Proposed Plans for Digital Securities in Malaysia's Capital Market
Malaysia is paving the way for a modern, secure capital market ecosystem by adopting a twin track regulatory approach for tokenized securities. This innovative model, overseen by the Securities Commission Malaysia (SC), seeks to facilitate growth in the digital asset sector while ensuring market integrity and investor protection.
The Twin Track Approach
The twin track approach involves regulating digital asset tokenization alongside conventional securities regulatory frameworks. This means that tokenized securities must comply with securities laws administered by the SC, while also accommodating blockchain technology innovations.
The SC has established guidelines such as the Recognised Market Operator (RMO) framework, enabling digital asset exchanges to operate legally and safely within Malaysia, supporting trading and issuance of tokenized securities.
Reconciliation and Compliance Requirements
Tokenized securities are subject to strict reconciliation processes to ensure that digital tokens accurately represent ownership rights and entitlement on the underlying securities. Clear record-keeping and ongoing monitoring are required to maintain investor protection and compliance with anti-money laundering (AML) and know-your-customer (KYC) rules.
The regulatory framework requires compliance with securities offerings, disclosures, and custody rules to align tokenized securities with Malaysia’s capital market laws. This includes ensuring that token issuers register or obtain approvals, and that marketplaces operate with transparency and proper investor safeguards.
Relation to Central Bank Digital Currency (CBDC) Development
Malaysia's advancement in tokenized securities regulation is linked to a broader digital transformation that includes exploring the Central Bank Digital Currency (CBDC). While the SC regulates tokenized securities, Bank Negara Malaysia (BNM), the central bank, leads CBDC initiatives.
The development of CBDC complements the digital asset ecosystem by providing a secure and regulated digital currency infrastructure that could be used in settlements and digital asset transactions, including tokenized securities. This integration supports liquidity and trust in digital markets, facilitating smoother reconciliation and compliance with legal monetary policies.
Context and Additional Notes
The twin track approach and compliance requirements position Malaysia as a progressive jurisdiction balancing technology advancement with investor protection, setting a foundational framework ahead of broader CBDC deployment and integrated capital market digitalization. Over 840,000 Malaysians use regulated digital asset exchanges, reflecting strong alignment of regulation and market demand.
The proposed framework aims to promote responsible innovation, facilitating innovation while ensuring investors' interests are not compromised. The initial focus of the framework is on "digital twin" tokens rather than natively digital blockchain assets often referred to as "digital securities".
The Securities Commission (SC) of Malaysia has proposed a regulatory framework for tokenized capital market products, with a consultation running until June 16, 2025. Tokenized capital market products, digital representations of traditional securities using distributed ledger technology, will be regulated under a technology-neutral principle.
It's important to note that tokenized share transfers alone won't constitute legal ownership changes until reflected in the official register of members, according to the Companies Act 2016. Bank Negara Malaysia is developing wholesale Central Bank Digital Currency (CBDC) capabilities.
The twin track regulatory approach adopted by SC Malaysia initially focuses only on digital twin tokens that mirror existing off-chain securities. The proposed framework distinguishes "tokenized securities" from cryptocurrencies and utility tokens. Issuers of tokenized products must comply with all existing securities laws, and the framework permits the use of permissionless public blockchains but requires additional controls and risk mitigation measures.
Digital securities, which exist solely on blockchains without conventional counterparts, will be addressed in future frameworks. The Securities Commission advises issuers and regulated market operators to consult with them before issuing and trading tokenized securities. As an aside, a European Commission adviser recently observed that all legislation inherently has a bias towards the technology that existed at the time the laws were passed.
- Under the twin track approach, tokenized securities will be regulated alongside conventional securities, ensuring compliance with securities laws administered by the Securities Commission Malaysia (SC).
- To maintain investor protection and adhere to anti-money laundering (AML) and know-your-customer (KYC) rules, tokenized securities require strict reconciliation processes to match digital tokens accurately with underlying securities.
- In addition to tokenized securities regulation, Bank Negara Malaysia (BNM), the central bank, is leading initiatives in the development of Central Bank Digital Currency (CBDC), which could be used for settlements and digital asset transactions.
- The proposed regulatory framework for tokenized capital market products aims to promote responsible innovation, aligning with Malaysia’s capital market laws while facilitating a progressive digital transformation.
- The Securities Commission (SC) of Malaysia has set forth a consultation for a new framework regulating tokenized capital market products, focusing on digital twin tokens that replicate existing off-chain securities, while leaving the regulation of digital securities for future frameworks.
