This article first appeared in Digital Edge, The Edge Malaysia Weekly on January 13, 2025 - January 19, 2025

Cryptocurrencies and the blockchain have sparked global intrigue and debate, moving beyond niche concepts to revolutionise finance. Much like the creation of money and the rise of the internet, blockchain technology and digital assets are reshaping how we value and invest in assets.

However, with this rapid transformation come significant challenges. The decentralised nature of blockchain, while revolutionary, introduces risks that demand careful oversight. From fraud prevention to regulatory clarity, the task of fostering responsible innovation is critical to maintaining the integrity and stability of financial systems.

In Malaysia, where 14.3% of the population owns cryptocurrencies, regulators, law enforcement and innovators are stepping up to the plate. The country is striking a delicate balance between embracing the future of finance and ensuring robust safeguards are in place to protect investors and the broader economy.

This is also reflected in the global adoption of digital assets, which has surged at an unprecedented pace. According to digital currency payment company Triple-A, a staggering 562 million individuals — 6.8% of the world’s population — now own crypto assets, with the 25 to 34 age group representing the largest demographic. Asia leads this surge, with a year-on-year adoption increase of 21.8%.

Some nations, such as El Salvador and the Central African Republic, have recognised Bitcoin as legal tender, marking a major milestone in mainstream recognition. Meanwhile, the US has seen the launch of several crypto exchange-traded funds, further legitimising the asset class.

Crypto is now regulated in most major economies. In Malaysia, the Securities Commission Malaysia (SC) regulates digital assets under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019.

The SC’s Guidelines on Digital Assets provide a comprehensive regulatory framework governing digital token offerings, the operations of initial exchange offering (IEO) platforms and the role of digital asset custodians.

These guidelines prescribe strict requirements for issuers, including minimum capital thresholds, the preparation of detailed white papers and fit-and-proper criteria for key personnel. The guidelines also ensure investor protection through rigorous disclosure requirements and robust oversight of IEO operators, who must carry out due diligence on token issuers and monitor the use of funds raised.

The judiciary has also demonstrated its commitment to integrating modern digital assets into established legal frameworks. The Malaysian courts have recognised that digital assets can embody enforceable ownership rights, making them subject to legal claims for recovery.

A landmark case illustrating this is Robert Ong Thien Cheng versus Luno Pte Ltd & Anor [2020] 1 LNS 2194 where, on appeal, the High Court affirmed the Sessions Court’s ruling that crypto, despite not being legal tender in Malaysia, constitutes a “thing” capable of recovery under Section 73 of the Contracts Act 1950. In its determination, the court notably held that the Contracts Act 1950, though enacted over 70 years ago, should be interpreted in a manner that aligns with advancements in modern technology and the evolution of commerce.

Across the Causeway, Singapore has positioned itself as a crypto-friendly hub. The Payment Services Act focuses on digital payment tokens, while the Securities and Futures Act governs security or real-world asset (RWA) tokens.

Meanwhile, the European Union’s Markets in Crypto-Assets Regulation (MiCA) offers a more unified approach for its member states. Taking effect from end-2024, MiCA establishes comprehensive rules for stablecoins, crypto issuers and service providers.

Over in the US, the regulatory landscape is more complex. The Securities and Exchange Commission (SEC) has asserted that most crypto assets are securities under its supervision, according to the antiquated Howey Test, a legal standard established from 1946 case law.

Meanwhile, another regulator, the Commodity Futures Trading Commission (CFTC), is also wrestling for jurisdiction, taking the view that certain crypto assets like Bitcoin function as commodities.

However, a seismic shift is on the horizon as Donald Trump assumes the US presidency once more. The Trump administration has pledged sweeping changes to crypto policy, including appointing crypto-friendly names like Paul Atkins to lead the SEC.

These initiatives align with broader legislative efforts to clarify the regulatory framework for digital assets. For example, the Financial Innovation and Technology for the 21st Century Act (FIT21) bill seeks to delineate the responsibilities of the SEC and the CFTC, offering much-needed clarity for market participants.

Blockchain technology functions as a distributed digital ledger maintained across a global network of nodes. Transactions are validated using consensus mechanisms like proof-of-work or proof-of-stake, ensuring authenticity before being recorded in immutable, cryptographically secured blocks.

Validators, incentivised with crypto rewards, align their self-interest with the network’s integrity. This design prevents tampering and ensures reliability, as fraudulent attempts require immense computational resources and risk severe economic penalties. Unlike traditional financial systems which often operate behind opaque structures, blockchain is public and decentralised, offering a transparent alternative.

Digital assets are built on blockchain technology and represent a diverse and rapidly growing category of value in the digital world. While Bitcoin was the original and most recognised example, the ecosystem has expanded far beyond that. For instance, utility tokens grant access to services within blockchain networks while security or RWA tokens represent fractional ownership in traditional assets.

One of blockchain technology’s most exciting applications is tokenisation, the process of converting asset ownership rights into digital tokens. By breaking down traditional barriers, tokenisation allows for fractional ownership, where investors can buy a share of high-value assets — whether it be real estate, fine art or even intellectual property — at a fraction of the price.

Tokenisation is revolutionising capital fundraising and providing unprecedented access to investment opportunities that were previously reserved exclusively for the high-net-worths.

As blockchain and tokenisation gain traction, this transformation is no longer confined to niche technology sectors. They are capturing the attention of global financial heavyweights and unlocking opportunities for businesses across all industries.

Giants such as BlackRock, JP Morgan and HSBC are making significant moves into the space. Notably, Larry Fink, the CEO of Blackrock — the world’s largest asset manager — who once criticised crypto, has since changed his tune, now championing the potential of digital assets and tokenisation. BlackRock has even launched its own tokenised BUIDL fund.

A study by Standard Chartered predicts that the tokenisation of global assets could represent a US$30.1 trillion market by 2034, driven by blockchain’s advantages over traditional investments.

It has the potential to streamline processes, increase liquidity and reduce costs by eliminating intermediaries. Blockchain’s decentralised ledger provides transparency, security and immutability, allowing investors to track and verify ownership in real time.

Malaysia is also jumping on the tokenisation bandwagon. Deputy Digital Minister Datuk Wilson Ugak Anak Kumbong was quoted as saying the ministry is committed to developing the necessary policies, infrastructure and incentives to support the widespread adoption of blockchain across various industries, including healthcare, supply chain management and finance.

While the SC laid down the legal framework for tokenisation as early as 2020, it has, in recent news, announced that it is collaborating with Khazanah Nasional Bhd to explore the issuance of tokenised bonds and plans to enhance its regulatory framework to further support the tokenisation of securities.

While the blockchain and digital assets offer unparalleled opportunities, they also introduce new risks. The decentralised and pseudonymous nature of blockchain has attracted bad actors.

But contrary to the perception that crypto enables criminals to operate in the shadows, blockchain’s inherent transparency actually makes crypto crimes more traceable compared to those in traditional finance. Every transaction leaves an unalterable trail on the blockchain.

In Malaysia, where it has been reported that nearly 90% of crypto-related crimes stem from investment fraud, the Royal Malaysian Police’s Commercial Crimes Investigation Department (CCID) has been at the forefront of combating such crimes. The CCID’s crypto unit has stated that crypto crime-related transactions are easily traceable on the blockchain, providing a trail for investigators to follow.

Thanks to advanced investigative tools, the CCID has successfully identified and apprehended perpetrators of fraudulent schemes, underscoring the evolving capabilities of law enforcement in the crypto space.

Regulatory measures have also bolstered these efforts. Stricter know-your-customer (KYC) regulations require digital asset platforms to verify user identities, allowing authorities to quickly link suspicious activities to wrongdoers. In the interest of safeguarding investors, the SC maintains a publicly available list of licensed digital asset exchanges (DAXs) on its website and has demonstrated a firm stance against non-compliant entities, including taking enforcement actions against unlicensed platforms and warning the public against unauthorised parties by placing them on its investor alert list.

These initiatives not only protect investors but also ensure greater transparency, aiding regulators and law enforcement in their efforts to maintain integrity in the rapidly growing digital asset market.

As a nation, Malaysia must position itself at the forefront of this financial revolution to remain competitive on the global stage. The key challenge will be striking the right balance between fostering responsible innovation and safeguarding against fraud and financial instability.

As the industry, with bated breath, awaits the roll-out of regulatory enhancements, hopes centre on new measures to support digital asset businesses. Potential amendments that would be welcomed include easing token issuer requirements, permitting foreign entities to issue tokens and introducing regulatory exemptions to adopt a lighter-touch approach for specific token types.

Nonetheless, one thing remains clear: Blockchain and digital assets are here to stay. As the crypto natives would say, “HODL on”, for the next technological evolution of mankind is nigh upon us.

Derrick Leong is head of legal and compliance at IX Swap, a licensed global digital asset platform

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