In 2021, the trading value of the digital asset and cryptocurrencies market in Malaysia rose to RM21bil in 2021 based on the Annual Report 2021 released by the Securities Commission.[1]
With increasing interest in alternative assets, what is the legal position on cryptocurrency in Malaysia?
To give a better understanding of the laws involved, it is perhaps apposite to delve into the technology behind cryptocurrency. Cryptocurrency is essentially a medium of exchange, created and stored electronically in the blockchain. In other words, blockchain is what enables the existence of cryptocurrency, such as Bitcoin. What then is blockchain? Blockchain technology basically uses encryption techniques to control the creation of monetary units and to verify the transfer of funds without any central clearing authority.
As for non-fungible token (NFT), it is similar to cryptocurrency but the difference lies in the fact that the latter is fungible and interchangeable (i.e. one Bitcoin has the same value as another one Bitcoin). NFTs are unique and non-interchangeable in that sense while also using the blockchain technology to provide verifiable proof of ownership of the item the NFT is associated with. Besides, unlike a cryptocurrency, NFTs are sold but not traded like securities on digital exchanges.
Not illegal but not legal tender
When the Bitcoin white paper first rolled out in 2008,[2] it suggested how Bitcoin would be a decentralised form of electronic cash that bypassed traditional financial institutions. Since the original white paper, the original cryptocurrency and its descendants have primarily become investments for many people as opposed to practical payment forms.
It is for that purpose that some have been advocating for the authorities to make it a legal tender, which essentially means a legally recognised payment method. In this context, section 10 of the Currency Act 2020 stipulates that ‘only currency note and currency coin issued by the Bank shall be legal tender in Malaysia at its face value provided that the currency note is not defaced and the currency coin is not tampered with’.
As the Bank Negara does not issue any cryptocurrency, it is not an acceptable legal tender in Malaysia. In fact, Bank Negara took a formal stance on Bitcoin in 2014 that ‘The Bitcoin is not recognised as legal tender in Malaysia. The Central Bank does not regulate the operations of Bitcoin. The public is therefore advised to be cautious of the risks associated with the usage of such digital currency.’[3] It was also reported in March 2022 that the caretaker deputy finance minister Mohd Shahar Abdullah stated in Parliament that Malaysia has no intention of recognising cryptocurrencies as legal tender.[4]
Overview of cryptocurrency regulations
Despite not being a legal tender in Malaysia, cryptocurrency is not illegal and is regulated by Securities Commission through the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 (“Order 2019”), pursuant to Capital Markets and Services Act 2007 (“CMSA 2007”). Based on the Order 2019, all digital currencies and digital tokens satisfying the requirements in the Order will be prescribed as securities.
According to the Order 2019, digital currency is defined as ‘a digital representation 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’, whereas digital token is defined as ‘a digital representation which is recorded on a distributed digital ledger whether cryptographically-secured or otherwise.’
Apart from the Order 2019, the Securities Commission has also published its 2020 Guidelines on Digital Assets, pursuant to CMSA 2007. The Guidelines essentially set out the requirements relating to fundraising activity through digital token offering, operationalisation of initial exchange offering (IEO) platform and provision of digital asset custody.[5]
With regards to operating cryptocurrency exchanges, they are required to register with the Securities Commission in order to operate, in accordance with the Guidelines on Recognized Markets, issued pursuant to the CMSA 2007. These exchanges are called Digital Asset Exchange, also known as ‘DAX’, which means an electronic platform which facilitates the trading of a digital asset. In this regard, there are currently four registered DAXs operating in Malaysia.[6]
Court recognises cryptocurrency as commodities
In Malaysia, it has been held that Bitcoins fall under the ambit and application of the term ‘anything’ under Section 73 of the Contracts Act 1950.
In Robert Ong Thien Cheng v Luno Pte ltd & Anor,[7] the Respondent runs a business as an online wallet and exchange of digital currencies, under the trade name of ‘Luno'. Every registered customer of Luno will be allocated a Luno account known as 'Luno Wallet' whereby they are able to buy, sell, send, receive and store cryptocurrencies.
Being the registered customer of Luno, the Appellant requested for 11.3 Bitcoins to be withdrawn from his Luno wallet. However, on the same day, the Respondent mistakenly transferred additional 11.3 Bitcoins. Subsequently in the following day, the Respondent wrote to the Appellant requesting the Appellant to return the 11.3 Bitcoins, but to no avail.
The Appellant then brought an action against the Respondent under Section 73 of the Contracts Act 1950 which provides, ‘A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.’ However, the Appellant contended that Bitcoins are not a 'thing' capable of being returned 'as envisaged under Section 73 Contracts Act 1950
The High Court in recognising the need for the Contracts Act 1950 to reflect the changes in modern technology and commerce, held:
[15] The Respondents were also correct that it cannot be disputed that it is a form of 'commodity' as real money is used to purchase the cryptocurrency. In this regard, there is indeed value attached to the Bitcoin in the same way as value is attached to 'shares'.
[16] I also agree with the view that the Contracts Act, 1950 having been drafted some 7 decades ago ought to be construed to reflect changes in modern technology and commerce.
[17] Hence, rightfully Bitcoins ought to fall under the ambit and application of the term 'anything' under Section 73 of the Contract Act 1950 and therefore, the Appellant is bound to return the same to the Respondents if the circumstances warrant it. In this regard, the term 'anything' is plainly wide enough to cover Bitcoins.
In coming to its decision, the High Court also accepted the Respondents’ contention that while cryptocurrency is not 'money', i.e. legal tender, as we know in the traditional sense, it has been recently defined as a form of 'security' by the Order 2019.
Are NFTs recognised as property too?
Whilst NFTs are highly sought-after items to NFT enthusiasts, it is important that they are recognised as property legally so that the rights of the purchasers and owners of NFTs are protected under the law.
A recent decision by the Singapore High Court sheds some light on the legal position of the NFT. In Janesh s/o Rajkumar v Unknown Person (“CHEFPIERRE”),[8] the Claimant acquired the Bored Ape NFT for 15.99 ETH from a user operating under the pseudonym ‘victorjia_eth’ on OpenSea.[9] The Claimant was a regular user on NFTfi,[10] and he would often enter into loan transactions with other users to borrow cryptocurrencies with NFTs as collateral. One NFT he would use as collateral was the Bored Ape NFT, which allowed him to obtain larger sums of cryptocurrency loans due to its rarity. The Claimant reached out to the defendant, whom he only knew by the pseudonym ‘chefpierre.eth’ to obtain the loan. The Claimant emphasised that one of the terms that must be complied with is that at no point should the lender utilise the ‘foreclose’ option of NFTfi’s Smart Program[11] on the Bored Ape NFT without first granting the Claimant reasonable opportunities to make full repayment of the loan and retrieve the Bored Ape NFT from the escrow account. Having secured assurance from ‘chefpierre.eth’ that the Bored Ape NFT would not be “foreclosed”, the claimant entered into a loan agreement with ‘chefpierre.eth’ for 45 ETH.
However, when the Claimant was unable to find sufficient funds to repay the loan, ‘chefpierre.eth’ exercised the “foreclose” option of the NFTfi’s Smart Program and the Bored Ape NFT was transferred from NFTfi’s escrow account into his cryptocurrency wallet. The Claimant also discovered that ‘chefpierre.eth’ had listed the Bored Ape NFT for sale on OpenSea (an online NFT marketplace).
The Claimant therefore filed a suit against the Defendant and claimed that:
(a) He had an “equitable proprietary claim” over the Bored Ape NFT.40
(b) The Defendant was liable to him in the tort of conversion, breach of contract, and unjust enrichment.
Further, the Claimant also made an application for an injunction prohibiting the Defendant from in any way dealing with the Bored Ape NFT. For the Claimant to obtain the injunction, the legal test inter alia includes that he needs to show that he had a seriously arguable case that he had a proprietary interest in the Bored Ape NFT.
The issues that arose therefore include whether the Bored Ape NFT, or NFTs in general were capable of giving rise to proprietary rights which could be protected via a proprietary injunction.
After going through the authorities with a fine tooth comb, the High Court of Singapore adopted Ainsworth criteria[12] in determining whether crypto assets were property and set out the aforesaid criteria.
First, the right must be definable, meaning that the asset must hence be capable of being isolated from other assets whether of the same type or of other types and thereby identified. It was held that metadata is central to an NFT, which distinguishes one NFT from another.[13]
Second, the asset must have an owner being capable of being recognised as such by third parties. It was held that where NFTs are concerned, the presumptive owner would be whoever controls the wallet which is linked to the NFT. Similar to cryptocurrencies, excludability is achieved because one cannot deal with the NFT without the owner’s private key.[14]
Third, the right must be capable of assumption by third parties, which in turn involves two aspects: that third parties must respect the rights of the owner in that asset, and that the asset must be potentially desirable. It was held that these requirements are also satisfied as the nature of the blockchain technology gives the owner the exclusive ability to transfer the NFT to another party and such NFTs are clearly the subject of active trading in the markets.[15]
Fourth, the right and the asset must have some degree of permanence or stability. In this regard, the High Court of Singapore was of the view that this is a rather low threshold with an analogy being drawn that ‘ticket to a football match which can have a very short life yet unquestionably it is regarded as property’. It went on to held that the NFT concerned has as much permanence and stability as money in bank accounts which exist mainly in the form of ledger entries.[16]
The High Court of Singapore also agreed that the balance of convenience lies in favour of granting the injunction, as the string of code that represents the Bored Ape NFT on the blockchain is irreplaceable. If that is transferred to third parties, the Claimant might never be able to recover it, and so any proprietary remedy ordered by the court in relation to the Bored Ape NFT would be ‘writ in water’.[17]
Insofar as the jurisdiction to hear the application is concerned, the High Court of Singapore was of the view that the decentralised nature of blockchains may pose difficulties when it comes to establishing jurisdiction, and as such there had to be a court which had the jurisdiction to hear the dispute. Here, the primary connecting factor was the fact that the claimant was located in Singapore, and carried on his business here and as such the Singapore High Court had the jurisdiction.
In conclusion, there seems to be a trend that the courts are willing to extend the fabric of the law to cover the new technology such as cryptocurrency. Whilst its related law and regulations are still maturing, these decisions which give some extent of legal certainty definitely set a precedent and pave the way for the cryptocurrency industry to develop further in years to come.
[1] ‘Malaysia's digital assets market value rises to RM21bil in 2021 with 760,000 accounts’ New Straits Time (Kuala Lumpur, 28 March 2022) < https://www.nst.com.my/business/2022/03/783955/malaysias-digital-assets-market-value-rises-rm21bil-2021-760000-accounts > accessed 2 November 2022 [2] On October 31, 2008, Satoshi Nakamoto released the Bitcoin white paper on the Cryptography Mailing List and introduced the world to the first scalable peer-to-peer electronic cash system. [3] ‘Statement on Bitcoin’ (3 January 2014) <https://www.bnm.gov.my/-/statement-on-bitcoin> accessed 2 November 2022 [4] ‘Malaysia says no to cryptocurrency as legal tender’ FMT (Kuala Lumpur, 24 March 2022) <https://www.freemalaysiatoday.com/category/nation/2022/03/24/malaysia-says-no-to-cryptocurrency-as-legal-tender/> accessed 2 November 2022 [5] Security Commission Malaysia, ‘Guidelines on Digital Asset’, (17 August 2022) <https://www.sc.com.my/api/documentms/download.ashx?id=aeb10f62-944b-4d83-8aa0-4ed492dc1109> accessed 2 November 2022 [6] Security Commission Malaysia, ‘Guidelines on Digital Asset’, (28 October 2020) <https://www.sc.com.my/regulation/guidelines/recognizedmarkets/list-of-registered-digital-asset-exchanges> accessed 2 November 2022 They are: Luno Malaysia Sdn Bhd, MX Global Sdn Bhd, SINEGY DAX Sdn Bhd and Tokenize Technology (M) Sdn Bhd [7] [2019] 1 LNS 2194 [8] [2022] SGHC 264 [9] An online non-fungible token marketplace [10] A community platform functioning as an NFT-collateralised cryptocurrency lending marketplace [11] NFTfi facilitated loan agreements through smart contracts, which are computer programs that automatically carry out a given set of instructions upon the fulfilment of pre-set condition. It would also allow unilateral “foreclosure” on the NFTs by the lender if the specified payment was not made by the stipulated date [12] National Provincial Bank Ltd v Ainsworth [1965] AC 1175 [13] ibid [14] ibid [15] ibid [16] ibid [17] ibid
Authored by Tan Zu Hao
Edited by Kevin Wu
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