Digital currencies set to go mainstream

Digital coin: A file picture showing an image of bitcoin and US currencies displayed on a screen at a conference in Singapore. Led by bitcoin and ethereum, the typical daily trading volume of all major cryptocurrencies combined is well in excess of US2bil (RM8.24bil) these days. — AFP

Bank Negara’s move to regulate the tokens expected to instil public confidence in their viability

Salient points
• Guidelines to be unveiled before year-end
• Sceptics concerned about risks of fraud and volatility
• Digital monies can be the new norm 

LIKE it or not, cryptocurrencies are set to go mainstream in Malaysia.

Bank Negara’s move to regulate the world of digital monies in the country from next year onwards is expected to instil some public confidence in the viability of these tokens, and hence encourage the growth of cryptocurrency adoption in the local market.

The central bank is expected to unveil the official guidelines on cryptocurrency next month.

For a start, though, Bank Negara governor Tan Sri Muhammad Ibrahim over the week announced that from 2018 onwards, all parties acting as exchanges in the digital currency space would be deemed as “reporting institutions” under the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act (Amla) 2001.

That means those involved in the business of converting digital currencies into fiat-money currencies or legal tender would be required to provide detailed information on buyers and sellers of such currencies.

Move welcomed

Industry players in the financial technology (fintech) sector welcome the move as a means to add credibility to cryptocurrencies and ensure that the technological developments for digital currencies and the underlying blockchain technology that supports them are not hampered.

Quoine co-founder and CEO Mike Kayamori, for one, notes regulatory developments could foster the growth of cryptocurrencies in Malaysia.

“Regulating digital currency exchanges is a move in the right direction to facilitate the inevitable mainstream adoption of digital currencies in the financial sector,” Kayamori says.

Universal currency: Raja Teh Maimunah says regulators should allow the usage of cryptocurrency in Malaysia, as the electronic money can serve as an universal currency.
Universal currency: Raja Teh Maimunah says regulators should allow the usage of cryptocurrency in Malaysia, as the electronic money can serve as an universal currency.

“This step by the Malaysian government will open doors for licensed cryptocurrency exchanges like ourselves to enter the Malaysian crypto market. We are looking forward to more regulatory developments to foster a secure, global blockchain fintech ecosystem,” he tells StarBizWeek in an email.

Quoine is a cryptocoin exchange operator with offices in Japan, Vietnam and Singapore. The operator, which recently raised US$105mil in an oversubscribed initial coin offering (ICO) of its QASH tokens, is the first global cryptocurrency fintech company to receive a license from Japan Financial Services Agency.

Kayamori says Quoine fully supports a pro-regulation practice of cryptocurrencies to protect the stability of the financial system and prevent cyber hacks.

Mriganka Pattnaik, country head of South-East Asia of Luno, shares the same sentiment, noting that sound regulatory initiatives for cryptocurrencies will help boost the industry and usher in the mainstream adoption of digital monies in Malaysia.

In an email, Mriganka tells StarBizWeek: “We share Bank Negara’s goals of keeping the financial and digital currency industry free from criminal and unlawful activities in Malaysia and around the world. This move is a positive step for the cryptocurrency industry, as it provides a more trusted and secure framework overall.”

Luno is a Bitcoin company headquartered in London with operations in Indonesia, Malaysia, Nigeria, South Africa the United Kingdom and 35 other European countries.

At present, Malaysians have access to up to 11 cryptocurrency exchanges locally, of which Luno is one. There are more than a hundred such exchanges globally that Malaysians can also access. These are websites where one can buy, sell or exchange cryptocurrencies for other digital tokens or traditional currencies such as the US dollar and the ringgit.

It is not clear what are the total value of the transactions of these 11 exchanges.

Led by bitcoin and ethereum, the typical daily trading volume of all major cryptocurrencies combined is well in excess of US$2bil (RM8.24bil) these days.

The new norm

Needless to say, there are still sceptics who remain unconvinced of the viability and purported merits of cryptocurrencies. This is in part due to the relative novelty of cryptocurrencies, which only burst into the scene in 2009, with the invention of Bitcoin.

Concerns of these sceptics range from risks of fraud to volatility and illiquidity. There is also concerns that rogue parties such as terrorists and money launders are planning or already using cryptocurrencies.

But proponents of cryptocurrencies believe that digital currencies are an inevitable development that offers many new opportunities for entrepreneurs and business owners.

One such proponent who thinks cryptocurrency is a “brilliant idea” is AmInvestment Bank CEO Raja Teh Maimunah Raja Abdul Aziz.

She argues that regulators should allow the usage of cryptocurrency in Malaysia, as the electronic money can serve as an universal currency, while helping to eliminate foreign exchange cost.

Believing that cryptocurrency would evolve into another form of medium of exchange, she projected that the current fiat currency could turn into an alternative currency in the future.

“I support cryptocurrency because it is a global trade,” Raja Teh Maimunah was quoted as saying on the sidelines of the 13th World Islamic Economic Forum in Kuching, Sarawak, recently.

She believes cryptocurrency will evolve into another form of medium of exchange, and projects the current fiat money to turn into an alternative currency in the future.

Where is Bank Negara’s stance?

Well, the central bank does acknowledge the possibility of digital currencies becoming the “new norm”, and hence, it cannot be oblivious to these developments.

“We need to prepare ourselves, as according to many pundits, digital currencies will become the new norm. The advent of digital currencies as some have forecast, will mark the beginning of a new era in the financial sector. As authorities, we cannot be oblivious to these developments,” Muhammad said recently.

This is in contrast to the statement by Bank Negara back in January 2014 that said cryptocurrencies such as Bitcoin were not recognised as legal tender in Malaysia.

At present, cryptocurrency transactions in Malaysia are tax-free, as digital currencies are not considered assets or legal tender by the authorities.

However, Muhammad had in recent months indicated that Bank Negara would introduce guidelines by the end of this year if it were to recognise cryptocurrencies.

Tightening the reins

Bank Negara’s decision to designate all cryptocurrency exchanges as “reporting institutions” under Amla beginning 2018 is the first notable move to regulate the world of cryptocurrencies in Malaysia.

This initiative, announced ahead of the release of the official guidelines, is predominantly aimed at preventing the abuse of the system for criminal and unlawful activities and ensuring the stability and integrity of the Malaysian financial system.

As “reporting institutions” under Amla, cryptocurrency exchanges will be required to undertake preventive measures to prevent their platforms from being used as a conduit for money laundering and terrorism financing activities. These preventive measures include conducting risk assessment; application of customer due diligence; submission of suspicious transaction report (STR) and cash threshold report; and maintenance and retention of records of transactions.

Violation of the Amla is punishable by fines, imprisonment, and freezing and seizure of assets.

While there is no conclusive proof that money laundering and terrorism financing goes through the trading of cryptocurrencies, some reports indicate that rogue parties are showing an increasing interest in cryptocurrencies.

On that note, Muhammad says the role of the financial sector as a bulwark against money laundering and terrorism financing had become even more critical, given the rise of fintech, which posted global investments totalling US$25bil (RM102.8bil) last year, compared with US$9bil in 2010.

“If this trend is anything to go by, the financial industry will be hard pressed to mitigate, identify and prevent cases of abuse in the system,” he says, adding that the fight against terrorism financing is an on-going battle that will continue to evolve in line with the ever-changing landscape of the financial industry.

“The financial system must always be in a state of readiness to identify and effectively prevent any emerging risk of terrorism financing,” he points out.

As in the case of all new technological innovations, the fear is that the bad guys will use it, says Paul Khoo, the founder and CEO of GetCover, an insurtech firm operating within Bank Negara’s fintech sandbox.

“Regulating exchanges ensures it is a good step to nip that in the bud and facilitate the growth of blockchain technologies that require the use of their own tokens,” Khoo says in reference to Bank Negara’s recently announced move on cryptocurrency exchanges.

Not good enough?

Bank Negara’s move to regulate cryptocurrency is in step with what some countries such as Australia, China and Japan had recently done, although Japan went a step further by issuing licences for exchanges as well.

But the question remains on the effectiveness of regulations on preventing the abuse of the cryptocurrency system by rogue parties.

An experienced crytocurrency trader says while exchanges can be regulated, it is going to be difficult to monitor all forms of trading.

“There will still be some lapses in the system that allow rogue parties to take advantage of... one has to note that fintech is constantly evolving at such a fast pace that it’s difficult for regulators to catch up,” the trader explains.

Meanwhile, another trader argues that the upcoming regulation on cryptocurrency in Malaysia may not be strong enough to prevent the abuse of the technology for criminal activities.

“From what is announced so far, we think Bank Negara’s regulation may not be strict enough because there is no requirement for the cryptocurrency exchanges to apply for licenses. Such requirement can perhaps give a legitimate identity to operators and compel them to play by the rules,” he explains.

Financial innovation produces many benefits for the financial system, but it can also be a double-edged sword that opens the door to illegal activities.

Efforts by regulators seem to be moving in the right direction. But at the end of the day, it is all about striking a delicate balance between consumer protection and innovation, so that technological development will not be stifled.


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Business , Cryptocurrency , digital monies


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