Under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019, all digital currencies and digital tokens that satisfy the requirements in the Order are securities for purposes of securities laws.

In line with digital currencies and digital tokens being prescribed as securities, the guidelines set out the requirements on fundraising activity through digital token offering, operationalisation of initial exchange offering (IEO) platform and provision of digital asset custody.

"Notwithstanding anything in these Guidelines, digital currencies and digital tokens are not recognised as a legal tender nor as a form of payment instrument that is regulated by Bank Negara Malaysia," the guidelines said.

The guidelines apply to all:

• issuers seeking to raise funds through digital token offering;
• persons intending to operate an IEO platform; and
• persons intending to provide the services of safekeeping, storing, holding or maintaining custody of digital assets for the account of another person.

The three registered operators are: Luno Malaysia, SINEGY Technologies and Tokenize Technology.

The announcement follows the coming into force of the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 on 15 January 2019, and the issuance of the revised Guidelines on Recognized Markets on 31 January 2019 to introduce new requirements for DAX operators.

DAX operators that the SC has not approved have to cease all activities immediately and return all money and assets collected from investors.

"Operating a DAX without authorisation from the SC is an offence under securities laws and a person in breach may be liable to a fine or imprisonment term or both," the SC said.

The SC also advised the public to be mindful of the risks related to trading in digital assets, including risks of trading on exchanges that are not registered with the SC.

The Malaysian regulator said that it received numerous questions about the implementation of the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 since it came into force in early January.

The SC said that it had engaged with existing digital asset platform operators and that arrangements have been made to facilitate their operations for a transitional period until 1 March 2019, subject to certain conditions being fulfilled.

"During this period, these platform operators will not be permitted to accept new investors and will only be allowed to facilitate the withdrawal or transfer of client assets with the written instruction of the investor," the SC said.

The regulator added that platform operators that did not attend the engagement with it on 17 January 2019 should get in touch immediately and not later than 25 January 2019, "failing which they shall be deemed to be operating a market in breach of the securities laws".

The SCS added that once the relevant guidelines have been issued, existing platform operators will be required to apply for authorisation if they want to operate beyond the transitional period.

Prospective operators can also apply to the SC for authorisation once the guidelines are issued.

The SC said it will evaluate all applications and will authorise only market operators that fulfil the relevant requirements.

"With regard to initial coin offerings (ICOs), no person shall conduct an ICO without the prior authorisation of the SC", the regulator said.

 The guidelines for ICOs will be issued by the end of Q1 2019 and, in the meantime, ongoing ICOs should stop their activities and return all moneys or digital assets collected from investors.

The order stipulates that the offering of digital assets and associated activities will need to the authorised by the SC as well comply with securities laws and regulations.

The SC said:

"The guidelines will among others, establish criteria for determining fit and properness of Regulators and exchange operators, disclosure standards and best practices in price discovery, trading rules and client asset protection."

Organisations dealing in digital assets will be required to put in place anti-money laundering and counter-terrorism financing (AML/CFT) rules, cybersecurity and business continuity measures.

In his statement, Lim said:

“The ministry views digital assets, as well as its underlying blockchain technologies, as having the potential to bring about innovation in both old and new industries. In particular, we believe digital assets have a role to play as an alternative fundraising avenue for entrepreneurs and new businesses, and an alternate asset class for investors."

He added:

"Any person offering an ICO or operating a digital asset exchange without SC’s approval may be punished, on conviction, with imprisonment not exceeding 10 years and fine not exceeding RM10mil."

Lim also explained that the new framework is expected to be launched by end-Q1 2019.

"The SC will regulate issuances of digital assets via initial coin offerings (ICO) and the trading of digital assets at digital asset exchanges in Malaysia. Regulations are currently being put in place to bring digital assets within the remit of securities laws to promote fair and orderly trading and ensure investor protection," the regulators said.

The statement adds that ICO Regulators and digital asset exchanges "involved in the issuance or dealing of digital assets with a payment function" will have to comply with BNM laws and regulations on payments and currency.

They will also be subject to the SC's Guidelines on Prevention of Money Laundering and Terrorism Financing.

The BNM also advised the public to be mindful of the risks associated with digital currencies, which are not legal tender in Malaysia, which means that no protections are in place if things go wrong.

The two regulators will now enter into co-ordination arrangements to ensure that the new framework fits the laws and regulations under both their purview.

"Reporting institutions must publish the prices of the digital currencies exchanged, including the pricing methodology used in determining the prices for the exchange of digital currencies”, the draft paper states.

The exchanges will have to provide BNM with data, including the number and value of transactions and customer Details.

The document sets out the "minimum requirements and standards that digital currency exchangers must observe as reporting institutions to increase the transparency of activities relating to digital currencies".

The aim is to ensure that effective measures are in place against money laundering and terrorism financing risks associated with the use of digital currencies as well as to increase the transparency of digital currencies activities in Malaysia, the draft paper explains.

BNM also reiterated that cryptocurrencies are not legal tender in Malaysia.

"Members of the public are therefore advised to undertake the necessary due diligence and assessment of the risks involved in dealing in digital currencies or with entities providing services associated with digital currencies."

The draft rules are up for consultation until 14 January.