Malaysia uses sledgehammer to crack crypto nut

On January 14, Malaysia’s finance minister announced that from January 15th digital currencies and tokens in Malaysia will be categorized and regulated as securities and all businesses dealing in cryptocurrencies will need to adhere to the country’s regulatory framework for digital assets.

In the statement, finance minister Lim Guan Eng announced the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 and said the offering and trading of digital assets, which includes both digital currencies and tokens, will require authorization from the Securities Commission of Malaysia and will need to comply with all local securities laws.

The finance ministry has also stated that harsh penalties will be enforced against those who do not comply with the regulations. "Anyone offering an ICO or operating a digital asset exchange without the SC’s approval may be punished, on conviction, with imprisonment up to ten years and fine up to RM10 million," the ministry said.

Malaysian digital currency exchange, XBit Asia, halted its services immediately as a result of the new cryptocurrency regulations and Bitcoin ATMs in Malaysia have ceased operations.

Malaysian approach in contrast to international norms

The move by the Malaysian finance ministry to categorize all cryptographic assets – including digital currencies like bitcoin, and utility tokens – as financial securities, deviates markedly from how the majority of countries are tackling cryptocurrency regulation.

Most regulators are leaning towards only categorizing ICO tokens as securities while classifying digital currencies such as bitcoin as either commodities or property.

In the US, for example, bitcoin and ether are not classified as securities while digital tokens launched during an ICO that do not pass the Howey Test are considered financial securities and are, thus, required to comply to US securities laws.

Japan and Germany, have gone as far as to make bitcoin a legally accepted payment method and are also only looking to regulate specific types of token offerings as securities.

While Malaysia has not been able to establish itself as a blockchain powerhouse in Asia the same way that South Korea and Japan have, it is still home to several leading blockchain projects and a thriving tech startup scene.

The most notable Malaysia blockchain venture is the Kuala Lumpur-based NEM Foundation, which has set up South East Asia’s largest blockchain center in Malaysia’s capital. Other local blockchain startups include Etherscan, HelloGold, and LuxTag.

For blockchain startups that are looking to raise funds through ICOs, the regulations will mean a pile of new paperwork to fill out and new rules to adhere to. For exchanges, the regulations mean tighter KYC/AML procedures and more interactions with the regulators.

It is difficult to be too specific, however, as to what the potential impact of the move will be, as the Malaysian government has not provided the details of any new crypto specific legislation. It is understood the Malaysian Securities Commission (SC) is working on formulating a detailed regulatory framework that will provide guidelines for the offering and trading of digital assets — but the framework is not expected to be released until the end of the first quarter of 2019.

With uncertainty surrounding how existing businesses would be treated post January 15th, organizations like XBit Asia have opted to freeze user funds and halt operations until further notice. Regarding the threat of fines and imprisonment, the company says "we are currently unclear on the operational process and we are taking proactive measures to stop all trading/withdrawal and deposit process till further notice. Once we get some clarity on the announcement made, we will operate and resume the business as usual."

*XBit Asia tells its customers not to request withdrawals or deposits *

Industry observers say any new regulations will likely only impact fintech blockchain companies with a tokenized business model, and exchanges dealing in digital assets. Pure-play blockchain startups that do not use tokens should not be affected.

Curiously, in the same announcement, the Malaysian government seemed to be trying to have its cake and eat it too with regards to the positive evolution of blockchain in the country. "The Ministry of Finance (MOF) views digital assets, as well as its underlying blockchain technologies, as having the potential to bring about innovation in both old and new industries. In particular, we believe digital assets have a role to play as an alternative fundraising avenue for entrepreneurs and new businesses, and an alternative asset class for investors," the statement read.

The positive interpretation that the regulations might help drive investment in digital assets, as they would now be perceived as a ‘legitimate’ asset class, is a stretch — especially as it relates to Malaysians themselves. A recent Malaysian central bank report found that Malaysians prefer to invest in bank deposits instead of financial securities such as stocks and bonds. Thus, regulating digital assets will probably not drive more investors towards cryptocurrencies even though the new framework will likely result in a safer trading environment for digital assets.