In our previous article, we ventured into the sphere of blockchain technology and how the rising adoption of digital payments and digital assets are regulated in Malaysia. We learnt that digital currencies and digital tokens (collectively called ‘digital assets’) are construed as “securities” under the Capital Markets and Services Act 2017. Hence, they fall under the purview of the Securities Commission (“SC”) and would be regulated accordingly by Malaysia’s securities laws. 

In parallel, any such digital asset / social gaming operators (“Operators”) would also have to ensure compliance with the anti-money laundering legislation overseen by our central bank, Bank Negara Malaysia. These Operators include decentralised finance (“DeFi”) gaming companies utilizing decentralised platforms such as Axie Infinity, Decentraland, Alien Worlds and Sandbox, all of which are built upon a distributed ledger technology (“DLT”) network with their own “in-game currencies”. 

This article examines the potential risk of money laundering and how our anti-money laundering laws (primarily, the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (“AMLA”)) apply to the growing use of synthetic or ‘in-game’ digital currencies in the social gaming industry.

Be mindful that if any of such games contain gambling or gaming elements, our gaming laws (e.g., Common Gaming Houses Act 1953 and Lotteries Act 1952) will also apply. Click here to read our earlier article on gaming laws in Malaysia.

What is ‘in-game’ currency?

Traditionally, the concept of in-game currency is distinct from digital currency and electronic money, because in-game currencies could only be used exclusively within a specific game environment or virtual community and did not function as medium of exchange, nor were they interchangeable with money. Therefore, if the in-game currency does not have an equivalent value in real currency and cannot be exchanged back-and-forth for real currency, it is radically different from digital currency and electronic money.

In more recent times, in-game currencies have evolved to be based on distributed digital ledger technology and can sometimes be used as a means of exchange which can be converted into money or money’s worth. An example would be Axie Infinity, a blockchain-based game in which its users can purchase non-fungible tokens (“NFT”) of playable characters (i.e. in cute monsters) and pit them against each other in a battle. During gameplay, users can earn Ethereum (a cryptocurrency) by completing missions in the game and exchange Ethereum for real world money at an exchange. Unlike conventional in-game items, the NFT purchased actually confers ownership on the users and the users can trade its in-game items, digital currencies and digital tokens for real world money or money’s worth, which is considered as a new phenomenon.

Is ‘in-game currency’ regulated as money?

This consequently raises the important question of whether ‘in-game currency’ is regulated as a digital asset (digital currency / digital token), or as electronic money, or neither?

Operators within the gaming industry have long used such self-created currencies either for placing stakes, making payments inside the game or in some rare cases allowing for it to be “cashed out” for real world money, albeit in most cases not based on the blockchain technology.  For example, games like Roblox allows earned credits to be cashed out in USD once a month, and PUBG, World of Warcraft, Genshin Impact, Fortnite and Counter-Strike used to allow the “container keys” (i.e., loot boxes) to be resold in the Steam Community (an online forum-based site) for real-world money until it was disabled in 2019. The word ‘currency’ may give the impression that ‘digital currency’ is treated exactly the same as ‘money’ from a legal and regulatory perspective, this is not necessarily the case. 

Generally, in-game currencies, like digital currencies and digital tokens, which are created using decentralised protocols or issued by a non-government entity, will not qualify as ‘e-money’ nor be regarded as ‘legal tender’ as they are not state-issued products (i.e., issued by a central bank) which lack an official act or backing of a state government. However, it is very likely to fall under the scope of digital currency or digital token, and regulated by the securities laws so long as such in-game currencies are created using DLT or functioning in a decentralized finance system.

Are Operators exposed to money laundering risks?

Due to the rapid development of digital currencies, increasing functionality of use growing adoption and its global nature, governments and regulators around the world, including Bank Negara Malaysia (“BNM“), have adopted regulatory measures to address money laundering risks posed by digital currencies. 

BNM has identified that unregulated digital currency exchanges are extremely susceptible to criminals undertaking money laundering transactions. Criminals can easily launder illicitly obtained money through a game that utilises convertible in-game currency by creating numerous accounts using fictitious IDs and funding these accounts with illicit money. The criminals can thereafter trade their purchased (virtual) assets amongst these fake accounts and “cash out” in-game currencies into real-world money. With the creation of an intricate web of transactions, tracing criminal activity involving transactions routed through multiple accounts across different operators is very challenging. 

Do Social Gaming Operators need to comply with AMLA and its reporting obligations?

Although digital currency is not recognised as legal tender or fiat currency, transactions involving the exchange of such in game digital currencies and the convertible nature of it (interchangeable with any money) will still be subject to the AMLA together with the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Digital Currencies (Sector 6) (w.e.f. 27 February 2018) issued by Bank Negara Malaysia (“AMLA Policy Document”), as their use presents money laundering and terrorism financing risks.

With the intensified efforts to effectively combat money laundering and terrorism financing, BNM has extended the scope of AMLA and now these Operators might be caught under Part IV of AMLA together with its First Schedule amended on 24 December 2021 by virtue of the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities (Invocation of Part IV) Order 2021 (“Invocation Order 2021”)” and Anti-Money Laundering, Anti-Terrorism Financing And Proceeds Of Unlawful Activities (Amendment Of First And Second Schedules) Order 2021 (“Amendments Order 2021”).

The Operators will need to comply with AMLA so long as they carry out the following activities:

  1. Providing safe keeping, storing, holding or custody of digital currency or digital token for account of other persons; or
  2. Providing intermediation and advisory services relating to an offer or sale of digital currency or digital token.

Reporting obligations will apply if Operators are regarded as “reporting institutions” carrying out those activities listed in the First Schedule of AMLA, whether as licensed recognised market operators (“RMO”), digital asset custodians (“DAC”), intermediaries or even those involved in the provision of advisory services relating to the offer or sale of digital currencies or digital tokens (“Reporting Institutions”). 

Therefore, social gaming operators that are regarded as “Reporting Institutions” need to adhere to non-exhaustive reporting obligations to BNM as well. 

Non-compliance

Any non-compliance of Part IV of AMLA by a Reporting Institution carries a fine not exceeding three million ringgit or to imprisonment for a term not exceeding 5 years or to both. 

Severe personal liability is imposed against the officers of a Reporting Institution. Failure to take reasonable steps to ensure compliance with the reporting obligations on the part of an officer and shall on conviction be liable to a fine of up to RM1,000,000, to imprisonment of up to three years, or both.

The Reporting Institutions, including any potential social gaming operators who intend to venture into DeFi, operating on a DLT network to introduce convertible digital currency or tokens now need to carefully design its terms and conditions and put in place transaction-monitoring-procedures and reporting procedures to facilitate compliance with anti-money laundering laws seeking to mitigate financial crime.

Do contact us at info@dnh.com.my for further information, or if you are unsure whether your business model is regarded as a reporting institution and subject to reporting obligations under the Malaysian laws.

For the purposes of this article, any view and opinion expressed herein are based on the information available as of the date of publication and may not include the latest regulatory developments. In view of this constantly evolving space, you are advised to also refer to the official website of the relevant authorities for latest updates.

***

This article was written by Shawn Ho (Partner) & Sylvia Lock (Associate) from the corporate practice group of Donovan & Ho.  Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021.  We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.

 

 

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