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Advocates & Solicitors
The Regulatory Framework on Blockchain / Cryptocurrency / Digital Assets Fundraising (ICO/IEO/STO) / Cryptocurrency Exchange in Malaysia
(A) Digital Assets Fundrising
In Malaysia, the Malaysian securities regulatory framework is governed by the Securities Commission Malaysia under the Capital Market Services Act 2007 and other ancillary regulations and guidelines.
On 15 January 2019, Malaysia has officially laid out its regulatory framework on crypto-currency through Capital Markets and Services (prescription of Securities) (Digital Currency and Digital Token) Order 2019 (“ Prescription Order”),
Pursuant to the Prescription Order, crypto-currency is officially known as digital asset, consisting of digital currency and digital token. Malaysia, like most of the countries in the world, is of the view that digital assets would only be regulated by the Securities Commission Malaysia if such assets are prescribed as securities under its securities laws.
Securities Commission Malaysia, had on 15 January 2020, issued Guidelines On Digital Assets (“Guidelines”) to govern fundraising through digital tokens in Malaysia.
Pursuant to the Guidelines, digital token offerings could only be carried out through an Initial Exchange Offering (“IEO”) platform operator that is registered with the Securities Commission Malaysia. IEOs are basically very similar to Initial Coins Offering except that IEO is done through crypto exchange instead of token issuers themselves. Requirements of the Guidelines are summarised as follows:-
Eligibility of issuer
- Locally incorporated exempt private company (does not include LLPs)
- No direct issuance by public listed companies – issuance can be effected through a new subsidiary or SPV
Capital requirement of the issuer
- Minimum paid up capital: RM500,000
Approval criteria
- Digital token offering may only be carried out through an electronic platform operated by an IEO operator
- Offering will be assessed and approved by the IEO operator (*Securities Comission retain power to revoke approval granted)
- The issuer must demonstrate that it has an innovative solution or a meaningful digital value proposition for Malaysia
- Digital tokens that serve as a payment instrument may only be used in exchange for the issuer’s goods and services as prescribed in the registered whitepaper
- Has sufficient safeguards in place to protect the interests of existing shareholders and the token holders
Fundraising limit and disbursement
- Calculated as a multiple of 20 times the shareholders funds and subject to a ceiling of RM100Million
- All or nothing approach — Issuer can prescribe a soft and hard cap but needs to hit minimum target
- Retail investors limited to RM2,000 per offering, and RM20,000 total per year; angel investors up to RM500,000 total per year; no limit for sophisticated investors
- Issuer needs to specify a milestone-based disbursement schedule
Governance requirement
- Board and Senior Management must be fit and proper and submit a declaration to the IEO operator
- Board of Director requirements — at least 2 directors to have principal or only place of residence within Malaysia
- Board and Senior Management must in aggregate own minimum 50% equity in issuer on the issuance date
- Board and Senior Management may only transfer less than 50% of initial equity holding until completion of the project
Whitepaper
- Offering must be accompanied by a Whitepaper that has been assessed by the IEO operator
- Whitepaper will also be furnished to the SC
Must contain minimum information as prescribed by SC, including material information on the issuer, the digital token and the utilisation of funds obtained through the issuer’s fund-raising exercise
However, the Guidelines will only be brought into force in the second half of 2020. Securities Commission Malaysia has warned that until the coming into force of the Guidelines, no person is permitted to offer or issue any digital tokens in Malaysia.
Alternative Approach : Digital Assets Fundraising in, from or through Labuan – Credit Token License
Labuan Financial Services and Securities Act 2010 allows credit token license holder to issue tokens that satisfy the requirements of the Act. Lately, license has been granted by Labuan Financial Services Authority to companies that issue utility tokens or asset backed tokens. However, the issuer shall only carry on the said activities in, from or through Labuan. The license will not permit a licensed entity to carry on any regulated activities under the Capital Markets and Services Act 2007, where such regulated activities are carried on in Malaysia other than Labuan.
(B) Cryptocurrency Exchange
On 31 January 2019, Securities Commission Malaysia issued the revised Guidelines on Recognised Markets to regulate the registration of crypto-currency / digital asset exchange operator (“DAX Operator”). Moving forward, any party that operates a crypto-currency / digital asset exchange in Malaysia must be registered as a Recognised Market Operator under section 34 of the Capital Markets and Services Act 2007.
Requirements for registration as a DAX Operator are summarised as follows:-
Eligibility of DAX Operator
Locally incorporated company
Capital requirement of the DAX Operator
- Minimum paid up capital: RM5,000,000
Criteria for registration
- It is able to operate an orderly, fair and transparent market in relation to the securities or derivatives that are traded through its platform;
- it and its directors, chief executive, controller and certain senior management staff are fit and proper persons taking into account the factors set out in paragraph 3.01(f) of the Guidelines;
- its business model has a clear or unique value proposition or will contribute to the overall development of the Malaysian capital market.
- the rules of the market it seeks to operate make satisfactory provision to: (i) protect investors and public interest; (ii) promote fairness and transparency; (iii) manage conflicts of interest; (iv) promote fair treatment of its users; (v) ensure proper regulation and supervision of its users or any person using and accessing its platform (including taking appropriate action against a person who breaches its rules).
- must have appropriate security arrangements, including maintaining a secured environment pursuant to the Guidelines on Management of Cyber Risk and other relevant guidelines.
Governance requirement
- Board of Director requirements for a public company — at least one member of the board must be an independent director.
Alternative Approach:
(i) Cryptocurrency Exchange in Labuan
Section 34 of Labuan Financial Services and Securities Act 2010 provides that the Labuan Financial Services Authority “may approve a Labuan company to be an exchange in Labuan upon such terms as it deems fit”. The criteria for applying for the license under the Act mirrors the criteria under the Guidelines on Recognised Markets. However, the Labuan licensed exchange operator shall only carry on the said activities in, from or through Labuan. The license will not permit a licensed entity to carry on any regulated activities under the Capital Markets and Services Act 2007, where such regulated activities are carried on in Malaysia other than Labuan.
(ii) Cryptocurrency Broker License in Labuan
Sections 90 & 92 of Labuan Financial Services and Securities Act 2010 or Sections 65 & 67 of Labuan Islamic Financial Services and Securities Act 2010 allow the license holder to carry on money broking business in Labuan. The money broking business is intended to serve the institutional investors and high-net worth individuals. The business has recently been extended to include cryptocurrency.
Eligibility of Applicant
- Labuan incorporated company
Must maintain an operational office in Labuan
Capital requirement of the applicant
- Minimum paid up capital: RM500,000
Criteria for application
- the persons in control, directors and principal officer meet the fit and proper person requirements as specified in the Guidelines on Fit and Proper Requirements issued by Labuan Financial Services Authority.
- establish an adequate set of internal policies and controls for its operations, compliances, corporate governance and risk management.
it should engage with principal broker and liquidity provider that are regulated by a recognised supervisory or regulatory authority.
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