The rapid evolution of FinTech is forcing regulators to keep up with developments so that they and their constituents – corporate and retail customers – do not get left behind or suffer the consequences of a lack of various oversights in consumer protection.
In the area of digital assets, tokens and exchanges, The Securities Commission Malaysia (SC), the capital market regulator, is way ahead in its regulatory response, architecture and processes. The SC’s latest initiative in July 2020 is seeking industry feedback on the regulatory framework for digital asset wallet providers, which will complement the existing frameworks for Digital Asset Exchange (DAX) and Initial Exchange Offering (IEO).
Digital asset wallet providers, according to the SC’s definition, are persons who provide custody or storage services on behalf of digital asset owners. Such providers play an important role within the ecosystem in safeguarding the digital assets of the client.
In this regard, existing digital asset wallet providers or any interested parties are henceforth required to contact the SC for an engagement on their current business operations, and/or to provide any feedback on the framework for digital asset wallet providers. Once finalised, the regulatory framework for digital asset wallet providers will be included as part of the Guidelines on Digital Assets (Guidelines), launched in January this year that outline the framework for fundraising through digital token offering in Malaysia.
An Initial Coin Offering, says the SC, allows a company with an innovative business proposal to raise capital before it is able to do so through venture capitalists or lenders. It also allows the company to raise funds without selling their equity or taking out a debt while developing their innovative ideas.
“Digital tokens offering can provide another alternative fundraising avenue for early stage entrepreneurs. This initiative supports Malaysia’s Shared Prosperity Vision 2030 (SPV2030) by supporting the growth of SMEs and micro businesses which are targeted to contribute 50% to Malaysia’s GDP. It also aligned with SPV2030’s aspiration to create 30% high technology Malaysian companies,” said Datuk Syed Zaid Albar, Chairman of the SC.
The Guidelines set out the requirements for all offerings of digital tokens to be carried out through an initial exchange offering (IEO) platform operator that is registered with the SC. In this regard, the IEO platform operator would be required to carry out the necessary assessment and due diligence to, among others, verify the business of the issuer and the fit and properness of the issuer’s board, as well as understand the features of the digital tokens.
Prospective issuers, stressed the SC, must also satisfy governance and capital requirements in order to be eligible to raise funds through an offering of digital tokens. Issuers are required to demonstrate that their proposed project or business provides an innovative solution or a meaningful digital value proposition for Malaysia.
An issuer may raise funds up to a ceiling of RM100 million and tap on investments from retail, sophisticated as well as angel investors, subject to the investment limits provided in the Guidelines. The Guidelines are set to come into force in the second half of 2020 to allow potential issuers, platform operators and investors to familiarise themselves with the requirements. Until then no person is permitted to offer or issue any digital tokens in Malaysia.
This latest initiative coincides with the landmark resolution in July 2020 of the SC’s new Shariah Advisory Council (SAC) that trading of digital assets is permissible. “The SC Shariah Advisory Council,” confirmed Datuk Albar, “has resolved that in principle, it is permissible to invest and trade in digital currencies and tokens on registered digital asset exchanges. This is a really ground-breaking resolution by the SAC that could spur greater development and investment in digital assets. Once the resolution is finalised, we will issue further detail.”
The new nine-member SAC, set up under Section 31ZK of the Securities Commission Malaysia Act 1993 (SCA) and chaired by prominent Scholar Dr. Mohd Daud Bakar, Executive Chairman of Amanie Group, and including two new members in Prof. Dato’ Dr. Mohd Azmi Omar, President and CEO, INCEIF, and Dr. Zaharuddin Abdul Rahman, CEO, Elzar Shariah Solutions and Advisory, is the apex central authority responsible for determining the application of Shariah principles in Malaysia’s Islamic Capital Market (ICM). The new SAC will serve a three-year term starting 1 July 2020.
To date, the SC has allowed three digital asset exchanges to operate in the country, namely Luno, Sinegy, and Tokenize. According to reports, the Commission has also approved at least four digital assets in the country up until July 2020.
At the same time, in July also, the SC cautioned the public against the usage of Crypto Automatic Teller Machines (Crypto ATMs). According to the regulator, Crypto ATM is a machine that allows individuals to buy and/or sell digital assets via cash, debit/credit cards or e-wallets. These machines are installed in various locations in Malaysia, facilitating the exchange of different types of digital assets with fiat currency and vice versa.
“The SC wishes to alert the public that entities operating Crypto ATMs are considered to be operating a Digital Asset Exchange (DAX) which require registration with the SC. In this regard, the SC has not authorised any entity to operate Crypto ATMs. As such, we wish to caution and remind members of the public not to deal with unlicensed or unauthorised entities or individuals. Those who do so are not protected under the Malaysian securities laws and are exposed to various risks, including fraud and money laundering,” said the SC in a statement.
The SC also warned all unauthorised Crypto ATM operators in Malaysia to immediately cease their activities. Operating a DAX without authorisation from the SC is an offence under Malaysian securities laws. Anyone convicted may be liable to a fine not exceeding RM10 million or imprisonment up to ten years or both.
Members of the public may verify if a digital asset operator is registered with the SC at https://www.sc.com.my/development/digital/digitalassets. Additionally, investors are encouraged to alert the Commission if they come across any suspicious activities or websites, and if they receive any unsolicited phone calls or e-mails offering investment advice and opportunities, especially those that offer high returns with seemingly little or no risks.