Digital and crypto banking regulations in Malaysia
The increasing use of technology has led to a radical change in traditional finance, and no country wants to be left behind
The banking industry of the future could not have been welcomed sooner once humanity was plagued by covid-19 and the plethora of daily restrictions that came with it. Consumers are now more dependent and demanding on digital experiences, including instant and continuous access to banking products, services and information.
At the same time, the Internet of Things has also seen several advancements, with cryptocurrency and blockchain technology leading the way. In October, the Malaysian Securities Commission (SC) announced that more than MYR 16 billion ($ 3.85 billion) in digital assets and cryptocurrencies had been traded between August 2020 and September 2021.
For some time now, the Central Bank of Malaysia, or Bank Negara Malaysia (BNM), has recognized the importance of technological innovations and the entrenchment of such innovations in the financial sector in Malaysia. In 2016, BNM introduced the financial technology (fintech) sandbox regulatory framework to enable the deployment and testing of fintech innovations and advancements in real environments, within specified parameters and timeframes.
Through this framework, BNM aimed to facilitate the growth and development of the Malaysian financial sector by encouraging innovation in financial services and the introduction of new business models, solutions and improvements in value and customer experience, as well as improvements in the efficiency and risk management of institutions.
Based on this, BNM subsequently issued a policy document on the licensing framework for digital banks, in December 2020. The introduction of digital banks in Malaysia was aimed at facilitating sustainable growth and improving the financial well-being of individuals and businesses but, most importantly, its main objective is to promote and provide financial solutions tailored to unserved and underserved segments.
Notwithstanding the importance of protecting the integrity and stability of the financial system and the interests of Malaysian depositors, the BNM has taken a balanced approach to enabling the admission of digital banks with strong value propositions. It introduced a simplified regulatory framework for licensed digital banks during the basic phase of operations (a period of up to five years from the start of operation), which a licensed digital bank must maintain. at any time a minimum capital fund amount of MYR 100 million. free of losses and be subject to the business limitation as described in the policy document. Licensed digital banks need to demonstrate their viability and sound operations so that BNM can observe the associated risks during the founding phase.
After the founding phase, the simplified regulatory framework will be abolished and licensed digital banks will be required to comply with similar laws and regulations that apply to traditional banks under the 2013 Financial Services Act; Islamic Financial Services Law, 2013; 2001 Law on Combating Money Laundering, the Financing of Terrorism and Proceeds from Illegal Activities; as well as all policy documents that have been published by the BNM, in particular on standards of prudence, sharia, business conduct and consumer protection.
As of July, 29 digital banking license applications from a wide range of applicants had been received by BNM, ranging from banks, tech companies, fintech players, state governments and retail operators. electronic. BNM plans to issue up to five licenses by 2022. While it may be premature to analyze or assess the success of digital banking in the country, one thing the authors can be sure of is that ‘With 7.8 million Malaysians turning 18 by 2023, as the former Malaysian prime minister mentioned in July 2019, an entire generation likely not going to a physical bank is ready, willing and able to adopt the use of digital banking services.
Cryptocurrency, or digital currency, became regulated in Malaysia with the enactment of the Capital Markets and Services (Securities Prescription) (Digital Currency and Digital Token) Ordinance 2019 (Ordinance 2019), where all Digital currencies and digital tokens meet the criteria stipulated in the order will be prescribed as securities for the purposes of securities law in Malaysia. However, the SC also clarified that digital currency and digital tokens are neither legal tender nor BNM regulated payment instrument.
Following Ordinance 2019, the SC also released its 2020 Digital Asset Guidelines, which came into effect on October 28, 2020, outlining the requirements for fundraising activity through fundraising activities. digital tokens, the operationalization of initial exchange platforms and the provision of services. for the safekeeping, storage, holding or custody of digital assets on behalf of another person. The 2020 guidelines provide regulatory flexibility by allowing the SC to grant exemptions varying the requirements of the guidelines upon request.
In January, the SC amended its 2015 Guidelines on Recognized Markets to introduce new requirements for electronic platforms that facilitate trading in digital assets. Based on the SC website updated on October 7, four recognized market operators are currently licensed to operate as digital asset exchanges in Malaysia.
Note that digital asset exchanges were previously subject to the Anti-Money Laundering and Counter Financing of Terrorism Guide – Digital Currencies (Sector 6), published by the BNM in February 2018. However, taking into account the changes made to the 2015 directives, Digital asset exchanges are currently subject to the Guidelines on the Prevention of Money Laundering and Terrorist Financing for Capital Market Intermediaries, published by the SC in 2014 and amended in April this year.
In addition to prescribing digital assets as securities for the purposes of securities legislation and issuing guidelines for initial coin offerings, there are other aspects that need to be considered, primarily the treatment of the coin. holding cryptocurrencies for tax purposes. The current tax system in Malaysia does not have a specific regime to deal with digital businesses.
Recognizing the need to reorganize the Malaysian tax system, the Ministry of Finance formed a Tax Reform Committee in September 2018. Among the main objectives of this committee are the reduction of the existing tax gap, the fight against tax leakage, the ‘exploration of new sources of income, the study of the taxation of the digital economy, and to examine the effectiveness of the various tax incentives provided by the laws. The government has studied the mechanism for implementing the taxation of companies in the digital economy that have recorded billions of ringgits in profits and announced that a new law will be introduced to allow online gambling to collect taxes.
Another important aspect is the legal status, especially if cryptocurrencies are treated as property. This is a fundamental legal consideration because a property can be owned and granted property rights that are enforceable against the whole world. The adoption of English common law has long been practiced by Malaysian courts under section 3 of the Civil Law Act 1956.
Therefore, it will be useful to discuss the approach taken by the English courts. Malaysian justice had, in October 2018, heard a case related to the cryptocurrency.
The court ruled that although cryptocurrency is not legal tender in the country, trading in cryptocurrency is not illegal. More importantly, the court classified cryptocurrency as a commodity because fiat currency was used to purchase cryptocurrency and there is value attached to cryptocurrencies in the same way that value is attached to cryptocurrency. actions. Still, digital asset investors should keep in mind that as of October 5, none of the digital asset exchanges operating in Malaysia were members of the Securities Industry Dispute Resolution Center (Sidrec), an organization approved by the SC for manage capital market issues. disputes between investors and its members.
A member is required to participate in Sidrec’s dispute resolution service if the dispute meets the criteria of the mandatory scheme. First, the dispute must be against a member of Sidrec, and the plaintiff is an individual investor or a sole proprietor. Second, the dispute must relate to a capital market product or service purchased or offered by a member of Sidrec. Finally, the monetary claim must not exceed MYR 250,000. Investors should also be aware that there is no consumer protection and recourse to the dispute resolution framework for cryptocurrencies, as opposed to conventional securities.
The introduction of a regulatory framework governing digital assets has received a positive response from market participants, signaling the acceptance of cryptocurrencies in Malaysia. Nonetheless, investors in general, and retail investors in particular, should exercise caution when deciding to invest in cryptocurrencies regarding their volatile nature and the complications of the remedies available to investors if their goals are not achieved.
Adnan Sundra & Low
Level 25, Menara Etiqa, n Â° 3
Jalan Bangsar Utama 1
Kuala Lumpur – 59000, Malaysia
Phone. : +603 2279 3288
Email: [email protected]