Islamic Finance

Malaysian start-ups welcome planned ICO, crypto exchange framework as they seek clarity on fintech rules

FILE PHOTO for illustrative purposes only: The screen of Southern California's first two bitcoin-to-cash ATMs on its first day of operation, is seen in Locali Conscious Convenience store in Venice, Los Angeles, California, June 21, 2014. REUTERS/Lucy Nicholson/File Photo

The first budget presented by Malaysia’s new government earlier this month was generally a low-key affair, but a detailed reading of the points made by the finance minister will give some cheer to the country’s financial technology start-ups.

Finance minister Lim Guan Eng announced that the Capital Markets and Services (Prescription of Securities) guidelines would be gazetted in early 2019 to set up a new regulatory framework to approve and monitor digital coin and token exchanges in Malaysia.

When the new rules are gazetted, regulators will be going some way to bring cryptocurrency out of the shadows and into the mainstream. However, so far there is very little information on what these guidelines will contain.

“It’s incredible that the minister has come up with that statement, but the devil is in the detail. It's a first step and great as far as it goes,” Robin Lee, who is chief executive of Kuala Lumpur-based Shariah-certified gold trading platform HelloGold, told Salaam Gateway.

The Securities Commission (SC), which regulates Malaysia’s capital markets, has confirmed it has been charged with overseeing this process.

In a statement it said it “will put in place a regulatory framework to regulate digital asset exchanges and initial coin offerings (ICOs) to facilitate a fair and orderly development of this nascent market.”


Islamic fintech: Malaysia wins in Islamic finance but its tech start-up ecosystem still a work in progress

So far, the only framework addressing cryptocurrencies centres on anti-money laundering (AML) and preventing the financing of terrorism, based on a policy paper released in February.

Bank Negara Malaysia, the central bank, emphasised at the time this referred to the use of currency—which it stressed, in the case of cryptocurrency, was not legal tender—and did not refer to ICOs.

Its policy prevents reporting organisations such as crypto exchanges to portray themselves as licensed entities under the central bank, though they still have an obligation to report to the regulator. And under the cryptocurrency regulations, they must conduct adequate risk assessments on their customers.

“Bank Negara says, if you have a crypto exchange, we want to regulate you so you have to report to me in terms of KYC (know your customer) and AML, but your coin is still not legal tender,” Effendy Zulkifly, a serial cryptocurrency entrepreneur, lamented to Salaam Gateway.

“It’s like paying tax to a government and then not being given an official identity card,” he added.

Zulkifly, who is an advisory board member of PayHalal, which claims to be Malaysia’s first Islamic payment gateway, has complained to the SC that it is unusual for a government to monitor a fintech business but not acknowledge its coins.

“I said, if you don’t recognise this kind of crypto offering, you cannot offer solutions. It’s not covered legally, like it is in, say, Japan, and that’s a real problem. So crypto is still a grey area now in Malaysia.”

While he is positive about the finance minister’s announcement, he wonders whether there will be enough detail in the putative guidelines to make much difference.

Whereas elected officials may appear to be in a hurry to get digital segments moving, institutions of state including the civil service are less enthused and have the real power to dictate the pace and the breadth of change, said Zulkifly.

“As far as fintech is seen now by the state, blockchain is good, crypto is bad, with scam issues and volatility that cannot be regulated. Institutions see crypto as disruptive to the commercial base of banks, which bring in a lot of money, so how can you expect ICOs to be accepted easily here?” he questioned.


 “When it comes to ICOs, Malaysia’s institutions expect anarchist thinking: all these young guys making money through a decentralised system. They cannot accept ICOs, but they maybe will accept security token offerings more easily.”

By this Zulkifly is highlighting the difference between “coins" like Bitcoin, which act as simple stores of wealth, and “tokens” such as Ethereum, which can store complex, multi-faceted levels of value and are generated through a smart contract system.

As tokens can be more easily monitored, and therefore regulated, than coins, this leads Zulkifly to believe that tokens will provide the focus for any Securities Commission framework.

The regulator declined Salaam Gateway’s invitations to comment.


From an Islamic fintech point of view, the presence of Dr Mohd Daud Bakar in the regulatory process is expected to provide a boost for the status of cryptocurrency within the new framework.

The chairman of the Shariah Advisory Council of the Securities Commission is seen as one of the leading figures in Islamic finance in Malaysia and is a notable proponent of decentralised currencies.

At a fintech forum in Kuala Lumpur earlier this year attended by Salaam Gateway, Dr Bakar urged state institutions to “have the courage to review our mindset” over cryptocurrencies, which he sees as a complementary means to buy goods and services alongside fiat money.

Mooting the possibility of a new Islamic coin, the scholar said at the time that he hoped they would “find a solution” for cryptocurrency regulation sooner rather than later, a move that would hold a great deal of potential for start-ups to build a new Islamic fintech economy.

“The best thing about the SC is we have Daud Bakar,” said Zulkifly. “He’s a believer in blockchain and crypto, and he will help us.”


While Zulkifly is concerned about the role of cryptocurrency within a regulatory framework, HelloGold’s Lee feels the clarity provided by new oversight will offer new funding opportunities for Malaysian fintech entrepreneurs.

“From a start-up’s standpoint, the ability to raise funds within a framework that is both cost-effective and efficient would be great,” said Lee.

“The new regulations must be cost-effective, efficient and definitive so there’s clarity and certainty in a way that doesn’t actually kill the opportunity. If it’s not cost-effective or efficient, then start-ups aren’t going to use it.”

On the investor’s side, there should be “definition and balance” to make sure that bad actors are prevented from entering the market, and can be easily found out if they do.

The guidelines must also help deliver clarity in understanding the risk-reward profile of an investment opportunity, especially when fresh start-ups are little more than a good yet untested idea until they get funding.

“If you start to add too many rules and regulations in terms of disclosure, it could kill off an avenue of funding for start-ups that are at that stage, when they have an idea but recognise they need investors. There is a balance there, but I don’t know yet what that balance looks like,” Lee said.

(Reporting by Richard Whihtehead; Editing by Emmy Abdul Alim

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