# Blockchain Law in Malaysia – Malaysian Legal Perspective

> Blockchain law in Malaysia: how the POS Order 2019 brings digital assets under SC oversight, plus ICO approval and crypto exchange registration rules.

Canonical URL: https://www.cecolaw.com/blockchain-law-in-malaysia/
Published: 2019-10-06
Updated: 2021-04-30
Author: Cecilia Lim (Associate), Ching, Elaine & Co — Advocates & Solicitors, Malaysia
Reviewed by: Lim Ching Yong (Partner)

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*Editor's note: This article was first published in October 2019 and describes the regulatory framework as at that date. The Securities Commission Malaysia has since issued the Guidelines on Digital Assets and further revised the Guidelines on Recognized Markets; readers should refer to the current guidelines for the latest position.*

## Introduction

Blockchain law in Malaysia – this article will discuss the laws affecting the use of blockchain technology in the financial sector in Malaysia.

Blockchain technology is commonly used today in cryptocurrencies. The distributed ledger and proof-of-work system behind blockchain allow remittance of cryptocurrencies across international jurisdictions without reliance on an intermediary such as a bank, at a much faster rate and cheaper fees than conventional inter-bank transfer, and without the need for the parties to divulge personal details except for their respective unique alphanumerical public keys. The multiple independent nodes in the blockchain system ensure a self-sustaining environment for the digital currencies and eliminate meddling from the government, where such meddling may sometimes lead to devaluation in currencies as documented by history.

However, beyond the blockchain ecosystem, cryptocurrencies are susceptible to certain drawbacks. As an open source technology, anyone who is savvy enough can create and deploy his or her own version of cryptocurrencies. Ever since the launch of Bitcoin by the elusive Satoshi Nakamoto, there have been numerous other cryptocurrencies launched, with aggregate market capitalisation averaging between USD 120 and 140 billion as of February 2019[[1]](#fn1). New launches of cryptocurrencies in the form of initial coin offerings (“**ICO**”) allow investors from all over the world (with internet connection, of course) to purchase newly minted currencies with either fiat or existing cryptocurrencies in the hope of appreciation in the value of such new currencies upon implementation of the underlying project and listing on a cryptocurrency exchange.

Unfortunately, more often than not, these ICO projects fail and are abandoned, together with all monies raised from the investors. The fact that the company behind these ICO projects does not have a physical presence in the country of the respective investors hinders the recovery of the money lost by the respective investors. Even if an ICO project may be promising and legitimate, investors could lose their investment when such cryptocurrencies traded on a digital cryptocurrency exchange are compromised by hackers, as seen in the case of Mt. Gox, or, in a more absurd scenario, the death of the CEO, as seen in the case of QuadrigaCX, who was purportedly the only person with access to its customers’ cryptocurrencies stored in cold storage.

Against this backdrop, it is paramount to have blockchain law in Malaysia regulate activities relating to cryptocurrencies, particularly the issuance of cryptocurrencies and the establishment of cryptocurrency exchanges, in the interest of the general investing public.

## Malaysian Regulatory Framework

The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 (“**POS Order**”), which is in force with effect from 15 January 2019, widens the scope of “securities” under the Capital Markets and Services Act 2007 (“**CMSA**”) to cover ***digital currencies*** and ***digital tokens***. This effectively means that the issuance of blockchain-based digital currencies and digital tokens which are not issued or guaranteed by any government body or central bank, and which fulfil the prescribed criteria, is subject to approval by the Securities Commission Malaysia (“**SC**”). Digital assets which display the following prescribed criteria[[2]](#fn2) will be considered as securities:

1. in the case of digital currency: when it is used as payment to purchase goods, services or other digital assets and is traded on a digital asset platform; and

2. a person who trades such currency on the platform expects to benefit from a return or appreciation in the value of the digital currency.

in the case of a digital token which is issued through an ICO, the token will fall under the definition of securities if:

1. the digital token represents a right or interest of a person in any arrangement made for the purpose of, or having the effect of, providing facilities for the person;

2. investors pay monies in exchange for the token received;

3. investors’ monies are pooled and managed by the issuer; and

4. investors who purchase the token expect a return or appreciation in value from their investment. The returns to investors may be derived from either the buying or selling of assets of the issuer or from any business activities carried out by the issuer.

In essence, in the context of the POS Order, a digital currency is issued entirely as a means of payment for goods and services which are not related to the platform running the digital currency, and such digital currency is interchangeable with any money (either fiat or other digital currencies). Interestingly, only digital currencies which are traded on a digital asset platform are caught under the definition of digital currency under the POS Order. On the other hand, a digital token provides investors with something more than a means of payment, such as access to a particular product or platform using the digital token.

The categorisation above adds to the overwhelming terminologies in cryptocurrencies such as coin, token, security token, and utility token. Nevertheless, these forms of digital assets share some resemblance in that all of them run on distributed ledger technology and invite the general public to part with their money and to participate in the cryptocurrency boom. As at the time of writing, the SC has announced[[3]](#fn3) that in view of the POS Order, no person shall conduct an ICO without the prior authorisation of the SC and the guidelines for ICOs will be issued by the end of Q1 2019. Until issuance of such guidelines for ICOs, ongoing ICOs should cease all activities and return all monies or digital assets collected from investors. Pursuant to the CMSA, any person who makes available, offers for subscription or purchase, or issues an invitation to subscribe for or purchase unlisted capital market products (which include securities and, by virtue of the POS Order, digital currency and digital token) and fails to obtain authorisation from the SC commits an offence and shall on conviction be punished with imprisonment for a term not exceeding ten (10) years and be liable to a fine not exceeding RM3,000,000.

By virtue of the POS Order, cryptocurrency exchanges would technically be classified as stock markets under the CMSA. The CMSA describes “stock market” as “a market or other place at which, or a facility by means of which offers to sell, purchases or exchanges of **securities** are regularly made or accepted”. The enactment of the POS Order therefore restricts the establishment and operation of cryptocurrency exchanges in Malaysia, as section 7 of the CMSA prohibits the operation of a stock market other than (amongst others) a stock market of a stock exchange or a ***recognized market***. Approximately 15 days after the enactment of the POS Order, the SC then revised the Guidelines on Recognized Markets to include **digital assets exchanges** (being electronic platforms which facilitate the trading of digital currency and digital token) as a recognized market. With that, any person intending to operate a cryptocurrency exchange is required to be registered with the SC as a recognized market operator and comply with the following criteria (amongst others):

1. must be locally incorporated and have a minimum paid-up capital of RM5 million;

2. where a cryptocurrency exchange operator is a public company, at least one (1) member of the board must be an independent director;

3. must have in place policies and procedures to manage conflict of interest;

4. is prohibited from providing direct or indirect financial assistance to investors, including its officers and employees, to invest or trade in digital assets on its platform;

5. ensure a high degree of security and operational reliability;

6. must have a business continuity plan which addresses events posing a significant risk of disrupting operations, including events that could cause a wide-scale or major disruption;

7. must establish an internal audit function to develop and maintain an appropriate internal audit framework which is commensurate with its operations;

8. must obtain approval from the SC prior to the trading of digital assets;

9. must have in place rules and procedures for the trading, clearing and settlement of digital assets on the platform;

10. must ensure that all disclosures are fair, clear and not misleading, including risk warning statements and qualifications to enable investors to have an accurate understanding of the associated risks;

11. must only allow investors to invest or trade in digital assets hosted on its platform using Ringgit Malaysia or any foreign currency which is recognised as legal tender, subject to Bank Negara Malaysia (“**BNM**”)’s requirements relating to international and domestic transactions;

12. must maintain accurate and up-to-date records of investors;

13. ensure investors’ monies and digital assets are properly safeguarded from conversion and inappropriate use by other persons;

14. must establish one or more trust accounts in a licensed Malaysian financial institution to store monies received from investors; and

15. must maintain a secured storage medium to store digital assets from investors.

In addition to the above, BNM has also imposed a requirement on cryptocurrency exchanges in Malaysia to register themselves as reporting institutions pursuant to the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001. BNM issued the “Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Digital Currencies (Sector 6)” policy document on 27 February 2018, which specifies further detailed requirements imposed on such reporting institutions, including an obligation to submit a declaration in respect of its business to BNM.

## Conclusion

The regulation of blockchain law in Malaysia and/or cryptocurrencies should be welcomed as it provides much certainty and protection to the general investing public. However, it remains to be seen whether the existing and future regulatory framework will spur or stifle the growth of blockchain technology in Malaysia. As blockchain technology is still in its pioneering stage and much of its application is still being discovered, regulating in advance may stifle further innovation. On the other hand, regulators must ensure that the legislative process can catch up with the rapid innovation in blockchain technology.

## Related Reading

- [Data Privacy Law in Malaysia](https://www.cecolaw.com/data-privacy-law-in-malaysia/)

- [The Law of Undue Preference in Malaysia](https://www.cecolaw.com/the-law-of-undue-preference-in-malaysia/)

- [IPO Lawyers in Malaysia](https://www.cecolaw.com/ipo-lawyers-malaysia/)

## Footnotes

1. [https://coinmarketcap.com/charts/](https://coinmarketcap.com/charts/) [↩](#fnref1)

2. Securities Commission Malaysia’s Public Consultation Paper No. 1/2019, Proposed Regulatory Framework for the Issuance of Digital Assets Through Initial Coin Offerings (ICOs). [↩](#fnref2)

3. [Securities Commission Malaysia, Media Statement on Implementation of Digital Assets Prescription Order](https://www.sc.com.my/resources/media/media-release/media-statement-on-implementation-of-digital-assets-prescription-order) [↩](#fnref3)

**Author:** [Lim Ching Yong](https://www.cecolaw.com/lim-ching-yong/)

*Disclaimer: This article is for information purposes only and is not intended to create a solicitor-client relationship.*

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This commentary is general in nature and is not legal advice.
Ching, Elaine & Co, a boutique corporate law firm in Malaysia — https://www.cecolaw.com/ · info@cecolaw.com · +60 3-7664 2141