The Rise of Digital Payments: Digital Currency VS Electronic Money and their Regulation
In this article, we explore the 2 different concepts of “digital currency” (e.g. cryptocurrencies, security tokens and utility tokens) and “e-money” within the existing legal framework in Malaysia, and examine the differences in both.
While most digital currencies and tokens based on a decentralised trust model (e.g. Bitcoin, Ethereum, Ripple etc) are digital representations of value and function as a medium of exchange interchangeable with money, they are not the same as ‘money’ or ‘payment instruments’. This is because these digital assets do not exhibit the universal characteristics of money.¹ These digital currencies or tokens are not ‘legal tender’. In essence, their characteristics prevent them from being a good store of value and medium of exchange as they are prone to price volatility, vulnerable to cyber threats and lack scalability.²
For anyone wishing to foray into this space, it is helpful to first understand the different forms of digital assets, including digital currencies and digital tokens, and how they are regulated in Malaysia.
There is a string of different terms used in our legislation & guidelines including ‘digital assets’, ‘digital currency, ‘digital tokens’, ‘electronic money’, ‘payment instruments’ that mean different things, and are regulated by 2 different regulatory bodies, Bank Negara Malaysia (BNM) and the Securities Commission (SC).
Understanding “Digital Currency”
In Malaysia, it is the SC that regulates “digital assets”, which include digital currency or digital tokens.
Under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019, digital currencies are digital representations of value which is recorded on a distributed digital ledger, whether cryptographically-secured or otherwise, that functions as a medium of exchange and is interchangeable with any money, including through the crediting or debiting of an account moneys.³
Such currencies primarily leverage on cryptography and distributed ledger technology (“DLT”)⁴ and they are commonly called cryptocurrencies. With blockchain technology, these digital currencies can be transacted easily with no intermediaries.
Some general observations on digital assets, digital currencies and digital tokens are:
- All digital currency and digital tokens that are not issued by a government body or central bank, meeting the definition above, are regarded as “securities” or even “commodities” with attached value, and are regulated by the SC;
- Digital currencies that are not issued by the BNM are not recognized as legal tender (ie they are not backed by a claim on the central bank) nor a payment instrument regulated by the BNM;⁵ and
- Any entity providing services relating to digital assets must be registered and approved as recognised market operator, digital token offerings platform operator, initial exchange offerings operator or digital assets custodians by the SC.⁶
What is “E-Money”?
Unlike digital assets, BNM regulates e-money and payment instruments. The definition of “electronic money” in Financial Services Act 2013 (“FSA”) covers any payment instrument, whether tangible or intangible that stores funds electronically in exchange of funds paid to the issuer and is able to be used as a means of making payment to any person other than the issuer.⁷
A quick search at the BNM’s website⁸ reveals that the non-bank e-money issuers as of today are mostly companies promoting cashless retail payments in the form of an e-wallet to store actual monetary value (backed by actual fiat currency) in an electronic device to be used to make payment across retailers.
That said, any institution keen to roll out e-money or e-wallet programs must be required to first be an eligible Electronic Money Issuer (“EMI”) or a limited purpose EMI pursuant to the FSA and obtain an approval from the BNM before operationalizing the e-money scheme.⁹
Other differences between Digital Currency and E-money
Another key difference between “digital currency” and “e-money” is in how they are created and who they are issued by.
For digital currency that are privately issued, whether backed by assets or not, they are created using blockchain technology supported by decentralized consensus mechanism where there is no centralised government control or authority over the currency. Such digital currencies will likely not exhibit the universal features of money and not be recognised as legal tender, unless it is a central bank digital currency (CBDC). Such digital assets, in their current form, are likely not payment instruments within the regulatory purview of BNM, but may still be regulated by the SC as “securities”.
In contrast, if BNM ever decides to issue a CBDC, it will be a digital currency created by and backed by a sovereign body, which will be legal tender. This type of digital currency which exhibit the universal features of money will be regulated by BNM.
Whereas for e-money, it is typically privately issued and backed by assets (i.e., being fiat currency, which includes currency notes and coins issued by a sovereign body). E-money that is denominated in fiat currency which is legal tender, can be used to settle a debt or payment obligation in that country. Therefore, e-money is regulated by BNM rather than the SC.
That said, it remains to be seen how Stablecoins (e.g, Tether or USD Coin), being privately issued digital assets backed by fiat currency to decrease their volatility, are classified and regulated in Malaysia. The same applies to virtual currency (including social gaming currencies) used as payment instruments within its virtual community only.
Change is the only constant
In the quest of developing efficient and innovative financial services, we will witness the birth of new digital assets, currencies & tokens, along with a new wave of decentralisation. With the emerging trends of blockchain technology, there will likely be further development on the regulatory front and it will be interesting to see how this evolves.
Given the ever-growing interest and constant changes to digital currency and e-money, interested issuers should be clear on (i) how such assets and instruments are classified, and (ii) which authority regulates them (if at all regulated), before rolling them out in Malaysia.
¹ Annual Report 2020 issued by Bank Negara Malaysia, page 55.
³ Order 2 of Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 (“Digital Currency Order 2019”).
⁴ Note: DLT is a means of saving information through a distributed ledger, i.e. a repeated digital copy of data available at multiple locations, with an immutable cryptographic signature.
⁵ Statement from Bank Negara Malaysia, 27 February 2018.
⁶ Guidelines on Digital Assets issued by Securities Commission pursuant to Capital Markets and Services Act 2007, 28 October 2020. Note: Read more and find out what we wrote on the ban of Binance in Malaysia, one of the world’s largest cryptocurrency exchange operators.
⁷ Section 2 of the Financial Services Act 2013 and Electronic Money (E-Money) Exposure Draft (11 June 2021).
⁹ Note: Exemption for an approval is possible subject to the conditions set out in Section 11 of the Financial Services Act 2013 having been fulfilled.
This article was written by Sylvia Lock (Associate) and edited by Shawn Ho (Partner) 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.
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