Digital Asset Exchange (DAX)
In July 2020, the Shariah Advisory Council (SAC) of the Securities Commission Malaysia (SC) announced it would be permissible to invest and trade in digital currencies and digital tokens on registered digital asset exchanges (DAXs) that satisfy the requirements under the SAC’s resolution. This recognised the importance of digitisation in the capital market and its increasing adoption by market participants. In essence, the SAC has resolved that digital assets are recognised as assets from the Shariah perspective.
To determine the Shariah-compliant status of digital tokens, the following requirements must be met:
- Issuance proceeds from the digital tokens must only be used for Shariah-compliant purposes, and the rights and benefits that come with the tokens must also be Shariah-compliant.
- The existing SAC resolution on the deployment of sukuk proceeds and the business activities benchmark under the Shariah screening methodology for listed companies will apply if the utilisation of proceeds and entitlement of rights and benefits of digital tokens are for Shariah-compliant and non-Shariah-compliant purposes.
Global Market Trends
The digital asset market experienced a subdued first half in 2023 (1H2023), reflecting global market environment which was largely driven by the lingering impact of the FTX collapse at the end of 2022. However, trading volume in the Malaysian DAX saw an uptick in the third quarter of 2023, in line with global market movements. This surge was primarily driven by Bitcoin and Ethereum prices surging on news of international asset managers interest in issuing crypto ETFs in the US. Trading value was especially high, registering over 300% increase in trading volume across regulated DAXs. Despite the subdued first half, 2023 was a year of expansion in the digital asset ecosystem having recorded an increase products and services across the capital markets. Given the growth in the digital assets segment, the SC intensified its oversight on operators of digital asset exchanges (RMO-DAX) to ensure that key elements of their business operations continued to align with applicable regulatory and supervisory requirements such as governance, policies and procedures, systems and actual practices.
To strengthen the protection of digital assets, the SC granted approvals-in-principle (AIPs) to three (3) local digital asset custodians (DAC). The intent was to serve to safekeep digital assets in a protected environment by using advanced security measures to prevent hacking attempts or unauthorised access and enable regulated players and investors to securely store their digital assets. Of the three, one DAC went live in 2023 whilst incumbents remained reliant on third-party technology service providers for their custodial services. Across regulated DAXs, retail investors below the age of 45 made up over 72% of the investor segment, a clear indicator that this asset class is primarily retail driven market. DAXs added Avalanche (AVAX) and Polygon (MATIC) tokens to their trading platforms in 2023, bringing the total number of tokens traded across DAXs to 11, driven by demand from investors for more trading pairs. To date, Malaysia counts five DAXs:
Based on data from the SC, 450,000 accounts were opened with these DAXs between October 2019 and December 2020. This compares well against the 159,333 and 423,264 CDS accounts opened with Bursa Malaysia in 2019 and 2020 respectively. In 2022, more than 128,000 digital asset accounts were created. The SC’s Guidelines on Digital Assets, first issued on 28 October 2020, aim to promote responsible innovation in digital assets while managing emerging risks and protecting the interests of issuers and investors. Members of the public cannot offer, issue or distribute digital assets in Malaysia without first registering with or obtaining authorisation from the SC. The list of permissible digital assets in Malaysia includes Bitcoin, Bitcoin Cash, Cardano, Chainlink, Ethereum, LiteCoin, Ripple, Solana and Uniswap.
Market Development
In 2022, the SC announced that it has registered two Initial Exchange Offering (IEO) operators, Kapital DX and Pitch Platforms. IEO fundraising allows offerings of digital tokens through an IEO platform operator for early-stage entrepreneurs. In contrast to an Initial Coin Offering (ICO), IEO cryptocurrency exchange facilitates the token offering on a regulated fundraising platform rather than the start-up doing it themselves. An issuer may raise funds up to RM100 million from retail, sophisticated, as well as angel investors, subjected to SC’s Guidelines on Digital Assets. These operators will be required to carry out the necessary assessments, among others, to verify the issuer’s digital value proposition, review the issuer’s proposal and disclosures, and undertake a comprehensive due diligence on the issuer and its token offering, prior to hosting the issuer’s digital token on their platform.
While IEO enables companies to raise funds through the issuance of digital tokens in Malaysia, Digital Asset Custodians (DAC) allow companies to be custodians for digital assets to ensure the protection of investors’ funds from being stolen or misappropriated during a fundraising exercise.