Blockchain law in Malaysia – This article will discuss the laws affecting the use of blockchain technology in 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 jurisdiction without reliance on an intermediary such as 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/her own version of cryptocurrencies. Ever since the launch of Bitcoin by the elusive Satoshi Nakamoto, there are numerous other cryptocurrencies being launched with aggregate market capitalisation averaging between USD 120 to 140 billion as of February 2019. New launches of cryptocurrencies in the form of initial coin offering (“ICO”) allows investors from all over the world (with internet connection, of course) to purchase newly minted currencies with either fiat or existing cryptocurrencies in hope of appreciation in value of such new currencies upon implementation of the underlying project and listing on the cryptocurrencies exchange.
Unfortunately, more often than not, these ICO projects fail and abandoned, together with all monies raised from the investors. The fact that the company behind these ICO projects does not have physical presence in the country of the respective investors hinders the recovery of the money lost by the respective investors. Even if the ICO projects may be promising and legit, investors could lose their investment when such cryptocurrencies traded on digital cryptocurrencies exchange is 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 purportedly being 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 issuance of cryptocurrencies and establishment of cryptocurrencies exchange in the interest of 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 issuance of blockchain based digital currencies and digital tokens which are not issued or guaranteed by any government body or central bank, and fulfils the prescribed criteria, are subject to approval by the Securities Commission Malaysia (“SC”). Digital assets which display the following prescribed criteria will be considered as securities:-
a) in the case of digital currency–
i) when it is used as payment to purchase goods, services or other digital assets and is traded on a digital asset platform; and
ii) person who trades such currency on the platform expects to benefit from a return or appreciation in the value of the digital currency.
b) in the case of a digital token, which is issued through an ICO, the token will fall under the definition of securities if–
i) 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;
ii) investors pay monies in exchange for the token received;
ii) investors’ monies are pooled and managed by the issuer; and
iii) 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 digital asset platform are caught under the definition of digital currency under the POS Order. On the other hand, digital token provide 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 form of digital assets shared some resemblances in that all of them runs on distributed ledger technology and invites the general public to part with their money and to participate in the cryptocurrencies boom. As at the time of writing, the SC has announced 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 make available, offer for subscription or purchase, or issue an invitation to subscribe for or purchase unlisted capital market products (which includes securities and by virtue of the POS Order includes digital currency and digital token) and fails to obtain authorization 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, cryptocurrencies 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 cryptocurrencies exchange in Malaysia as section 7 of the CMSA prohibits the operation of a stock markets other than (amongst other) a stock market of a stock exchange or a recognized market. Approximately 15 days later after the enactment of the POS Order, the SC then revised the Guidelines on Recognized Markets to include digital assets exchanges (being electronic platform which facilitate the trading of digital currency and digital token) as a recognized market. With that, any person intending to operate cryptocurrencies exchange is required to be registered with the SC as a recognized market operator and comply with the following criteria (amongst other):-
- must be locally incorporated and have a minimum paid-up capital of RM5 million;
- where a cryptocurrencies exchange operator is a public company, at least one (1) member of the board must be an independent director;
- must have in place policies and procedures to manage conflict of interest;
- 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;
- ensure a high degree of security and operational reliability;
- 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;
- must establish an internal audit with function to develop and maintain an appropriate internal audit framework which commensurate with its operations;
- must obtain approval from the SC prior to the trading of digital assets;
- must have in place rules and procedures for the trading, clearing and settlement of digital assets on the platform;
- 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;
- 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;
- must maintain an accurate and up to date records of investors;
- ensure investors monies and digital assets are properly safeguarded from conversion and inappropriate use by other person;
- establishing one or more trust accounts in a licensed Malaysian financial institution to store monies received from investors; and
- maintaining a secured storage medium to store digital assets from investors.
In addition to the above blockchain law in Malaysia, BNM has also imposes requirement on cryptocurrency exchanges in Malaysia to register itself as a reporting institution pursuant to the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001. BNM has 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 which includes an obligation to submit a declaration in respect of its business to BNM.
CONCLUSION – BLOCKCHAIN LAW IN MALAYSIA
The regulation of the blockchain law in Malaysia and/or cryptocurrencies should be welcomed as it provides much certainty and protection to 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 the 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 hand, regulators must ensure that the legislative process can catch up with the rapid innovation in blockchain technology.
 Securities Commission Malaysia’s Public Consultation Paper No. 1/2019 Proposed Regulatory Framework For The Issuance Of Digital Assets Through Initial Coin Offerings (ICOs)
Author: Lim Ching Yong
Disclaimer : This article is for information purpose only and is intended to create solicitor-client relationship.