An Overview on Development and Regulations of Blockchain Technology and NFTs in Singapore
Since the birth of the first digital currency, Bitcoin, in 2008, blockchain technology has developed significantly in various fields. As one of the financial hubs of Asia, Singapore has also attracted a wide range of software professionals and investors in the financial services industry involving blockchain technologies and nonfungible tokens (NFT). NFT marketplaces can be either gaming platforms for earning digital assets like Axie Infinity, collectibles trading platforms like NBA TopShot or metaverse platforms like Decentraland and Earth 2 where virtual properties can be bought and sold.
On 11 March 2021, a Singaporean entrepreneur and investor and an Indian businessman jointly bought an NFT painting, “Everydays: the First 5,000 Days,” made by crypto artist Beeple for a whopping $69.3 million at Christie’s Auctions in London. Many have begun to wonder whether NFT will become the next burgeoning investment sector after cryptocurrency. The Monetary Authority of Singapore (MAS) expressed its stance in February 2022, namely that NFTs may be subject to compliance requirements if they fall under the regulated regime (as discussed below) and MAS will continue monitoring the development in this sector.
Blockchain Technology and NFTs
An NFT has a unique identification representing an underlying tangible or intangible asset, such as a pair of limited edition sneakers or a painting. Unlike fiat currencies and cryptocurrencies (fungible in nature), each NFT is distinct from other NFTs and cannot be replicated. Each of them represents an ownership certificate of the underlying property. In other words, when a buyer purchases an NFT, he is claiming exclusive ownership over it. The rights of NFT owners are recorded on the relevant smart contracts.
Depending on the attributes of an NFT, it may be governed by the Singapore Payment Services Act 2019 (PSA) if it is identified as a digital payment token (DPT) or by the Securities and Futures Act (Cap 289, Rev Ed 2006) (SFA) if it is identified as fully under the limb of “securities.” In such cases, licensing requirements will apply.
DPTs Regulated by the PSA
The PSA is the primary legislation regulating cryptocurrency payments and transactions. A DPT means any digital representation of value (other than an excluded digital representation of value) that:
(a) is expressed as a unit; (b) is not denominated in any currency and is not pegged by its issuer to any currency; (c) 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; (d) can be transferred, stored or traded electronically; and (e) satisfies such other characteristics as the MAS may prescribe.
If an NFT is recognized as a DPT, a MAS payment service licence is required. In general, an NFT would not meet the DPT characteristic set out in line (c) above. It is also worth noting that NFTs could be regarded as limited purpose DPTs, which are exempted from the licence requirement, including
[A]ny non-monetary customer loyalty or reward point, any in-game asset, or any similar digital representation of value that —
(a) cannot be returned to its issuer, transferred or sold in exchange for money; and; (b) may only be used (i) in the case of a non-monetary customer loyalty or reward point — for the payment or part payment of, or in exchange for, goods or services, or both, provided by its issuer or any merchant specified by its issuer; or (ii) in the case of an in-game asset — for the payment of, or in exchange for, virtual objects or virtual services within an online game, or any similar thing within, that is part of, or in relation to, an online game.
In short, whether an NFT constitutes a DPT requires a case-by-case analysis.
Securities Regulated by the SFA
Although the SFA does not specify whether NFTs may constitute securities, the definition of securities covers “any other products or other class of products as may be prescribed.” This therefore empowers MAS to include NFTs as a form of securities, depending on the attributes and purposes of a particular NFT. In general, securities are usually fungible such as shares, units in business trusts and debentures. If an NFT represents part ownership in a company, then the prospectus and business conduct requirements will apply.
NFT Trading Issues
There are several issues that can arise in NFT transactions which require the attention of both buyers and sellers:
1. Whether the seller has the right to sell the NFT: NFTs are actually metadata on the blockchain. Anyone may create an NFT of an underlying asset on a blockchain. However, not all trading platforms require a seller to verify his actual ownership to the underlying asset. For example, a seller may take a digital picture of a painting from an exhibition and subsequently create an NFT for sale on a trading platform without the artist’s consent
2. Whether the buyer wants to purchase the underlying property represented by the NFT: Typically, the ownership of the underlying property will not be automatically transferred along with the NFT, where the latter is subject to the terms of the smart contract. The assignment of intellectual property rights of the underlying property must be made in writing and in accordance with the law.
3. Theft by hackers: Like cryptocurrency, NFTs may also be stolen due to hacking issues.
It is advisable that operators of an NFT platform seek professional legal advice from Singapore lawyers in advance to ensure their business model is in compliance with the Singapore laws. In addition, policies in respect of onboarding KYC, anti-money laundering and combating the financing of terrorism should be established to detect suspicious transactions and to mitigate such risks. Likewise, investors should be well aware that as most NFTs are not regulated by the MAS (unless it is deemed to be a DPT or securities), the associated risks must be carefully weighted. In addition, given that NFTs are not pegged to fiat currencies, which inevitably leads to volatility in value, the investors’ tolerance for losses must also be carefully considered.