Proposed Strategies for Digital Securities in Malaysia's Capital Market
Malaysia's Securities Commission (SC) has announced a new regulatory framework for tokenized capital market products, aiming to promote responsible innovation while ensuring investors' interests are not compromised.
The proposed framework distinguishes between digital twin tokens and digital securities, each with different compliance requirements and investor protections.
Digital Twin Tokens
Digital twin tokens represent real-world assets off-chain but have a digital counterpart on a blockchain. These tokens serve as a "digital twin" of the asset, but do not meet the full regulatory definition of securities. Their issuance and trading are subject to lighter regulatory oversight, provided they comply with certain conditions.
Digital Securities
Digital securities, on the other hand, are tokenized forms of equity, debt, or other capital market products that represent ownership or creditor rights. These tokens are fully regulated as securities and must comply with comprehensive requirements.
Key Features of the Framework
The SC's proposed framework integrates several key features:
- Smart Contracts: For automating compliance tasks such as dividend distributions, ownership transfer, and KYC/AML checks.
- Tokenization Platforms: Recognition of platforms that facilitate fractional ownership and cross-border trading, but enforce strict guidelines to align with existing securities laws.
- Differentiated Treatment: Acknowledging the unique legal, technological, and economic attributes of digital twin tokens versus digital securities.
- Investor Protection: Emphasis on investor protection, market integrity, and mitigation of systemic risks through licensing of digital asset exchanges, custodians, and intermediaries.
- Ongoing Consultation: Public consultation and industry collaboration to refine these frameworks, reflecting Malaysia's position to be a leading digital asset and tokenization hub.
Benefits of the Framework
This nuanced approach enables Malaysian SMEs and capital market participants to tokenize assets and raise capital efficiently while operating within a legally certain and secure environment. It balances innovation with rigorous oversight, leveraging blockchain technology without compromising on regulatory safeguards.
Consultation and Timeline
The consultation for this framework runs until June 16, 2025. Key aspects of the framework include the requirement for issuers and regulated market operators to consult with the Securities Commission before issuing and trading tokenized securities.
Future Developments
The framework adopts a phased approach, with digital twin tokens being the initial focus. Digital securities, which exist solely on blockchains without conventional counterparts, will be addressed in future frameworks.
Bank Negara Malaysia is also developing wholesale Central Bank Digital Currency (CBDC) capabilities, initially focusing exclusively on wholesale applications.
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