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Malaysia's Regulatory Landscape for Cryptocurrencies: Legal Tender Status and Emerging Challenges

Malaysia's Regulatory Landscape for Cryptocurrencies: Legal Tender Status and Emerging Challenges

Cryptocurrencies are not considered legal tender in Malaysia. The Central Bank of Malaysia Act states that only the ringgit holds that status. This means cryptocurrencies are excluded from being recognized as legal money. While the law doesn’t outright ban them, it restricts legal tender to the ringgit.

However, cryptocurrencies are classified as securities under the Capital Markets and Services Order. This classification gives them a legal standing within Malaysia’s financial regulations.

Some government officials are pushing for a more open approach to cryptocurrencies. In March 2022, Zahidi Zainul Abidin, the deputy minister of the Communications and Multimedia Ministry, suggested that Malaysia should recognize bitcoin and other cryptocurrencies as legal tender. He expressed hope that the government would consider this change during a parliamentary session, as reported by Bloomberg.

Additionally, religious authorities in Malaysia, like the Shariah Advisory Council of the Securities Commission, have acknowledged digital currencies as a form of property from an Islamic viewpoint. This further legitimizes their use in a predominantly Muslim society, according to a study published in the Journal of Fatwa and Falak Selangor.

The primary authority overseeing cryptocurrency in Malaysia is Bank Negara Malaysia. Key laws that govern cryptocurrency include:

  • The Central Bank of Malaysia Act: This defines legal tender and outlines Bank Negara’s authority over monetary policy.
  • The Financial Services Act: This regulates financial institutions and payment systems, including those related to cryptocurrencies.
  • The Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act: This law combats illegal activities involving cryptocurrencies.

The Capital Markets and Services Order strengthens regulations by classifying certain digital currencies and tokens as securities. This means they fall under the Securities Commission Malaysia’s oversight. Cryptocurrency businesses must comply with additional requirements, including obtaining licenses to operate legally. Organizers of unregistered coin offerings may face up to 10 years in prison or fines reaching 10 million Malaysian ringgit (about $2.5 million).

For taxation, active traders on Digital Asset Exchanges must declare their profits in their annual tax returns. Infrequent traders may classify their earnings as capital gains, which are not taxed in Malaysia, according to research in The Journal of Management Theory and Practice. Recently, the government has increased enforcement of these tax rules.

In June 2024, Malaysia's Inland Revenue Board launched a special operation called "Ops Token" to tackle tax revenue loss from cryptocurrency trading. This operation included raids on 10 locations in the Klang Valley, conducted by 38 personnel from the Royal Malaysia Police and CyberSecurity Malaysia, as reported by Cointelegraph.

The IRB CEO, Datuk Abu Tariq Jamaluddin, warned crypto traders to declare their taxes promptly or face compliance actions. He stated, "Through the operation, we found cryptocurrency trading data stored in mobile devices and computers. We successfully identified the value of digital assets being traded, which caused a very significant leakage of tax revenue."

While cryptocurrency mining is not illegal in Malaysia, authorities are cracking down on illegal operations that use stolen electricity. In August 2024, seven individuals were arrested for such activities, according to Cointelegraph. The deputy energy minister revealed that illegal crypto-mining operations cost an estimated $723 million in stolen electricity from 2018 to 2023.

In a show of enforcement, Malaysian authorities destroyed 985 confiscated Bitcoin mining rigs valued at $452,000 using a steamroller. This action echoed a similar event in 2021 when they destroyed mining equipment worth $1.25 million.

Despite Malaysia's efforts to regulate cryptocurrencies, significant challenges remain. A study in the Journal of Fatwa and Falak Selangor pointed out that the current regulatory framework lacks comprehensive legislation specifically for digital assets. This gap creates uncertainty for businesses and investors in the cryptocurrency space.

One major issue, highlighted in research from the Journal of Management Theory and Practice, is the absence of clear consumer protection guidelines for cryptocurrency transactions. Unlike traditional financial products, crypto investments do not have safeguards against fraud or market manipulation. The regulatory framework also does not adequately address the complexities of blockchain and decentralized finance.

To improve its regulatory environment, Malaysia could consider:

  • Developing comprehensive cryptocurrency legislation for legal clarity.
  • Implementing stronger consumer protection measures for crypto investors.
  • Establishing a licensing framework for cryptocurrency businesses, similar to Singapore's model.
  • Enhancing collaboration among regulatory bodies to tackle the multifaceted nature of cryptocurrencies.

As Andrey Kuznetsov, co-founder and CTO at Haqq Blockchain, noted, "Regulations can vary by state, as different regions may have unique local laws, especially concerning Islamic finance principles. This regulatory fragmentation can create challenges for businesses and crypto users, who must navigate both federal guidelines and state-specific rules." Balancing innovation with regulatory compliance will be crucial for the future of cryptocurrencies in Malaysia.