BIX ARTICLE
Getting the law behind tokens
Jun 16, 2025
|
5 min read
Featured Posts
SRI Sukuk: The Journey Towards Sustainable and Responsible Investment
Jul 23, 2020
|
5 min read
Securities Commission's Capital Market Masterplan 3 (CMP3)
Sep 21, 2021
|
2 min read
What If We Allowed Retail Investors to Directly Invest in Malaysia’s Government Bond?
Aug 24, 2021
|
8 min read
Islamic Bonds Come Under Microscope After Garuda Indonesia Default
Aug 19, 2021
|
8 min read
MALAYSIA is taking baby steps in tokenisation of capital market products such as stocks, bonds, derivatives or unit trusts.
As a first step, the Securities Commission (SC) is awaiting comments or feedback on a public consultation paper on the matter, with the deadline being next Monday.
The consultation paper was published on May 6 to discuss the next steps for the development of a regulatory framework relating to the offering and dealing of capital market products in the form of digital twin representation tokens, or a digital copy of these products on a distributed ledger, such as blockchain.
Understandably, the SC is proceeding cautiously as tokenisation of market products is in its infancy in Malaysia. Knowledge or understanding of blockchain technology among retail investors is also not high.
The phased approach being taken mirrors the caution but it may not be to investors’ benefit. There is a need for clarity on a range of issues.
Across the world, comprehensive regulations or laws are either being tabled or have been enacted to cover digital or crypto assets.
Perhaps this is a first step towards more comprehensive legislation or amendments to existing legislation on a whole range of issues that pertain to digital assets – like whether digital smart contracts are legally binding, or the place of digital assets such as tokens in claims or recovery on debt.
Ordinarily, senior secured and unsecured bonds are first in line on claims, with the last being ordinary shares.
GLT Law, a legal firm, says in a client communique that even asset-backed digital tokens may not be recoverable under local insolvency laws if token holders do not have priority claim over the assets.
Would-be investors will also be very interested to know where digital tokens stand in the precedence of claims, because as far as we know, the law is unclear on the matter.
In fact, as an industry insider involved in advising clients on the SC’s tokenisation initiative pointed out, regulatory certainty is not enough because laws are upheld or enforced by the courts.
Regulations, meanwhile, are normally enforced by statutory bodies such as the SC.
In the event of conflicts between laws and regulations, laws prevail, which is a good reason to have legislation keep pace with technological developments in investing.
Consider this, under the Companies Act 2016, only shareholders are protected.
This brings up the question of dispute resolution, as digital token holders have no recourse to the law since tokens are not shares, which means they are not owners of the company.
They cannot sue for loss or fraud – their investments in the form of the digital tokens are unsecured, which can lead to expensive litigation and no certain outcome.
There is also no law or regulation that clearly identifies ownership of digital tokens. Whoever has access to the private key, that is, the password to the tokens, will “own” them.
If the SC wants digital tokens to be proprietary financial assets that can be legally transferred from A to B, then the existing laws covering areas such as contract, property, equity, trust and insolvency, among others, must be changed to accommodate this.
For now, though, these laws do not recognise digital assets as properties and a statutory body’s regulations, like the SC’s, have no impact when up against laws.
The market and investors want the legal certainty of digital assets for private ownership, the industry insider says.
Coming back to digital smart contracts, there is uncertainty where these contracts stand in the eyes of the law, whether these contracts can be treated as legally binding.
A digital smart contract is a set of codes stored on a blockchain with no signatures and no names of contractual parties except alphanumeric strings, totally different from the normal contract with all its legal language that requires signatures.
For tokenisation of capital market products, has the SC even considered whether there are experts, either within its own organisation or the courts, that can understand digital smart contracts?
The GLT Law client communique noted that the SC is placing the responsibility of ensuring the same legal rights and protection to tokenised shares as normal shares on the issuer of the shares or the recognised market operator.
“While this can be conclusively addressed with the passing of crypto legislation as other jurisdictions have done, there is no indication yet that this path is being taken in Malaysia,” it says.
Gan Ming Chiek, GLT Law partner, also observes that the current legal infrastructure designed for traditional capital markets presents structural challenges when it comes to implementing innovative products such as decentralised finance, tokenised real-world assets (RWAs) and decentralised autonomous organisations.
“Platforms that enable the trading of such products is imperative.
“Without legislative reform to accommodate these innovations, Malaysia may struggle to stay competitive in the rapidly evolving digital asset landscape,” he says.
As it is, the framework is pretty narrow in scope and does not include tokenised fiat money or stablecoins, the tokenisation of commercial real estate, asset-backed tokens with RWAs as underlying assets and non-fungible tokens.
Article by: FINTAN NG
Disclaimer
The information provided in this report is of a general nature and has been prepared for information purposes only. It is not intended to constitute research or as advice for any investor. The information in this report is not and should not be construed or considered as an offer, recommendation or solicitation for investments. Investors are advised to make their own independent evaluation of the information contained in this report, consider their own individual investment objectives, financial situation and particular needs and should seek appropriate personalised financial advice from a qualified professional to suit individual circumstances and risk profile. The information contained in this report is prepared from data believed to be correct and reliable at the time of issuance of this report. While every effort is made to ensure the information is up-to-date and correct, Bond and Sukuk Information Platform Sdn Bhd (“the Company”) does not make any guarantee, representation or warranty, express or implied, as to the adequacy, accuracy, completeness, reliability or fairness of any such information contained in this report and accordingly, neither the Company nor any of its affiliates nor its related persons shall not be liable in any manner whatsoever for any consequences (including but not limited to any direct, indirect or consequential losses, loss of profits and damages) of any reliance thereon or usage thereof.
YOU MAY ALSO LIKE
ARTICLE
Jun 16, 2025
|
5 min read
ARTICLE
Jun 16, 2025
|
5 min read
ARTICLE
Jun 05, 2025
|
5 min read
ARTICLE
May 21, 2025
|
6 min read