Malaysia’s Securities Commission recently published new regulations on cryptocurrency exchanges and initial coin offerings. The Securities Commission will be the regulator in charge of digital asset exchanges and sale of digital assets.
Malaysia’s regulations previously did not specifically address cryptoccurencies. Instead, in the absence of specific laws, existing laws were applied by the regulators.
The Malaysian regulator in charge of securities is the Securities Commission. But, due to the way Malaysia’s regulations are drafted, the Central Bank (Bank Negara Malaysia) has also stepped in where cryptocurrencies are concerned.
This is because, the central bank regulates money, and the monetary supply. Whereas, the Securities Commission regulates the issuance of securities, and derivatives.
The overlap in Malaysia’s Regulations
There is obviously an overlap, due to the nature of cryptocurrencies, which were not specifically regulated by Malaysia’s regulations in the past.
As an example of the overlap, Bank Negara Malaysia has previously:
- Issued statement that Bitcoin is not legal tender (2014)
- Raided a company suspected of illegal deposit taking (2017)
- Issued another statement that digital assets are not legal tender (2018)
Whereas, Securities Commission has previously:
- Ordered Copycash ICO to cease its activities (2018)
- Ordered LaVida ICO to cease its promotional activities (2018)
The overlap comes from the nature of cryptocurrencies, which can be:
- a system of payment (send/receive money through crypto);
- the means of payment in itself (as a currency);
- a representation of something (or a derivative);
- a promissory note for something else (as a security).
A cryptocurrency is nothing more than a token created on a blockchain, but it’s the rights attached to the token that determine its characteristics.
But now, that’s changing. The government will regulate using legislation specific to digital assets.
Generalia Specialibus Non Derogant
There is a Latin maxim of law, “Generalia Specialibus Non Derogant“. It means that when you have a general law, and you have a specific law, the specific law takes precedence.
This means that in future, companies in blockchain can rely on laws specific to blockchain.
In future, companies in crypto can rely on laws specific to crypto.
In future, companies running crypto exchanges can rely on laws specific to crypto exchanges.
They don’t have to be afraid of legacy laws, which “may or may not apply”, but they are always urged by lawyers to err on the side of caution.
Malaysia’s regulations on cryptocurrency, and digital assets, have gotten specific provisions.
And that’s a good thing.
(On a side note, legacy laws will apply to some extent: When there is lacunae in the new law.)
Need for a Licence
The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 took effect on 15 January 2019. Under this law, any person operating an unauthorised ICO or digital asset exchanges can be punished with a 10-year jail term and/or a fine of up to RM10 million.
This doesn’t mean that Malaysia’s regulations ban ICOs and digital asset exchanges. Instead, it merely means that a licence is required.
At this point, the licensing requirements for digital asset exchanges (aka crypto exchanges) have been published. The licensing requirements for sale of digital assets are expected to be published in March 2019.
Initial Coin Offerings (ICOs)
The licensing requirements for ICOs will be published in March 2019. In the meantime, the Securities Commission has ordered all ICOs to cease their activities in Malaysia, and return all money or digital assets collected from investors.
But where does it leave previous ICOs from Malaysia? There are some companies which have carried out ICOs, such as Ecobit, HelloGold, and Hada DBank. (Disclosure: I was the legal advisor for Hada DBank during their ICO.)
Those who carried out ICOs previously, may be considered “safe” if they had not violated any laws previously. Laws which create new offences, do not apply retrospectively in Malaysia.
Article 7(1) of the Malaysian Federal Constitution states: ” No person shall be punished for an act or omission which was not punishable by law when it was done or made…”
So, those who have completed their ICOs are safe. (Provided, they complied with the law then.)
But, for those who are in the middle of their ICOs, they are caught in the interim law, which prohibits token sales.
But it’s not the end.
They can stop for now, and apply for permission to carry out their token sale when the licensing guidelines have been issued.
Digital Asset Exchanges (DAX)
On 31 January 2019, the Securities Commission published its guidelines for digital asset exchanges. It updated the guidelines on recognised market operators (RMO).
An RMO must be a “body corporate”. In other words, it needs to be a company, not an individual.
If you are keen to read the RMO guidelines, some of the requirements are:
- Having a paid up capital of RM5 million; (RM is how Malaysians describe the Ringgit. RM means MYR, not RMB)
- The applicant, its directors, and executives, must be suitably qualified to run an RMO;
- There must be appropriate security measures to address cyber security;
- There must be an independent director;
- There must be a framework to handle conflicts of interest;
- Digital assets on the DAX must first be approved by the Securities Commission;
- There must be continuous surveillance of the activities on the DAX;
- There must be adequate measures to protect clients’ assets.
There are some things that DAXs cannot do:
- Provide financial assistance to investors;
- Allow digital assets to be traded before the digital asset is approved by the SC.
But there are some things that DAXs can do.
- They can allow market making activities, with the permission of the SC;
- They can charge a fee or a levy for transactions.
For many ICO projects that have raised a lot of money, setting up a DAX may be an attractive diversification.
It can also be a platform for an ICO project to allow trading of its tokens.
Running your own DAX gives you certain advantages:
- No need to pay expensive listing fees to crypto exchanges;
- More transparency and control over market making and liquidity activity;
- Reducing transaction fees for your own tokens;
- Earning listing fees by allowing other tokens to be listed on your exchange.
But beware, because sometimes, crypto exchanges might be subjected to manipulation.
Low liquidity can lead to high volatility.
Some people may play pump and dump games.
That’s why, the Malaysian Securities Commission also requires “market integrity” measures:
- Arrangements to deter manipulative activities;
- Arrangements to manage excessive volatility, such as circuit breakers, price limits and trading halts;
- Arrangements to manage error trades;
- Arrangements to manage systems error, failure, or malfunction;
- Arrangements to manage investors assets in the event of outages, or suspension, of the platform.
We recently wrote about how USD160 million in investors’ money was locked up in Canadian exchange, QuadrigaCX, after its founder died.
Securing crypto assets is good, but not to the extent that its investors are deprived of their assets.
The QuadrigaCX matter shows how a crypto exchange (or DAX) needs to have backup measures to recover digital assets.
Without those measures, it’s possible to argue that QuadrigaCX has been negligent in discharging its duties to its clients.
Thanks for reading. We hope to update this article when the digital asset sale guidelines have been announced.
This article was prepared to provide general information only. It is not intended to serve as legal advice. Please check with a lawyer before acting on any information contained in this article. In case you need a consultation, you may contact us.