Web3 Going Global: Interpretation of Malaysia’s Virtual Currency Legal and Regulatory Policies

Source: Lawyer Liu Honglin

Malaysia has a strong and diversified economy and low inflation, which makes its legal currency one of the most stable currencies in the world. At present, Malaysia's regulatory environment for cryptocurrencies is very friendly, allowing the trading of approved crypto assets, but cryptocurrency exchanges must comply with the regulations of the Securities Commission of Malaysia (SC) and comply with local laws.

From the perspective of policy trends,Malaysia intends to establish itself as Asia's cryptocurrency center, challenging the central position of Hong Kong and Singapore in the crypto field. Malaysia is steadily expanding its ecosystem of venture capital companies and web3 startups, among which CoinGecko is a notable success story.

From the perspective of the legal environment,Malaysia's attractiveness in the crypto field is attributed to factors such as the common law court system, English proficiency and its sound regulatory framework. These key advantages, including the lack of capital gains tax on cryptocurrencies and the high level of education of the workforce, which mainly uses English, help to enhance Malaysia's overall attractiveness.

01 Malaysia's Development of Legal Policy on Cryptocurrency

In Malaysia, cryptocurrency is legal. The Malaysian government has formulated relevant laws and regulations to ensure the stability and transparency of the cryptocurrency market. However, as an emerging market, its regulatory bodies are still working to understand and follow up the development of cryptocurrency and take measures to protect investors from possible risks.

In Malaysia, cryptocurrency is considered property. This is a basic legal issue because property can be owned by a person and given ownership that can be enforced around the world. The adoption of English common law has long been a practice in Malaysian courts by virtue of Section 3 of the Civil Law Ordinance 1956. Therefore, it is meaningful to discuss the attitude of the British courts. In October 2018, a Malaysian court heard a case related to cryptocurrency. The court ruled that although cryptocurrency is not a legal tender in the country, cryptocurrency transactions are not illegal. Most importantly, the court classified cryptocurrency as a commodity because legal tender is used to purchase cryptocurrency and the method of measuring the value of cryptocurrency is the same as that of shares.

In 2019, Malaysia enacted the Capital Markets and Services (Determination of Securities) (Digital Currency and Digital Token) Act (2019 Act), which included cryptocurrencies (also known as digital currencies) in the scope of regulation. According to the 2019 Act, all digital currencies and digital tokens that meet the criteria set out in the 2019 Act will be deemed to be securities under the Malaysian Securities Act. Despite this, the Securities Regulatory Commission of Malaysia still clearly stated that digital currencies and digital tokens are neither legal tender nor means of payment regulated by BNM (also known as Bank Negara Malaysia, hereinafter referred to as "BNM").

After the promulgation of the 2019 Act, the Securities Regulatory Commission of Malaysia also announced the 2020 Digital Assets Guidelines, which came into effect on October 28, 2020. The guidelines set out requirements related to the following matters: activities to raise funds through the issuance of digital tokens, the commissioning of the initial exchange issuance platform, and the safekeeping, storage, holding or custody of digital assets for others. The 2020 guidelines allow the Securities Regulatory Commission of Malaysia to grant exemptions from certain requirements of the guidelines upon application by the relevant parties, which allows for a certain degree of flexibility in supervision.

In January 2021, the Securities Commission of Malaysia amended the 2015 Guidelines on Recognized Markets to implement new requirements for electronic platforms that facilitate digital asset trading.

The SC (Securities Commission of Malaysia) approved trading of crypto assets such as BTC, ETH, AVAX, MATIC, etc.

02Malaysia's Tax Policy on Cryptocurrency Trading

In Malaysia, cryptocurrency trading, including the sale or use of cryptocurrencies, is generally tax-free due to the lack of capital gains tax.

However, active cryptocurrency trading or the classification of individuals as day traders may subject them to income tax of 3% to 30%, depending on income level. To be identified as a day trader, certain criteria must be met, such as large-scale trading, short-term holding, high-frequency trading, efforts to increase marketability, and business motivations. Evidence must be provided to the LHDN (Inland Revenue Board of Malaysia) that the individual is not a trader but is holding cryptocurrencies for investment purposes in order to avoid taxation.

03 Advice for Future Investors

Potential developments and changes to the regulatory environment for cryptocurrencies in Malaysia remain unclear. The Securities Commission of Malaysia (SCM) and Bank Negara Malaysia (BNM) have yet to issue official regulations on cryptocurrency trading and investment activities. Cryptocurrency exchanges are currently subject to existing anti-money laundering and counter-terrorism financing laws and some voluntary codes of conduct developed by industry groups such as ACCESS Malaysia.

As cryptocurrencies gain popularity worldwide, both the SCM and BNM may develop formal regulatory policies within Malaysia. These developments could restrict certain aspects of trading activities or impose new taxes on crypto transactions. However, the Malaysian government believes that cryptocurrency and blockchain have the potential to promote the development of the domestic economy. "The Ministry of Finance sees digital assets and their underlying blockchain technology as having the potential to innovate in new and old industries. In particular, we believe that digital assets can serve as an alternative fundraising channel for entrepreneurs and new businesses, and as an alternative asset class for investors."

Therefore, the Malaysian government will maintain a friendly attitude towards cryptocurrency and blockchain for a long time, and intends to build itself into Asia's cryptocurrency center, challenging the central position of Hong Kong and Singapore in the encryption field.