How Must Singapore DPT Service Providers Segregate Customer Assets?

Key takeaways

• MAS announced on 3 July 2023 that digital payment token (DPT) service providers must segregate customers' assets from their own and hold them on statutory trust.
• The measures also require safeguarding of customers' money, daily reconciliation of customers' assets with proper books and records, access and operational controls in Singapore, and an operationally independent custody function.
• The Payment Services Regulations contain the detailed rules in Part 2, Division 2A, regulations 18A to 18J, covering trust accounts, record keeping and computation of customer assets.
• Retail customers' DPTs may not be used for lending or staking facilitated by the provider, under the same package of measures.
• Customers' fiat money must also be safeguarded, and is best reconciled separately from token holdings.

What are the key facts on DPT customer asset segregation?

Singapore requires crypto service providers licensed by MAS to keep customers' tokens apart from their own and held on trust, and to prove it with daily reconciliation and proper records. The rules aim to make customer assets easy to identify and return if a provider fails, which past exchange collapses elsewhere showed was often impossible.

What did MAS require?

Segregation and trust, daily reconciliation, local controls, an independent custody function and clear disclosure.

MAS's media release of 3 July 2023 set out the measures after an October 2022 consultation. DPT service providers must segregate customers' assets from their own assets and hold them in trust for customers, safeguard customers' money, conduct daily reconciliation of customers' assets and keep proper books and records, maintain access and operational controls over customers' DPTs in Singapore, ensure the custody function is operationally independent from other business units, and give customers clear disclosures about the risks of having their assets held by the provider. MAS said the aims were to reduce the risk of loss or misuse of customers' assets and to make recovery easier if a provider became insolvent.

The trust is what separates customers from ordinary creditors. Without it, tokens held by an insolvent exchange can be treated as part of its estate, and customers become unsecured claimants in a long process. With a valid trust, segregated assets belong to customers, and the question becomes practical: can the liquidator identify each customer's share quickly? That is why the measures pair the trust with daily reconciliation and proper books and records, rather than relying on the legal structure alone.

Where are the detailed rules?

In Division 2A of Part 2 of the Payment Services Regulations, regulations 18A to 18J.

The division covers customer assets generally, trust accounts held with a safeguarding person (regulation 18D), trust accounts maintained by the licensee itself (regulation 18E), record keeping (regulation 18F), other requirements (regulation 18G), the computation of customer assets (regulation 18H) and conditions for exempt providers (regulation 18I). The enabling power sits in section 23(5) of the Payment Services Act, which lets MAS make regulations on trust accounts, commingling, treatment on insolvency and separate book entries for each customer's relevant money, e-money and digital payment tokens. Firms should read the current text on Singapore Statutes Online, as the regulations have been amended since they were first made.

How is customers' fiat money treated?

It must be safeguarded too, under MAS's measures, and kept in records separate from token entitlements.

MAS's July 2023 measures require DPT service providers to safeguard customers' money as well as their tokens. Where section 23 of the Act applies, it sets the timing and methods: an undertaking or guarantee from a safeguarding institution, a trust account, or another prescribed manner. A provider therefore runs two parallel records: token entitlements reconciled to wallets and custodians, and fiat balances reconciled to safeguarding accounts. Our guide to MAS safeguarding of relevant money explains the fiat side.

What can a provider not do with retail customers' tokens?

It may not facilitate lending or staking of retail customers' DPTs, although institutional and accredited investors may still take part.

MAS's July 2023 release restricted DPT service providers from facilitating lending and staking of DPTs by retail customers, while allowing these activities for institutional and accredited investors. The restriction supports segregation: tokens lent or staked out of the custody arrangement are no longer simply held on trust, and may not be returnable in full if a counterparty or protocol fails. For providers serving both retail and institutional customers, the records must show which customers may take part in lending or staking, so that retail holdings are never drawn into those activities by mistake.

What does daily reconciliation involve for tokens?

Comparing, for each token, what customers are entitled to with what the provider actually controls.

The comparison runs token by token, never in aggregate value, because a customer owed ether is not repaid by surplus bitcoin. Entitlements come from the customer ledger at a fixed cut-off. Holdings come from on-chain balances of the provider's wallets and statements from any third-party custodian at the same moment. Differences usually arise from deposits seen on-chain but not yet credited, withdrawals broadcast but not yet confirmed, fees and errors. Each should be listed and cleared, so that a true shortfall stands out and is fixed the same day.

What does a daily customer asset reconciliation look like?

The example reconciles three tokens and the fiat balance for one day, at a single cut-off time.

Worked example. A Singapore DPT service provider runs its reconciliation at 23:59 Singapore time.

Bitcoin and ether reconcile once timing items are recorded. USDC is 50,000 tokens short with no explanation, so the provider must investigate immediately, restore the 50,000 USDC to customer holdings from its own resources if the cause is not found quickly, and record the cause and fix. The fiat balance is reconciled separately under section 23.

What governance does MAS expect around custody?

A custody function that is operationally independent, with controls exercisable in Singapore.

Operational independence means the people who hold keys and move customer assets are separate from those who trade, list tokens or make investment decisions, so no single business line can move customer assets for its own purposes. Controls exercisable in Singapore means the Singapore entity can act on customer assets itself, rather than depending on staff or systems abroad that it does not control. Both points also matter on insolvency: a liquidator needs to find, access and return assets quickly, and the books, records and daily reconciliations are the map.

How do token and fiat safeguarding differ?

Tokens are protected in kind and reconciled by unit; fiat is protected by amount through safeguarding institutions.

What should the books and records show?

Each customer's entitlement to each token and each currency, and where the matching assets are held.

Section 23(5) of the Act allows regulations requiring separate book entries for each customer's relevant money, e-money and digital payment tokens, and regulation 18F of the Payment Services Regulations deals with record keeping for customer assets. In practice the records should let the provider, an auditor or a liquidator answer three questions for any day: what each customer was owed, which wallets or custody accounts held the matching assets, and what differences were open and why. A daily reconciliation log, kept with the evidence for each explained item, is the simplest way to answer the third question.

What should a DPT service provider check?

These checks map the July 2023 measures to daily operations. Each should produce evidence an auditor or MAS could inspect: a reconciliation log, a wallet register, an access list and a record of every difference resolved.

• Hold customer tokens in wallets or custody accounts separate from the provider's own, under a trust structure.
• Reconcile each token's entitlements to holdings every day at a fixed cut-off.
• Clear timing items daily and investigate any unexplained difference immediately.
• Keep books and records that show each customer's tokens and fiat balances separately.
• Keep the custody function independent from trading and other business lines.
• Ensure access and operational controls over customer DPTs are exercisable in Singapore.
• Do not facilitate lending or staking of retail customers' tokens.

Our guides to crypto custody reconciliation and MAS single-currency stablecoin reserves cover related rules.

How does Safeheld help?

Safeheld reconciles customer token entitlements to wallet and custodian holdings, and fiat balances to trust accounts, every day by entity and asset.

Unexplained differences are raised as breaks with their investigation history. See daily reconciliation.

Frequently asked questions

Must Singapore DPT service providers segregate customer assets?

Yes. MAS requires them to segregate customers' assets from their own and hold them on trust for customers, with daily reconciliation and proper books and records.

Where are the DPT customer asset rules?

In Part 2, Division 2A of the Payment Services Regulations, regulations 18A to 18J, made under the Payment Services Act 2019.

Can a DPT service provider hold the trust account itself?

The regulations provide for trust accounts with a safeguarding person (regulation 18D) and trust accounts maintained by the licensee itself (regulation 18E).

How often must DPT customer assets be reconciled?

Daily, according to MAS's July 2023 measures, with proper books and records.

Can retail customers' tokens be lent or staked?

No. MAS restricted DPT service providers from facilitating lending and staking of retail customers' DPTs.

How is customers' fiat money protected?

MAS requires DPT service providers to safeguard customers' money. Where section 23 of the Payment Services Act applies, it is protected by an undertaking or guarantee from a safeguarding institution, a trust account, or another prescribed method.

Should token reconciliation be done in value or in units?

In units, token by token. A shortfall in one token cannot be covered by a surplus in another, because customers are owed the specific tokens they hold.

Why must the custody function be independent?

So that staff who hold and move customer assets are separate from trading and other business units, reducing the risk of misuse.

References

• MAS, MAS publishes investor protection measures for digital payment token services (3 July 2023)
• Payment Services Act 2019 (Singapore Statutes Online)

About Safeheld

Safeheld is reconciliation and regulatory financial control software for regulated firms that hold client money. For Singapore DPT service providers it reconciles customer token entitlements and fiat balances to holdings every day and keeps the books and records the rules require. To discuss your digital asset operations, contact us at safeheld.com/contact.

This article is general information on Singapore payment services rules and is not legal or regulatory advice.