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The Monetary Authority of Singapore (MAS) recently published a consultation on proposed market integrity measures in digital payment token (DPT) services.
Noting that DPT markets were prone to market misconduct – such as market manipulation and insider trading – MAS said unfair trading practices distort price discovery, affect market integrity and undermine customer confidence in DPT markets. Respondents to the previous October consultation issued by the MAS also largely agreed with the MAS observations and some supported specific bans on market misconduct.
Growing concerns about unfair trading
Taking note of recent recommendations from the International Organization of Securities Commissions (IOSCO), MAS also highlighted the growing global consensus to address market integrity issues in cryptoasset markets.
This can be seen from the publication of IOSCO’s draft recommendations in May 2023, as well as jurisdictions – such as the European Union – that have introduced into legislation bans on market conduct on crypto-asset trading platforms.
Examples of unfair trading practices identified by MAS include wash trading, pump and dump schemes, cornering, trade rigging and insider trading. In essence, these activities are the same as those occurring in capital markets, and related guidelines are equally relevant to DPT markets. To understand more about their characteristics, and how to detect and prevent them, please refer to the trade surveillance practice guide jointly issued by MAS and SGX Group.
Same risks, same rules
Accordingly, the proposed regulatory measures for DPT service providers (DPTSPs), and in particular trading platforms, are largely similar to the requirements currently applied to capital market intermediaries (such as brokerage houses) and approved exchanges (AEs). regulated in accordance with securities and futures. Act (SFA). This includes systems, controls and processes that ensure the fair, orderly and timely handling and execution of customer orders, as well as the prevention and detection of unfair trading practices.
For those familiar with relevant capital markets rules, the proposed DPTSP measures will sound familiar – such as pre- and post-trade controls to mitigate operational errors (“fat fingers”), management of material non-public information that may be sensitive to trade or prices (“private party lists” and “blackout periods”), and properly publish prices and trades for transparency.
In terms of the statutory prohibitions against market misconduct, the MAS will mirror the existing ones set out in Part 12 of the SFA with amendments and exemptions that will apply in relation to DPTs. Provisions on civil penalties, civil remedies and related areas will be consulted on in the future.
MAS clearly recognizes the unique characteristics of the crypto market – as can be seen from the references to record keeping and information disclosure for on-chain activities.
However, he also firmly believes in the basic principle of the same activity, the same risk, the same regulatory outcome – especially for DPTSPs that provide services similar to those of traditional financial markets in terms of trading and execution – which explains the approach of adopting and adapting the rules and requirements of existing legislation.
The challenges posed by market misconduct
However, the emphasis on venue market misconduct without much consideration of on-chain risks to market integrity is likely because the latter issue is much more complex, given the global nature of crypto-asset trading and the speed of atomic settlement that complicates timely oversight . and enforcement.
Unfair trading activities in crypto markets will be more akin to cross-market, cross-venue and cross-media misconduct that is difficult to address in traditional capital markets – let alone in crypto markets that currently lack global alignment in regulations and related arrangements such as the IOSCO MMoU for regulatory enforcement regarding the capital market.
As for Singapore, many questions about the regulatory framework for monitoring and enforcing market conduct also remain unanswered. Will the self-regulatory organization model for capital markets be replicated in crypto markets? Is this possible given that DPTSPs often combine functions in one entity that are separately performed by AEs and member firms for multiple layers of defense? Do DPTSPs have adequate resources such as AEs to detect and deter market misconduct given the size of their business and volume of trading?
As the common saying goes, all good things come to those who wait. In a dynamic crypto industry, companies need to be patient as regulators – who look out for the welfare of investors – develop their thinking, given that market integrity will build investor confidence and drive mass adoption. At the same time, we hope that regulators will be tolerant of inadvertent industry missteps as firms move into the unknown and not too loose with the stick for real mistakes!
APAC Regulatory Compliance
