Striking the eye of financial society, digital currency became a trend in the end of 2017 and caused global regulation transformation to ensure consumers safety and slacken money laundering processes.
Despite the decreasing of mentioning the phenomenon on the media and falling prices of electronic currency, lawyers kept holding the interest. In 2018 Indonesia and Thailand presented new regulations concerning particular ways of managing distributed ledger technology and digital cash.
Meanwhile, Singapore introduced the Payment Services Act (PS Act), which will contain demands, regulations and restrictions concerning specific digital currency intermediaries. It will serve as annexation to the existing Securities and Futures Act (SFA), adding new paragraphs for disturbed ledger technology and e-money regulations. New laws will represent Monetary Authority of Singapore’s (MAS) policy concerning classification and management of digital assets.
MAS Managing Director Ravi Menon noted that they divide digital assets into following categories: utility tokens, payment tokens and security tokens.
Utility tokens are applied for computing services and need no special control or restrictions. Security tokens ensure safe access to e-money. Payment tokens are used as digital currency (e.g. Bitcoin).
Hence, SFA develops new approach to security tokens and PS Act deals with payment tokens. MAS will take notice of work of utility tokens as a part of blockchain technology, which therefore have no precise definition in laws. The aforementioned types are similar to developed ones in Switzerland by Financial Market Supervisory Authority (FINMA) and are considered to complementary to each other.
While as intercrossing of categories causes no confusion among lawyers, the term “digital payment tokens” has vast meaning.
Today, according to PS Act, digital payment tokens are represented in units to reflect the value, are free of denomination and are not attached to any currency by issuer. This public electronic payment mean is used for purchasing goods and services, debt recovery, transfer, trade or storage on banking account.
Ravi Menon’s definion of utility tokens implies that they can serve as payment unit for computing services and debt repayment (payment limb). It appears then that digital payment tokens definition can include utility tokens.
From the first sight, it may seem that wide range of application of digital payment tokens can correlate it to the payment limb. It appears due to the fact that digital currency, used for paying does not necessary have inherent characteristic of digital asset.
Despite the increasing role of e-money globally, yet not all payment tokens are so well-thought-out as Bitcoin. Etherum, for instance, is a structure developed to create smart contract transactions and used by third parties for payment. Originally, Ether was not created for payment operations, but it can be used as a payment unit in case of mutual agreement between parties. This evolution was naturally caused by electronic transferability of digital asset. It means that in theory in can be done with any class of digital asset if it can be converted into digital payment token.
The aforementioned concern is sharpened by the lack of specifications and limitations of payee, purpose of digital token and customer rights on the scope of payment limb. There is no control on the identity of payee, which means besides the issuer any other person can make payments in the limb. According to the PS Act, it should make digital asset a digital payment token.
Taking into account urgency of decentralization of exchange regulations, digital asset, which was not created as mean of exchange, is likely to transform into digital payment token in the near future.
Any person will be able to create digital asset market due to decentralized exchange protocols, using either bonding curve mechanism or liquidity providers.
In further, the regulations may merge into payment patterns, which will allow payer to pay in any convenient currency regardless which digital asset is acceptable for beneficiary, even if it is paper money.
In this case, it is not even necessary to inform a payee, which currency was used by a payer. It is comparable with today’s online payment services such as PayPal or credit cards, with the only difference that digital currency will be used instead fiat money.
This implies that any digital asset can be used as exchange medium and as a digital payment token.
It follows thence that the payment limb and transferable digital asset may become similar when it comes to use.
Convertibility of digital asset makes it applicable for the payment limb at any rate. On the other hand, digital asset has to be transferable to satisfy the payment limb, because it should reflect monetary movement between payer and payee.
The payment limb may be perceived as a consequence of digital asset convertibility. It appears then that term ‘digital payment tokens’ encompasses basically all convertible digital assets for today.
At this point, digital assets should be distinguished from digital payment tokens if intermediaries work with digital assets, utility tokens and security tokens and want to avoid obtaining license under PS Act.
Inadequate compliance costs often appear even if the digital asset was monitored as payment mean. For that reason intermediaries are likely to prefer making a license.
This will make more thorough and well-thought license a prior task for lawyers: if requirements are too blurry it may be cumbersome to adjust the regulations. Conversely, heavy requirements may decelerate technology development pace and remove Singapore from the position of amiable environment for distributed ledger technology and digital innovation.
As industry develops extremely fast, the today concerns may have no legal impact by the day the PS Act comes into force.
At the top of that, MAS became entitled to add new characteristics for digital payment tokens, if they appear. It means that definition will probably adapt for the upcoming changes.
The good news is that the concept of digital payment tokens will transform together with technology development and provide us with timeous understanding of it.
Simon Chesterman, Dean of the National University of Singapore Faculty of Law published an article about Bitcoin, which illustrates how laws fall behind the innovations.
He stated that in order to keep in pace with time regulations should be clear and aware of technology development to be ready for upcoming innovations.
Singapore is about to reconsider and take into account digital assets issues observed in this article. Hopefully, new regulations will serve as a kindly soil for digital payment industry.