PETALING JAYA: As the fallout continues to unfold from bankrupt cryptocurrency exchange FTX, with its disgraced founder Sam Bankman-Fried currently also being suspected of fraud, the Securities Commission (SC) is trying to discourage local crypto investors from trading on unregulated digital asset exchanges (DAX).
In a briefing with the media yesterday, the regulator said it is doing its best to provide a “safe harbour” for investors who are not deterred by the ripple effects from the FTX saga, in order to provide a higher level of investor protection and to be able to deal effectively with complaints from investors.
“The digital space is one of the areas where we could enable Malaysians a wider choice of investment options. While we do that, it is also not only about providing greater diversification, but also greater investor protection,” the SC said.
Elaborating on the crypto regulatory condition globally, it said although there is little uniformity at present in how international regulators view methodologies that may be used to supervise this relatively new asset class, there have been increasingly more discussions among regulators that the digital space would require more oversight.
“In our case, we apply to a large extent the principles that we utilise to regulate our licensed intermediaries and other exchanges on the four DAX platforms that we have on board currently. The FTX issue has shown us that the digital asset space would require more scrutiny, but a large chunk of it is still unregulated,” the SC said.
The four DAX platforms that are currently being licensed and regulated by the SC are Luno Malaysia Sdn Bhd, MX Global Sdn Bhd and Tokenize Technology (M) Sdn Bhd that are based in the Klang Valley, as well as SINEGY DAX Sdn Bhd in Penang.
Revealing that it has received 13 complaints year-to-date in 2022 from investors that have deposited funds with unregulated DAX platforms, the SC cautioned that there is “nothing much” it can do if investors chose unsupervised platforms in the first place.
Responding to whether Malaysia would possibly see a similar occurrence of the FTX situation, the regulator said the interconnectedness of the local digital asset market is still “contained” as the supervised space is still minuscule compared with other forms of investments.
“For example, at this moment, the daily trading volume for regulated digital assets is only about 0.7% of the daily trading volume we have on Bursa Malaysia, working out to be about RM16mil.
“Linkages back to actual financial institutions are also minimal. For instance, we still do not see our banks providing these services. Besides, as mentioned, we do apply stringent regulatory measures to our DAX platforms,” it noted.
Listing some examples of steps that it is taking to ensure the safety of digital asset investors, the SC said it has put in place controls to segregate assets of investing clients from the assets listed on the books of the exchange platforms themselves, as an added form of security to protect clients in case any adverse events were to occur.
“The principle behind this segregation practice is so that, if the operator is being subject to liquidation, it would be easy for us to identify its assets from the investments parked with it by its clients,” the regulator added.
On top of that, the SC also mentioned that it is in constant touch with its regulated operators, on occasion up to several times a day if there is such necessity, to seek assurance on behalf of their clients as to whether adverse global events, such as the FTX fallout, are affecting these operators in any way.
Having emphasised on strict measures and investor protection, it nevertheless said there would always be the need to strike a balance between regulating and facilitating innovation, pointing out that if guidelines were too stringent, that could stifle innovation in this relatively new asset space.
“This is why regulators around the world have different approaches, hence the lack of uniformity. The reality is that regulators need to understand digital assets more and the innovative potential underlying such technology. Most regulators globally are operating on this basis,” it mentioned.
Meanwhile, despite applications being open for the entrance of new regulated DAX platforms besides the aforementioned four, the SC said no potential addition has emerged on the horizon so far.
Moving forward, it said one strategy to broaden the regulated DAX space would be to enable more products to be listed with its supervised operators.
“We are aware that one of the main reasons investors flock to unregulated platforms is because of the range of products they have. But the allowing of more products to be made available with our regulated platforms has to be done with careful consideration.
“Therefore, since our regulated operators are still commercial entities at the end of the day, we do encourage them to figure out what would make them compete better with the unregulated platforms,” it said.
Elsewhere, the SC commented that it would not regulate non-fungible tokens that are artistic in nature, but that it is looking out constantly for those that exhibit the characteristics of investment securities.