks” (FATF).


This is also encapsulated in Tenet 5 of the MAS’s Tenets of Effective Regulation, which are internal guiding principles for the development and review of the MAS’s regulatory framework. Tenet 5 requires MAS regulation to be “impact-sensitive,” and this requires that the “costs and impact of regulation” not be “disproportionate to the benefits” and that regulation be “targeted clearly at specific and material risks” and to avoid “unintended and unnecessary disruption to market practices.”


The definition of the relevant “intermediaries,” which are subject to licensing and regulation, will become decisive. Two possible approaches are available to the regulators. The first is to extend the existing regime under the Money-Changing and Remittance Businesses Act (MRBA) via interpretive guidance from the MAS, potentially clarifying that certain cryptocurrency businesses, particularly exchanges, fall within the MRBA definition of a “remittance business.”4 This is similar to the approach taken by the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which issued interpretive guidance documents in March 2013 and January 2014 to extend existing registration, reporting, and record keeping requirements for “money services business” under the US Bank Secrecy Act to cryptocurrencies. The second approach is to enact sui generis regulations for cryptocurrencies, similar to New York’s recently proposed “BitLicense” proposal. Which approach Singapore regulators choose may ultimately be a matter of form, rather than substance, although the latter approach would allow for greater customization ofrules to fit the needs and risk profile ofthe cryptocurrency industry and ecosystem.



Regardless ofwhich approach is taken, what is vital is that regulators calibrate the scope ofthe licensing regulatory regime such that participants in the cryptocurrency ecosystem, which are not in the business of exchanging, transmitting, or trading cryptocurrencies for real fiat currency or for other cryptocurrencies—that is, miners or users using cryptocurrency to purchase real goods and services, and merchants accepting cryptocurrency—are not regarded as money transmission intermediaries and therefore not unduly subject to potentially onerous compliance requirements. This is consistent with both FATF’s riskbased approach and current international best practices, as reflected by the US FinCEN guidance and German BaFin rules. AML/CTF regulation that covers miners and end users would be overinclusive, contrary to best practice, and significantly bog down the cryptocurrency ecosystem in Singapore with unnecessary costs.

As regards the specific regulations applicable to licensed entities, the MAS had announced in March 2014 that it would be introducing basic AML/CTF rules such as customer due diligence requirements, transaction reporting, and record keeping requirements. These would likely be similar to those that exist under the MRBA, which stipulates all ofthe above requirements in relation to transaction amounts of SGD $5000 and above (MRBA). These rules are appropriate, justified, and consistent with international best practices as crystallized in the FATF.

It is unclear from the MAS announcements whether Singapore regulators will extend to cryptocurrency-related businesses the existing rules under the MRBA that are meant to apply to “remittance businesses” or “money changers”—in particular, the rules stipulating requirements for a minimum capital ofSGD $100,000 and a SGD $100,000 bond or rules requiring licensees to have a “permanent place ofbusiness” in Singapore in order to operate.


Applying such rules to cryptocurrencies would be inappropriate: those rules are designed for and are rooted in a different contextual background, and extending them to the cryptocurrency ecosystem will have unintended costs and consequences. For instance, the requirement for a physical “place or location in Singapore” for business activities is both unnecessary and awkward when applied to cryptocurrencies, especially given that a large diversity of cryptocurrency business models do not involve or necessitate brick-and-mortar premises. Similarly, the rules requiring a minimum capital or bond sum were expressly introduced in order to create “higher entry requirements” so that only large or well-established remittance firms remained, thus “weed[ing] out the weaker players in the industry.”5 This stated justification is at odds with the promotion ofSingapore as an innovation-friendly hub or ecosystem for cryptocurrency start-up companies.



An optimal AML/CTF regulatory regime for cryptocurrencies should be facilitative, with customized rules appropriate for the industry and with suitable breathing space for innovation; it should not disincentivize or exclude small, nimble, and innovative business models from legitimately participating in business activities within the regulatory umbrella.

Securities and financial regulation

Another mode of potential cryptocurrency regulation is through securities or financial regulation. Such rules target and deal with very different regulatory interests from AML/CTF regulation: securities regulation deals with consumer protection and market integrity issues in the financial services sector, while financial regulation is concerned more fundamentally with issues of systemic risk and financial stability.


Singapore regulators have expressed that cryptocurrencies would not be considered
“securities” under the Securities and Futures Act (the “SFA”). This is consistent with of the SFA, which defines “securities” as, inter alia, debentures or stocks issued by governments or private corporations, any right or option or derivative in respect ofany such debentures or stocks, any unit in a collective investment scheme, or any unit in a business trust or its derivative. Cryptocurrencies are thus
not subject to the investor protection and market integrity regulation under the SFA and the Financial Advisers Act in Singapore, including the various registration, disclosure, and antifraud obligations under those statutes.


However, this does not preclude investment products or investment schemes that are based on cryptocurrencies from being regulated under securities regulations. Distinct from the purchase and exchange of cryptocurrencies themselves, cryptocurrency-based financial products, such as ETFs or derivatives, involve the use of regulated investment structures and therefore attract the application of the relevant securities regulations.

For instance, cryptocurrency ETFs would constitute “collective investment schemes” under the SFA, with the shares of such ETFs qualifying as “securities” under the SFA. Similarly, cryptocurrency derivatives will likely fall within the regulatory umbrella of Parts VIA and VIB of the SFA and the requirements therein. Even though cryptocurrency derivatives are not currently defined as “specified derivatives’ contracts” under existing guidelines, according to the Securities and Futures (Reporting of Derivatives’ Contracts) Regulations 2013, which limits such contracts to interest rate and credit derivatives, of the SFA clearly envisage that the MAS may prescribe the regulations to apply to such derivatives. In any event, these cryptocurrency-based financial products are only at a very early stage of development and do not raise significant regulatory concerns yet.


As for financial regulation, the effects of cryptocurrencies on monetary policy and financial stability are currently unclear. Cryptocurrencies are not issued or backed by any governmental authority and, at current adoption levels, do not have sufficient market capitalization to significantly impact the supply ofmoney or otherwise affect macroeconomic policy. In addition, cryptocurrency businesses, unlike banks, do not have access to public safety nets or central bank liquidity, and therefore, there is little or no justification for prudential regulation for safety and soundness concerns.


Cryptocurrency firms and businesses also do not pose the same systemic risks as banks
do in the form ofa structural vulnerability to “runs,” because they do not carry out maturity transformation, that is, the conversion ofshort-term liquidity needs ofdepositors into long-term funding commitments for borrowers. As the Diamond-Dybvig model (Diamond and Dybvig, 1983) illustrates, it is the structural mismatch between the liquidity and maturity profiles of a bank’s funding structure—that is, the fact that banks borrow short to lend long—that gives rise to the potential for systemically destabilizing “runs” (Lim, 2014). Since cryptocurrency firms are not generally in the business of performing maturity transformation, and do not pose the same systemic risks as banks, financial regulations such as capital requirements or public insurance schemes are not appropriate.


That said, drawing the line between typical cryptocurrency firms and banks will become less clear-cut over time, as lending in cryptocurrencies and cryptocurrency fractional reserve banks becomes possible and more widespread. It is too early to tell whether this “financialization” trend will continue, but at present, cryptocurrency banking and lending services remain quite niche and do not yet pose any real regulatory concerns. Hasty regulation in this area would be both unwarranted and unwise and poses more risks than benefits.

Theft or misappropriation

Like cash or other forms of money, cryptocurrencies function as a store of value and a medium of exchange and contain or signify a degree of economic value for its owner. Similarly, just like cash, cryptocurrencies can be lost or stolen (from virtual wallets), thus resulting in effective destruction ofthat economic value for the owner. However, while there are clear civil and criminal laws that protect one’s property rights in tangible hard currency or cash, it is unclear under existing laws whether such private remedies or criminal sanctions extend to the theft or misappropriation of     cryptocurrencies. 


Under Singapore law, it is uncertain whether private remedies for theft or misappropriation apply to cryptocurrencies. Conversion is the principal civil remedy under English or Singapore law in respect to theft or misappropriation of personal property (including money) and provides the original owner with a means of vindication where those rights have been interfered with, including through tracing his original property and demanding the return of the property or its equivalent in-kind from third parties (Kuwait Airways Corporation v Iraqi Airways Co (No 3)). However, the current state ofSingapore case law has left undetermined the question ofwhether conversion remedies are available for intangible property—a category that includes cryptocurrencies.


As the Singapore High Court recently held in Tjong Very Sumito v Chan Sing En (2012), it “remains an open question in Singapore whether intangible property can form the subject matter of conversion”. Likewise, in Alwie Handoyo v Tjong Very Sumito, the Singapore Court ofAppeal—Singapore’s apex court—cited to the approach by the majority ofthe English House ofLords in the OBG v Allan case, which had held that conversion protects only interests in physical chattels, and that there cannot be conversion of intangible property such as choses in action. However, the Singapore Court ofAppeal held in that case that narrow exception documentary intangibles (i.e., where the intangible property in question has a corporeal representation, such as in the case ofchecks or share certificates) applied in that case and that it was therefore not necessary to determine whether conversion could apply to purely intangible property.


Cryptocurrencies need not have their existence reflected in a physical document and would therefore be classified as purely intangible property. It is unclear whether conversion remedies would be available for theft or misappropriation ofcryptocurrencies. Practically, this means that a victim of cryptocurrency misappropriation or theft might only have a personal remedy against the relevant exchange or counterparty (under contract, tort, or other related personal actions such as unjust enrichment), but not a proprietary remedy that can be used to make recovery against the third parties that come into possession of the intangible online property.


A number of prominent legal commentators have rightly criticized the distinction between tangible and intangible properties as arbitrary and without basis. Indeed, a fixation with physical possession as the traditional criterion for the availability ofthe remedy ofconversion is inappropriate and out ofplace in a modern economy, where many things of value are intangible (Shaw, 2009). As a matter of principle, conversion should apply to protect property interests—whether tangible or intangible—that are excludable from others and capable ofbeing controlled in a broader and not just physical sense (Green, 2008). Unfortunately, this is not yet the current state ofthe law in Singapore; however, it is hoped that the realities of a functioning cryptocurrency and significant peer-to-peer economic activity will shape the law toward abolishing this distinction between tangible and intangible properties.


As for criminal sanctions, Singapore law has equally little to say about theft or misappropriation ofcryptocurrencies: intangible property is not covered by criminal offenses for theft or misappropriation of property under Singapore law. Theft is defined under of the Penal Code with reference to dishonest taking of“movable property,” which is defined in as including “corporeal property of every description.” The same goes for criminal misappropriation ofproperty under  of the Penal Code, which also makes reference to “movable property.” Thus, unlike other jurisdictions such as the United Kingdom, whose 1968 Theft Act expressly defines protected “property” to include “things in action and other intangible property,” Singapore’s criminal legislation does not address theft or misappropriation ofintangible property. The one exception is the offense of“cheating,” which is defined under ofthe Penal Code to include dishonestly inducing the delivery of“any property.” This has, however, only a limited scope and will not cover all instances of theft or misappropriation.


Singapore’s cybercrime legislation, the Computer Misuse and Cybersecurity Act, does little to address the above lacunae in relation to theft or misappropriation of intangible online property. That Act relies on a predicate offense approach and punishes the use of a computer to commit certain crimes or offenses involving “property, fraud, dishonesty or which causes bodily harm”. Without a predicate offense for theft or misappropriation under the Penal Code, all the cybercrime legislation does is criminalize very narrow classes ofonline misdemeanors, including “unauthorized access to computer material” and “unauthorized modification of computer material”. While these provisions may address to some extent particular hacking and cybersecurity breach concerns, they do not address many situations of theft or misappropriation of cryptocurrencies—which may not necessarily involve a breach or lack of authorization.


Under existing Singapore law, therefore, it remains unclear whether (or which) private remedies or criminal sanctions will be available in a case of theft or misappropriation of cryptocurrency. The laws in this area appear to be still grappling with an old-world distinction between tangible and intangible properties, with protection from interference largely available only for the former. As stated above, this is unsustainable in a modern economy where, as is the case in the cryptocurrency system, systems ofvalue and commerce are built upon intangible, but highly valuable, property. A developed and flourishing cryptocurrency business sector requires commercial certainty and clearly defined and enforceable property rights in respect to cryptocurrencies; this is currently lacking under the current legal landscape in Singapore and will require further clarification or reform, whether through courts or legislators.