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Published on: 1 June 2018

Cryptocurrencies and ICOs... 

BACKGROUND The emergence of cryptocurrencies and Initial Coin Offerings (ICO) has generated hypes and craze worldwide. Domestically, the Central Bank of Malaysia, also known as Bank Negara Malaysia (BNM) reported that the cryptocurrency transactions on four digital currencies exchanges is worth an average of MYR75 million each month in Malaysia.
 
CopyCash Foundation, a Singapore-based blockchain[1] startup has attempted to launch an ICO in January 2018. The launch had resulted in a heated discussion on the legitimacy of ICO when the Securities Commission Malaysia (SC) issued a Cease and Desist Order to the startup that put a halt to the launch. In light of the recent developments, one might be concerned about the legality of such instrument and arrangement in Malaysia.
 
CRYPTOCURRENCIES Cryptocurrencies, commonly referred to as digital currency, in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operates independently of a central bank. In Malaysia, digital currency is legally defined as a digital representation of value that functions as a medium of exchange and is interchangeable with any money, including through the crediting or debiting of an account, but does not include electronic money issued by an approved issuer of electronic money under the Financial Services Act 2013 and the Islamic Financial Services Act 2013[2].
 
In 2014, BNM issued a statement declaring that cryptocurrencies are not recognised as legal tender in Malaysia. However, the trading of cryptocurrencies is not banned in Malaysia. In order to promote greater transparency in the use of cryptocurrencies and to prevent the use of cryptocurrencies for money laundering or terrorism financing, digital currency exchanges will be subject to obligations under the Anti-Money Laundering,Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) as a reporting institution pursuant to the First Schedule of AMLA.
 
“Basically, we are going to make the promoter of the cryptocurrency, which include bitcoin, ethereum and ripple, to be more transparent, the methodology transparent and the people behind it transparent too. Hopefully, by doing this, the people can make their decision on whether to invest in cryptocurrency.” - Tan Sri Muhammad Ibrahim, former Governor of the Central Bank of Malaysia.
 
A reporting institution under AMLA[3] is defined as any person who provides any or a combination of the following services: (i) exchanging digital currency for money; (ii) exchanging money for digital currency; or (iii) exchanging one digital currency for another digital currency, regardless of whether in the course of carrying on a digital currency exchange business, or otherwise. It is irrelevant that the person is not domiciled in Malaysia when providing the aforesaid services[4].
 
The minimum requirements and standards to be observed by reporting institutions under AMLA have been set out in the policy document[5] (“the Document”), which came into effect on 27 February 2018. The stipulated obligations of a reporting institution under the Document, among others, is to take appropriate steps to assess their money laundering or terrorist financing risks (“Risks”), have policies to manage and mitigate the identified Risks, to conduct risk profiling on their customers, perform customer due diligence, identify and assess Risks that arise in the development of new digital currencies, products, services and business practices.
 
INITIAL COIN OFFERINGS According to BNM, ICO is “the offering of digital token in exchange for digital currency or any form of payment and incidental activities thereof”. ICO is also known as initial token offerings, token pre-sale, and token crowd-sale. SC observed that ICO may be structured in various forms, which include direct investments in projects which enable the investors to have a share of the returns from the projects, seeking funding through foundations where the investors are not entitled to any returns on their investment, and issuance of tokens which allow the investors to enjoy rights to a future product or service.
 
ICO has attracted the interest of venture capital companies. This is because ICO is a cost effective and faster option to raise funds, as it does not have to fulfill stringent regulatory processes. Similar to an Initial Public Offering (IPO), an ICO is a fundraising platform for companies, but using blockchain technology. In an ICO, a whitepaper, the equivalent of prospectus in an IPO which provides details on the purpose of the raised funds, will be issued. The difference between an IPO and an ICO is that companies issue cryptocurrencies in an ICO, instead of shares in an IPO, at a specified value to the investors. Further, investors in an ICO will not have an equity interest, unlike in an IPO. Thus, an ICO investor will not have any legal claim on the companies’ assets in the event of liquidation.
 
In Malaysia, SC and BNM in a joint statement issued in January 2018, has cautioned that the launching of ICOs, without proper authorisation, is an offence in Malaysia. This is because such an act involves regulated activities that fall within the purview of laws administered by SC and the Bank. Although a comprehensive and clear regulation framework for ICO in Malaysia is yet to be issued by SC and BNM, the SC and BNM established a Brokerage Industry Digitisation Group (BRIDGe) to accelerate and review digitisation of the stockbroking industry.
 
CONCLUSION The regulation of cryptocurrencies and ICO in Malaysia is in its infancy. As the regulation of ICO is lacking, investors are reminded to be prudent with the associated risks of ICOs, especially since some of the ICO structures might limit the legal recourse available to the investors. ICO operators are advised to seek legal consultation as no person is allowed to carry out regulated activities such as, fund raising, fund management, and other dealings in capital market products without first obtaining SC’s approval.

For further insight in this area of law, please contact our Partners:
Loh Mei Mei 
Kung Suan Im
Ashela Ramaya
Chan Kwan Hoe
Celine Rangithan
 
[1] A system in which a record of transactions made in bitcoin or another cryptocurrency are maintained across several computers that are linked in a peer-to-peer network.
[2] Paragraph 6 of the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Digital Currencies (Sector 6)
[3] Paragraph 25(1) of the First Schedule to Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001
[4] Paragraph 4.2 of Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Digital Currencies (Sector 6)
[5] Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Digital Currencies (Sector 6)

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