Blockchain technology has been touted as the technology which will drive humanity towards the Fourth Industrial Revolution. Although the potential uses of blockchain technology transcend far beyond the financial and investment sectors, it is in relation to these sectors that the technology can be said to have had the most profound impact. It can be surmised therefore that the financial and investment sectors will most likely be the domains of our civilization in which blockchain technology will eventually leave its indelible mark. Accordingly, this article will discuss about the impact of blockchain technology on the financial and investment sectors in the legal context in general and the context of Malaysian laws in particular.
In this day and age of ours where banks may fail and nations require bailouts, the use of blockchain technology in the financial and investment sectors may represent a saving grace of sorts to the ordinary men on the street who more often than not end up as hapless victims of bank failures and collapsed nations. In general, most legal jurisdictions have their own financial and investment laws to mitigate the effects of market imbalances and information asymmetries whereby in the context of our country such laws can be found in the form of the Financial Services Act 2013 (“FSA”) and Money Services Business Act 2011 (“MSBA”) which regulates the financial and money services industries respectively in Malaysia and the Capital Markets and Services Act 2007 (“CMSA”) which regulates the capitals markets the capital markets industry in Malaysia in addition to the Interest Schemes Act 2016 (“ISA”) which regulates the operations of interest schemes in Malaysia.
MALAYSIAN REGULATORY FRAMEWORK
The primary manner in which the FSA may be applicable to blockchain technology is in relation to blockchain-based digital tokens issued in Malaysia which are exchangeable for fiat money whereby the issuer of such tokens would be deemed as the issuer of a payment instrument. As for the MSBA, it may be also be applicable to blockchain-based digital tokens issued in Malaysia which are exchangeable for fiat money albeit the issuer thereof would be deemed as carrying out a remittance business. In the context of securities laws, the CMSA may be applicable to blockchain-based digital tokens which are issued in Malaysia if the structure of the issuance scheme coupled with the features and functionalities of the tokens render such tokens to fall within the scope of any capital market product regulated under the CMSA be it in the guise of shares, debentures, derivatives or unit trusts. Additionally, blockchain-based digital tokens issued in Malaysia which grant its holders a right or interest to the profits or assets of the scheme, or an interest or right in respect of the properties of the scheme including any entitlement to use such properties, may amount to interests in an interest scheme whereby the issuer of such tokens would be required to register its issuance framework as an interest scheme with the Companies Commission of Malaysia (“CCM”).
In this connection, it is notable that todate the Malaysian legislature has yet to enact any legislation to regulate blockchain-based digital tokens save for a few public statements issued by the Malaysian Securities Commission (“SC”) with the latest one cautioning the public on the risks of Initial Coin Offerings (“ICOs”) and a policy guideline issued by Bank Negara Malaysia (“BNM”). In the absence of any legislation in Malaysia which has been devised specifically for the regulation of blockchain-based digital tokens, the application of our existing laws to such tokens can be said to be conjectural at best thereby leaving a swathe of grey area i.e. gaps in our laws. Nonetheless, this state of affairs is understandable given that the stance taken by the Malaysian legislature is a reflection of the fact that it is cognizant of the need for restraint on its part lest it may end up unduly stifling the development of this newfound technology which in turn may hamper the development of our financial and investment sectors.
ADVANTAGES AND BENEFITS
Notwithstanding the absence of any blockchain-specific legislation in Malaysia, as a general rule of thumb it can be said that any blockchain-based digital token issued in Malaysia which does not fall under the scope of the existing laws in Malaysia would not be subjected any laws and regulations in Malaysia. In this regard, the flexibility afforded by blockchain-based digital tokens vis-a-vis conventional financial and investment instruments renders such tokens to be a game changer of sorts as the proprietors of financial and investment schemes now have the option of tailoring the issuance framework of their schemes, as well as the features and functionalities of their products i.e. the tokens, in such manner so as to ensure that the underlying objectives of their schemes may be achieved without being subjected to the full scale of regulatory compliance requirements. This would not have been possible if the proprietors opted to use the existing arrangements under which they would have been straightjacketed into the conventional categories of financial and investment instruments which would have brought with it the burdens of cumbersome regulatory compliance requirements.
Moreover, the benefits arising from the absence of any intermediary are also applicable in the context of the offering of blockchain-based digital tokens which function as tradable securities. As blockchain-based digital tokens can be offered through the internet without the need for any securities clearance and settlement system, this renders it possible for the offering of such tokens which function as tradable securities to be made on a global scale in contrast with the offerings of conventional tradable securities which require the use of an intermediary clearance and settlement system thereby resulting in the issuer of such securities having to contend with the limitations thereof. An additional benefit arising from the differences between blockchain-based digital tokens and conventional financial and investment instruments in terms of the manner in which they are offered is that, given the fact that digital tokens can be subscribed to solely via the internet, it would not be necessary for the issuer of such tokens to have a physical presence in the jurisdictions in which the tokens are to be offered thereby providing much savings in terms of operational costs.
Another notable distinction between blockchain-based digital tokens and conventional financial and investment instruments is that digital tokens can be issued by non-legal entities without the need to go through any intermediary in contrast with conventional instruments which can only be offered by a properly incorporated and duly licensed entity. In the context of public crowdfunding for example, ICOs can be launched by unincorporated bodies or associations, i.e. a group of people who came together for a common purpose, without the need for any intermediary whereas conventional methods such as equity crowdfunding or peer-to-peer crowdfunding would require the use of an intermediary which in the context of Malaysia would be a recognized market operator registered with the SC.
Notwithstanding the benefits arising from the dispensation of the need for any market intermediary or registered entity, it has to be conceded that the registration of an issuer of blockchain-based digital tokens with a regulatory authority would grant some degree of legitimacy to the issuer in particular and the scheme itself as a whole. In the context of the overarching blockchain financial and investment ecosystem, an ICO market in which a majority of its players are registered with regulatory authorities would help promote greater investors’ confidence as opposed to one which is based on the free market economy model of operations. Nonetheless, the advantages which come with registration would carry a price in the form of regulatory compliance costs. In this regard, the use of offshore or mid-shore jurisdictions as a means of registration may offer a viable cost-savings alternative as opposed to the use of onshore jurisdictions as it is trite knowledge that the regulatory frameworks of offshore and mid-shore jurisdictions allow more flexibility and preferential treatment as compared to those of onshore jurisdictions.
LABUAN REGISTRATION OPTION
In the context of Malaysian laws, the issuer of any blockchain-based digital tokens which are exchangeable for fiat money, goods or services may choose to incorporate a Labuan company under the Labuan Companies Act 1990 (“LCA”) which would allow the issuer to register for a credit token business license under the Labuan Financial Services and Securities Act 2010 (“LFSAA”). As for platform operators who provide exchange and trading services for blockchain-based digitals tokens which are exchangeable for fiat money other than the Malaysian Ringgit or which are representations of short-term debt instruments, the LFSAA provides a registration option in the form of a money-broking business license. The choice of Labuan which is a mid-shore jurisdiction would enable the issuers of blockchain-based digital tokens which amount to credit tokens under the LFSAA and platform operators whose exchange and trading facilities for such tokens amount to the provision of money-broking services under the LFSAA to obtain the best of both worlds in terms of securing the advantages which come with registration while not being unduly burdened by operational costs arising from cumbersome regulatory compliance requirements.
In sum, blockchain technology can be a said to be a godsend tool in terms of its potential in enabling the SC to attain its philosophy to establish a self-regulatory market for the capital markets industry in Malaysia and assist BNM in its endeavor to promote financial inclusion among the Malaysian public. In terms of regulatory compliance, the decentralized nature of blockchain technology would fit in perfectly with the SC’s vision for the adoption of self-regulation among Malaysian capital markets players while the internet-based model of blockchain’s operations coupled with its autonomous and immutable nature would render the technology to be the ideal choice for BNM in its efforts to widen the reach of our financial infrastructure in terms of its coverage of the Malaysian public. It is clear therefore that blockchain technology will play a central role in our country’s drive towards achieving the status of a developed nation wherefore changes to our laws and regulations would be inevitable in time to come in order to accommodate the paradigmatic shifts brought about by this technology.
We at Ben & Partners look forward to embracing the changes brought about by the futuristic technology that is blockchain as we endeavor to guide our clients through the uncharted terrain of blockchain governance in Malaysia’s legal landscape in tandem with our progressive professional outlook the adoption of which is a must in order to stay ahead of the rest because as the ancient Greek philosopher Heraclitus of Ephesus once said, “change is the only constant in life”.
 SC, “Cautionary Statement on Initial Coin Offerings” (19 January 2018). Available at https://www.sc.com.my/post_archive/cautionary-statement-on-initial-coin-offerings/
 BNM, “Anti-Money Laundering and Counter Financing of Terrorism Policy for Digital Currencies” (27 February 2018). Available at http://www.bnm.gov.my/index.php?ch=57&pg=538&ac=680&bb=file
 SC, “Guidelines on Recognized Markets” (11 February 2015). Available at https://www.sc.com.my/wp-content/uploads/eng/html/resources/guidelines/recognizedmkt/guidelines_recognizedMarket_160413.pdf
 Notwithstanding the incorporation of a Labuan company and the obtaining of a credit token business license, if the issuer of any blockchain-based digital tokens intends to issue or offer its tokens in West Malaysia it would still be required to obtain the necessary approvals from SC and BNM if the features and functionalities of its tokens render such tokens to fall under the scope of the CMSA and FSA respectively. Additionally, as the ISA provides for the condition that any issuance of interests in an interest scheme can only be carried out by a management company which refers to a company incorporated under the Companies Act 1965 or the Companies Act 2016, the incorporation of a Labuan company and the obtaining of a credit token business license would not detract from the requirement that the issuer of any blockchain-based digital tokens which amount to interests in an interest scheme has to incorporate a company under the Companies Act 2016 if the issuer intends to issuer or offer its tokens in West Malaysia.
 SC, “Securities Commission Malaysia Regulatory Philosophy” (March 2015) at page 10.
 BNM, “Malaysia’s Financial Inclusion Framework” (2011). Available at http://www.bnm.gov.my/documents/fi/publication/research/Malaysia’s%20Financial%20Inclusion%20Framework.pdf