Cryptocurrencies: The importance of regulation to an emerging tech sector

This article first appeared in Digital Edge, The Edge Malaysia Weekly, on January 23, 2023 - January 29, 2023.
Cryptocurrencies: The importance of regulation to an emerging tech sector
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Innovations are bound to have a myriad disruptive characteristics, especially when compared with their traditional industry counterparts. For example, when ride-hailing services were first introduced in Malaysia, there was a significant disruption to the taxi industry. Other areas such as employee well-being and passenger safety also became part of a broader discussion on how to confront and manage this emerging sector. This further fuelled public discourse, which ultimately caught the attention of policymakers and regulators, resulting in operations licensing, driver registrations and regular assessments as a few of the key regulatory practices implemented for this market.

At the current juncture, the digital assets sector — best typified by cryptocurrencies and blockchain technology — represents yet another emergent technology that seeks to challenge the norm. From the peer-to-peer model, which removes the intermediary, to technological encryption, which secures transactions, cryptocurrencies have been envisioned as a new store of value and/or medium of exchange. Underpinning this is blockchain technology, a digital public ledger that provides full transparency, as well as records and preserves the integrity of the data stored within.

However, as with other new technologies and innovations in the early stages of development, certain aspects of the crypto industry are still largely unregulated. Additionally, any existing regulations also vary, depending on the market conditions. In June 2021, El Salvador passed the Bitcoin Law, adopting Bitcoin (BTC) as legal tender in the country. In September that year, the People’s Bank of China (PBoC) imposed a blanket ban on crypto mining and transactions.

Regulating the Malaysian crypto landscape

Multiple factors impact the extent of crypto regulation, ranging from local market maturity and jurisdictions to sociopolitical conditions and legacy mindsets in managing technology. There has been a long-running debate on the role of regulation in the crypto sector, which has been brought to the fore following the collapse of notable industry players over the past year, such as Terra, Celsius and, more recently, FTX. Customers were unable to recoup their investment losses given the lack of necessary measures and guarantees for consumer safety and funds.

For the domestic market, continuing Malaysia’s thoughtful approach to crypto regulation would benefit local investors in a variety of ways, although any regulatory exercise would need to be meticulously designed and effectively implemented to not inhibit further innovation and the overall advancement of the industry. Make no mistake — regulating an industry is a challenging task, particularly for a technology that is still in the nascent stage of development.

When it comes to regulation and compliance, each market needs to consider a variety of criteria and requirements, which can depend on factors such as how receptive regulators are to digital disruptions, or the performance and precedents of industry players. From a regulatory standpoint in Malaysia, this would involve actively engaging with regulators such as the Securities Commission Malaysia (SC). Regulation is important to the development of the crypto landscape, but how does it specifically serve the interests of customers and the industry at large?

Customer safety as the utmost priority

For all committed stakeholders in the crypto landscape, the primary ambition should be to make crypto accessible to everyone in a safe and secure manner. On crypto investing, regulations provide stronger assurance to the public, ensuring that digital asset exchanges (DAXs) are compliant with certain standards and industry best practices. Close collaboration with regulators is complementary to industry efforts in pushing for the growth and development of the crypto landscape. Regulations provide the necessary checks and balances to secure investor protection and confidence, as all customers can be assured that the industry players have been vetted according to specific guidelines.

Regulations also establish a barrier to entry for prospective crypto players, ensuring that service providers with little to no regard for consumer well-being are restricted from the Malaysian market. On crypto investing, consumers should be wary of those who refuse to abide by regulations — many of which are already listed on the SC’s Investor Alert List — and instead opt for DAXs whose practices are aligned with the necessary governance and compliance structures.

Whereas regulations provide industry players with a framework to adhere to, there also needs to be a proactive approach taken to safeguard consumers, in addition to regulatory compliance. Before any coins or tokens are approved for Malaysian investors, DAXs have the responsibility to conduct appropriate evaluative measures. There has to be a strong emphasis on conducting due diligence — either for industry players in vetting new investment inclusions, or for investors in doing their own research before any crypto investments.

Safeguarding the crypto landscape

From the perspective of developing the crypto landscape, it is important for industry players to maintain consistent and open communication channels with regulators and policymakers. This fosters a conducive collaborative environment, allowing all parties to keep abreast of ongoing policy and technological developments. On the other hand, with consumers, it is important to keep the public engaged through community engagements and by regularly and transparently communicating market updates. The combination of regulation and public accountability is what gives consumers the confidence to invest.

Cryptocurrencies are still in the early stages of development, and opportunities remain for further collaboration between crypto industry players and regulators. It is clear that the optimisation of regulatory frameworks will create a safer and more secure investment environment, protecting consumers and keeping irresponsible stakeholders at bay. Compliance with the regulatory requirements is key, alongside proactive measures to advance the local crypto landscape, as well as ongoing efforts to keep consumers updated and informed.

Aaron Tang is country manager at Luno Malaysia, the country’s first regulated cryptocurrency exchange