This article first appeared in Wealth, The Edge Malaysia Weekly on August 28, 2023 - September 3, 2023

A group of notable professional investors and entrepreneurs have come together to set up the world’s first shariah-compliant Bitcoin unit trust fund in Malaysia, called the Halogen Shariah Bitcoin Fund (HSBF).

Launched earlier this month, Halogen Capital Sdn Bhd, the licensed fund manager of HSBF, was founded by Liew Ooi Hann (better known as Hann Liew) and Lucas Ooi, co-founders of Jirnexu Sdn Bhd, the company behind financial comparison website RinggitPlus, and Ng Moon Ho, the former director of operations at RinggitPlus.

The trio are also shareholders of the newly launched digital asset management firm. Other shareholders include Lim Chia Wei, managing director of digital brokerage firm Malacca Securities Sdn Bhd and a third-generation member of the Lim family that founded Scientex Bhd, and Ahmad Fuad Alhabshi, CEO of Opus Islamic Asset Management.

Halogen Capital is expected to bring more excitement to the local digital asset scene this year, with a shariah-compliant Ethereum and an actively managed multi-coin unit trust fund slated to be launched in the near future. A discussion on the introduction of an exchange-traded fund (ETF) that tracks the price performance of digital assets such as Bitcoin is currently ongoing between the firm and related parties.

What Halogen Capital is doing is akin to putting new wine in an old bottle. Digital assets like Bitcoin or Ethereum are a relatively new asset class into which retail investors can easily buy through licensed digital asset exchanges (DAXs). But such investments may be less attractive for institutional and corporate investors who want a more comprehensive governance structure for compliance reporting when investing in cryptocurrencies.

The digital asset management firm solves this problem by putting these assets into a very common investment instrument — a unit trust fund — that comes with a well-understood governance structure.

Liew, who is Halogen Capital’s CEO, says the firm’s ultimate goal is to be the top digital asset management firm in the country and beyond. “We want to be the first port of call for any investor, whether individual, corporate or institutional, when they think of digital asset investing.”

It is clear that the digital asset industry is growing fast, evidenced partly by the number of new account openings at licensed digital asset exchange (DAX) Luno, which surpassed the number of newly registered Central Depository System (CDS) accounts with Bursa Malaysia in 2021 and 2022. As at July this year, the accounts set up with Luno (the largest local DAX and said to command a 90% market share) totalled 840,000, on top of the 2.4 million mobile application downloads — and this number is still growing.

Why do investors need a Bitcoin unit trust fund when they can trade digital assets freely on the four licensed DAXs in the country — Luno, SINEGY, Tokenize Malaysia and MX Global — with real-time quotes and a minimum investment amount of just RM1?

Liew says HSBF is targeted primarily at institutional and corporate clients who want a comprehensive governance structure for their digital assets, covering areas such as cybersecurity, accounting, auditing and tax to fulfil their compliance obligation.

Governance structure is vital to institutional investors as they often place hundreds of millions of ringgit with licensed fund managers to be invested strategically and profitably. Any weakness in the governance structure is a risk, which could translate into huge losses for investors.

In fact, investors witnessed such an event last year when FTX, once a top cryptocurrency exchange, collapsed when it was found to have commingled customer funds and used them to prop up its cryptocurrency trading activities.

When cryptocurrency prices plunged late last year, FTX couldn’t meet the redemption orders that flooded in from customers and it subsequently collapsed. Later, it was found that about US$9 billion in customer funds had gone missing.

According to news reports, FTX founder Sam Bankman-Fried is currently under house arrest at his parents’ home in Palo Alto, California, after being released on a US$250 million bond. A July 27 report by Reuters said Bankman-Fried is scheduled to go to trial on Oct 2 and prosecutors have accused him of “stealing billions of dollars in FTX customer funds” and “misleading investors and lenders and contributing illegally to US political campaigns in the names of colleagues”.

The reverberations from the FTX saga were felt in Malaysia. At least three individual investors told Wealth about their losses due to the event. One of them lost about half a million ringgit. Legal letters were delivered to their doorstep from overseas and the possibility of recovering their funds seems bleak.

“The year 2022 was an interesting time for the crypto industry. I think most people in the digital asset space would agree. And the key issue last year was not so much about crypto [as an asset class] itself, but classic governance failures such as the segregation of client assets,” says Liew.

As for Halogen Capital, the firm hires Universal Trustee to keep its clients’ fiat money separate from its own. Universal has been in operation since 1974, according to its official website. It is also the trustee of at least one of the four local DAXs and several asset management firms.

Halogen Capital entrusts its clients’ money to Universal as it is one of the best in terms of technological capability, says chief operating officer Ng.

“It is the most ready to work and move fast with us. The back-end operation of Halogen and Universal is API-connected, meaning that much of Halogen’s back-end work [such as the processing of deposits and withdrawals of customer funds] can be done fully online. Settlements can be done on the same day,” he adds.

BitGo, one of the go-to solution providers of the local DAXs, is the digital asset custodian of Halogen Capital. The US-based firm is backed by up to US$250 million in insurance. A digital asset custodian is akin to a gold custodian that keeps a person’s physical gold safe in a dedicated vault.

Apart from having a trustee and custodian, Liew says HSBF helps corporate and institutional investors take care of the accounting, auditing and tax issues under the unit trust fund structure.

“If you’re a corporate investor, you would be worried about self-custody. Where should I keep my private key? How do I value these assets? Where do I put it in my accounting entries? Halogen is here for you. We value the assets and we get them audited under the fund structure,” he explains.

“If you’re an institutional investor, large or small, you have no avenue to enter the digital asset space. Again, how are you going to open an account? Should you do it directly with the exchanges? How do you consider a digital wallet [suitable for institutional investors]? How do you account for the digital asset? You could also be looking for a well-understood structure that covers audits and taxes.”

Individual investors who are looking to include digital assets in their portfolios without managing them actively could also consider HSBF, he adds.

“In short, we are here to complement the existing solutions out there for people who want to invest in crypto. If you’re an active or high-frequency trader, the exchanges are there for you. If you are pretty much everyone else looking to gain exposure to digital assets [without the need to manage them], we are here for you.”

Liew emphasises that HSBF is a shariah-compliant fund that operates based on the rules and guidelines of the Securities Commission Malaysia’s (SC) Shariah Advisory Council. Its shariah adviser is Amanie Advisors Sdn Bhd, one of the well-known shariah advisers in Malaysia, founded by Tan Sri Dr Mohd Daud Bakar.

Liew says HSBF is an “access fund”, meaning it is managed more passively, mainly to provide investors with exposure to Bitcoin by tracking its day-to-day price performance. As such, it deploys any incoming funds to purchase the cryptocurrency at the prevailing market price.

“The active management part of this fund is to ensure that the fund is substantially invested in Bitcoin for investors to gain exposure,” he adds.

According to its information memorandum, HSBF has a minimum investment amount of RM10,000, with a minimum additional investment amount of RM1,000. There is a sales charge of up to 2%, an annual management fee of up to 1% and a trustee fee of up to 0.06%. A redemption charge is not imposed on investors.

It is also a wholesale fund only open to sophisticated investors who, among other criteria set out by the SC, have total net personal assets of RM3 million or its equivalent in foreign currencies. 

“Investors who reach out and onboard directly with us can get an exemption from the sales charge,” says chief business officer Ooi.

For a simple comparison, Luno Malaysia charges a buy/sell fee of 2% when its customers trade digital assets with the exchange directly. As for those who trade cryptocurrencies on its open market, the fee ranges from 0.25% to 0.5%, depending on its fee schedule, according to Luno’s official website.

It is worth noting that HSBF, like any other unit trust funds, only updates its price once a day, unlike a DAX such as Luno that allows investors to trade cryptocurrencies in real time.

Its information memorandum also states that HSBF invests at least 70% of its net asset value (NAV) in Bitcoin traded on local DAXs that are registered with the SC or other trading platforms approved by the SC’s Shariah Advisory Council. The rest of its NAV can be invested in sukuk, Islamic money market instruments and Islamic deposits.

Interestingly, the information memorandum points out that the fund may use Islamic derivatives to hedge or protect the value of its assets during adverse market, economic or other conditions, such as specific political conditions, insufficient funds to form an efficient portfolio and periods of high redemptions. The fund is not expected to make any dividend distributions.

Halogen Capital has also launched its Halogen Shariah Ringgit Income Fund, managed by its director and shareholder Ahmad Fuad.

“The main idea is for investors to convert their cryptos into cash [during volatile times] and still earn income. However, it turns out that the product in itself is very competitive. It has very low volatility and aims to offer investors a 4% return [per annum],” says Liew.

Investors do not need to wait for long for a more exciting digital asset fund to come along, he adds. The Halogen Shariah Ethereum Fund (HSEF) will be launched in the coming months, with basic details already posted on its official website.

Some investors may be more excited about the upcoming multi-coin unit trust fund that is expected to actively invest in 10 cryptocurrencies (for the time being) that are listed on local DAXs for trading after being approved by the SC. Apart from Bitcoin and Ethereum, there are Ripple (XRP), Avalanche (AVAX), Litecoin (LTC), Cardano (ADA), Solana (SOL), Chainlink (LINK), Uniswap (UNI) and Bitcoin Cash (BCH).

“It will be a discretionary managed multi-coin fund. If you want exposure to a basket of cryptocurrencies managed by digital asset experts and specialists, this will be the next ‘hero product’ to be launched in the coming months,” says Liew.

Colin Goh, Halogen Capital’s head of trading, will be a key member in managing those funds. According to his LinkedIn profile, he was head of foreign exchange (FX) trading at OCBC Bank for six years and spent about 4½ years at CIMB Bank as associate director in charge of FX options trading.

An ETF that tracks the price of a specific digital asset is in the making, says Liew, given that the firm can leverage the strength of its shareholder Lim, who is managing director of Malacca Securities.

“We started the conversation and hopefully, it goes well. On our end, we are ready. We are now a licensed fund manager. We are looking forward to launching the first shariah-compliant crypto ETF in the world,” he adds.

“I think for Bursa [Malaysia], it is down to two key things. The first being investor interest, which we believe is significant. The second being ensuring the counterparty involved in the creation of the ETF is suitable. We recently obtained our licence [from the SC].”

Ooi shares Liew’s view that there is significant interest from investors to trade digital assets on Bursa. “There are [Bursa] investors who, at some point, will probably want access to digital assets without leaving the Bursa platform. Doing this will indirectly, or directly, enable fund managers to include digital assets in their portfolios,” he says.

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