Digital Currency and Digital Tokens Prescribed as Securities

14 January 2019

The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 (‘the Order’) was gazetted today and will come into operation on 15 January 2019.  Under the Order, ‘digital currency’ and ‘digital token’ are securities for the purposes of securities laws in Malaysia if the criteria set out in the Order are satisfied.

Digital currency is defined as a digital representation of value recorded on a distributed digital ledger that functions as a medium of exchange and is interchangeable with any money including through the crediting and debiting of an account.  A digital currency is deemed to be a security for the purposes of securities laws if –

1. It is traded in a place or facility where offers to sell, purchase, or exchange of, the digital currency are regularly made or accepted;

2. A person expects a return in any form from the trading, conversion or redemption of the digital currency or the appreciation in value of that currency; and

3. It is not issued or guaranteed by any government body or central banks as may be specified by the Securities Commission Malaysia (‘SC’).

Digital token is defined as a digital representation which is recorded on a distributed digital ledger, and is deemed to be a security for the purposes of securities law if –

1. The person receives the digital token in exchange for a consideration;

2. The consideration or contribution from the person, and the income or returns, are pooled;

3. The income or returns of the arrangement are generated from the acquisition, holding management or disposal of any property or assets or business activities;

4. The person expects a return in any form from the trading, conversion or redemption of the digital token or the appreciation in the value of the digital token;

5. The person does not have day-to-day control over the management of the property, assets or business of the arrangement; and

6. The digital token is not issued or guaranteed by any government body or central banks as may be specified by the SC.

The Order states that the provisions of securities laws shall apply to a digital currency and digital token that are prescribed as securities under the Order except for Division 3 of Part VI (Prospectus Requirements) of the Capital Markets and Services Act 2007 (‘the Act’).
 
The Order further provides that a digital currency and digital token that are prescribed as securities under the Order is not a share in, or debenture of, a body corporate or an unincorporated body, or a unit in a unit trust scheme or a prescribed investment scheme if the digital currency and digital token is offered or traded on or through a recognised market (i.e. a stock market or a derivatives market operated or maintained by an person who is registered as a recognised market operator under section 34 of the Act).
 
The gazetting of the Order provides guidance as to when a digital token or digital asset will be deemed to be a security for the purposes of securities laws in Malaysia.
 
Presently the SC’s Guidelines on Recognised Markets apply only to operators of crowdfunding and peer-to-peer financing platforms.  The next step will be the launch by the SC of the guidelines (or amendments to the existing guidelines) to set out the requirements that will apply to the registration of persons who wish to operate exchanges for digital tokens and digital currencies or to launch initial coin offerings as well the documentation required in relation to such offerings.