Strangling the Baby? Malaysia’s Blockchain Legislation
Yesterday (14 January), the Malaysian government announced that the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 would come into force today (15 January). The whirlwind announcement was preceded only by a statement a month ago by the Securities Commission that “the SC will regulate issuances of digital assets via initial coin offerings (ICO) and the trading of digital assets at digital asset exchanges in Malaysia”.
Blanket regulation
So…are we under this regulation? By those definitions…isn’t everybody? Utility tokens, asset tokens, whatever tokens…we’re all in this?”
-A protocol coin
With a very broad definition, it seems that the new laws will regulate all tokens as securities. This is in contrast to comparable legislation in Switzerland (which has 3 categories of tokens, of which only one is regulated as securities) or Singapore (which has a 2 step process where they determine first if the token is a capital market product).
The 3 categories of tokens (according to financial authorities in Switzerland):
Payment: For ICOs where the token is intended to function as a means of payment and can already be transferred, FINMA will require compliance with anti-money laundering regulations. FINMA will not, however, treat such tokens as securities.
Utility: These tokens do not qualify as securities only if their sole purpose is to confer digital access rights to an application or service and if the utility token can already be used in this way at the point of issue. If a utility token functions solely or partially as an investment in economic terms, FINMA will treat such tokens as securities (i.e. in the same way as asset tokens).
Asset: FINMA regards asset tokens as securities, which means that there are securities law requirements for trading in such tokens, as well as civil law requirements under the Swiss Code of Obligations (e.g. prospectus requirements).
Exchanges halt operations
“Please withdraw your fiat and crypto by 11pm tonight. We will halt all Malaysia operations for now.”
-A cryptoexchange at 6pm the same day
With no clear path to compliance and the threat of a 10 year jail sentence/ MYR10 million fine, exchange operators erred on the side of caution and suspended operations. Many of them found out about the announcement at 6pm, with only a few hours to process withdrawals.
Confusion over route to compliance
“We are more than willing to comply. But to given such short notice, a threat of punishment, but with no clear process to gain approval…”
-A blockchain project working on storage solutions
The SC has announced it will have the relevant regulatory framework in place by the end of Q1 2019. In the meantime however, it leaves blockchain operators in limbo. If they continue operating while regulations are being put in place, will they be liable?
Moving forward
Malaysia should look to comparable legislation in blockchain-friendly countries such as Gibraltar, Estonia, Malta, and Dubai. In the SEA region, the Cagayan Economic Zone Authority (CEZA) is creating a blockchain economic zone in the Northern Philippines. These legislations make clear distinctions between different kinds of blockchain projects and work hard to facilitate their entry; they know full well the potential job opportunities and tax revenue that can be generated through these engagements.
We live in a mobile world. When Binance (one of the top cryptocurrency exchanges) was unhappy with Hong Kong’s conservative legislation, they packed their bags and relocated to Malta. Similarly, the Malaysian founder-led blockchain ProximaX conducted their ICO in Gibraltar due to a lack of regulatory clarity in Malaysia.
I am holding my breath to see what the final regulatory framework be — but the panic and confusion that has ensued from this whirldwind announcement doesn’t make me very hopeful.
If Malaysia doesn’t take the opportunity to listen to industry players, nurture the ecosystem with care and sensitivity, it will lose an opportunity to be a global player.
Are you affected by the new legislation? Do you have an opinion? I am gathering industry comments from Malaysia and worldwide that will inform our response to the SC. Please reach out to me if you have comments!
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*Note this does not constitute investment advice of any kind. The opinions and views expressed in the DLT are of my own and not representative of any organisation.
