Malaysia bans Initial Coin Offerings

The latest Malaysian regulation will allow for regulated Initial Exchange Offerings (IEOs) but will ban individual token offerings

The Securities Commission Malaysia (SC) has released new regulatory guidelines on Initial Coin Offerings (ICOs) which state individuals are no longer allowed to initiate digital token offerings.

Going forward, all digital token offerings will need to be carried out by exchanges in the form of Initial Exchange Offerings (IEOs) instead.

Malaysia regulation bans ICOs but allows IEOs

The new Malaysian regulation has been compiled after a great deal of thought. The SC originally released a consultation paper asking for feedback. After careful consideration, the regulatory body decided that IEOs were the best way forward for cryptocurrency companies looking to raise funds.

The Securities Commission cites overwhelming industry support for allowing platform operators to oversee and issue digital tokens for fundraising. In essence, IEOs are very similar to ICOs. The key difference is that they are carried out through a cryptocurrency exchange rather than a solo token issuer.

While this doesn’t guarantee the success of the project, it does have some benefits for investors. For example, under the new Malaysian regulation, exchange operators are obliged to carry out their own due diligence on the offerings they list. They must also assess the viability and characteristics of the token – something that can be hard for individual retail investors.

According to the guidelines, the new regulation will come into force in the second half of 2020. The SC will also work alongside cryptocurrency exchange operators to assess eligible issuers.

Who is eligible to act as an IEO operator?

Not just any exchange can act as an IEO operator. First of all, the platform must obtain the necessary permission from the Securities Commission. Moreover, even before the new guidelines come into effect, it is now illegal for any individuals to engage in the act of holding an ICO.

IEO operators must also meet certain requirements under the impending regulation. They must have a minimum paid-up capital of RM 5m (about $1.2m) and be locally incorporated in Malaysia – unless extenuating circumstances are approved by the SC.

IEO operators must also maintain a trust account for funds received from investors that is licensed by a Malaysian financial institution.

If the operator is also going to trade the digital assets they issue, they must register separately as a Digital Asset Exchange (DAX) platform operator.

What about token issuers in Malaysia?

There are also several stipulations for token issuers under the new law. They must have a physical presence in the country (be locally incorporated) with at least two executive employees whose principal residence is Malaysia. They must also possess a minimum paid-up capital of RM 500,000 ($125,000).

Furthermore, in order to be approved as a token issuer, the project must demonstrate that it provides meaningful digital value or an “innovative solution” for Malaysia.

‘Innovative’ is classified as projects that “provide a solution or addresses an existing market need or problem” or “improve the efficiency of an existing process or service undertaken by the issuer or the industry”.

The guidelines further stipulate that tokens must be intended as payment instruments to be used in exchange for goods and services. However, rather curiously, issuers must also include the following disclaimer:

“Investors are reminded that Bank Negara Malaysia (the Bank) does not recognise digital tokens as a legal tender nor as a form of payment instrument that is regulated by the Bank and that the Bank will not provide any avenues of redress for aggrieved token holders.”

Limitations for investors

While the Malaysian regulation doesn’t leave retail investors out, there are some significant limitations on investors wishing to participate in IEOs.

Retail investors are limited to just RM 2,000 ($500) per IEO. Not only that, but they have a total yearly investment limit of RM 20,000 (around $5,000).

Angel investors are also restricted to a maximum of RM 500,000 ($125,000) over a 12-month period. There are no limitations on sophisticated/accredited investors.

The takeaway

The new Malaysian regulation is certainly a positive move in allowing fundraising though token issuance and enabling cryptocurrency innovation.

Limiting offerings to registered IEOs is also a sensible way of reducing the number of rogue or unviable projects, adding a layer of protection for retail investors.

However, the limits on retail investors are extremely low, leading Fintech Malaysia to comment: “We do hope that down the line the limit of RM 2,000 per issuer will be raised to a more meaningful amount.”

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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