Can our laws keep up with innovative business models arising from cryptocurrency?

Introduction

Laws and regulations tend to always trail innovation. The rise of cryptocurrencies is no different. Compared to traditional fiat currencies, cryptocurrencies are virtual, encrypted and decentralized mediums of exchange with no control by any central authority.

This article explores the potential gaps in the existing laws of Malaysia in regulating or facilitating certain new business models adopted or emerging in the western countries which use cryptocurrencies.

Cryptocurrency Lending

Under the Moneylenders Act 1951 (“Moneylenders Act”), “moneylending” refers to the lending of money at interest, with or without security, to a borrower.

Consider a business which lends bitcoin, also known as BTC, against security/collateral in BTC. Principal and interest are payable in BTC. The lender disburses the loan in BTC, which is thereafter immediately converted into fiat currency upon receipt by the borrower – this process takes a fraction of a second. Is this moneylending?

As it stands, cryptocurrencies like BTC are neither recognized as legal tender in Malaysia nor statutorily defined as money. As such, one may argue that a literal reading of the Moneylenders Act suggests that BTC lending may not be “moneylending” and therefore would not be regulated under the Moneylenders Act.

Money Remittance using Cryptocurrency Payment Rails

Under the Malaysia Money Services Business Act 2011 (“MSBA”), “remittance business” refers to the transferring or facilitating the transfer of “funds”, which in turn is defined as “any unit of account or unit of value that facilitates the purchase of goods or services”. 

Consider a business which uses the BTC protocol (instead of legacy telegraphic transfers using SWIFT) as a payment rail to remit money anywhere in the world instantly. Conceptually, to transfer RM100 equivalent to Tanzania – the transferor deposits RM100 with the remitter, it is converted into BTC, then transferred via the Lightning Network (a secondary layer on the BTC protocol), then converted into Tanzanian Shillings and finally deposited into the recipient’s Tanzania bank account – all within a fraction of a second and a fraction of telegraphic transfer costs which banks now charge. Is this money remittance?

The applicability of the MSBA to such business in Malaysia depends on whether BTC constitutes “funds” or “money” within the meaning of MSBA. Whilst BTC may be regarded as a unit of account or unit of value, it is arguable that it does not facilitate the purchase of goods or services considering it is not recognized as legal tender in Malaysia. Until these points are clarified, the applicability of the MSBA to such business in Malaysia may remain unclear.

Bitcoin Mining

Bitcoin mining refers to the process where a global network of computers compete to solve complex math puzzles in order to validate new transactions in a distributed ledger (blockchain) and be rewarded with BTC. The system is designed to make the math puzzles increasingly difficult as demand for BTC grows whilst the supply of BTC remains fixed based on predetermined milestones. Solving the calculations requires hardware and energy, which are generally paid for by selling the BTC for fiat.

Uncertainties abound vis a vis the taxability of BTC proceeds under the Income Tax Act 1967. For example, if a company receives 1 BTC today (worth RM100,000/BTC) from its mining activities but only sells the said BTC one year later (at RM200,000/BTC), how is its revenue recorded on its profit and loss statement? Furthermore, the Malaysian Financial Reporting Standards does not currently provide for any standards to record BTC (and other cryptocurrencies) held on a company’s balance sheet.

Conclusion

To date, Malaysia has relied on subsidiary legislation such as the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 and Securities Commission Guidelines on Digital Assets to plug the gaps in law in this space. Whilst these are applaudable efforts to govern, inter alia, the trading of cryptocurrencies or issuance of digital assets in Malaysia, we look forward to the enactment of other primary laws for more holistic governance of innovative businesses using cryptocurrencies, including those discussed above. Until then, it is for us to rely on first principles in law in navigating the cryptocurrency landscape in Malaysia.