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Towards a mature Malaysian cryptocurrency ecosystem – Part 4

By on June 20, 2017

Authorities

In the final part of this series, we shall discuss the trickiest component of a local cryptocurrency ecosystem: regulation. As mentioned in the previous post, no Malaysian big business will sign up cryptocurrencies without a clear regulatory framework, and crafting that regulatory framework is solely up to us and the authorities.

As with any disruptive technology, promotion and adoption of cryptocurrencies carries the risk of financial loss. The purpose of regulation is not to turn authorities into an omniscient nanny that can protect the naïve from their own irrational exuberance, but to clearly demarcate the bounds beyond which market participants are expected to fend for themselves.

This notion may sound radical in conservative Malaysia, but an open mentality is essential if we are to fully benefit from cryptocurrencies in the long run. The coming paradigm ensures most artificial barriers to commerce can be sidestepped. If even the toughest regulatory stance can be rendered impotent due to unenforceability, then why not embrace the change instead, as far as it is reasonably practicable for us to do so.

 

As with our efforts to promote business adoption, our lobbying for regulation should be prioritized in phases. Our immediate goal is to alleviate fear. Cryptocurrencies has risks but detention, office raids and bank account closures should not be a part of those. Market participants must be allowed to experiment in the open, if for no other reason than to produce precedence. From there we can observe, postulate, draft and iterate subsequent moves that stand the highest chance of producing a beneficial outcome.

The thing about bureaucrats… is that as a species they are slaves to perceived momentum. Unless we give the impression that something is already snowballing, it will be difficult to get them to even budge. Were it not for the 2014 Mt. Gox debacle that puts Japanese regulators in the spotlight, it’s doubtful they would’ve come up with their much touted Virtual Currency Act as soon as they did.

Fortunately debacles are not the only way to get attention. If the local cryptocurrency community can demonstrate a nuanced understanding of current Malaysian laws and propose specific amendments, it will go a long way towards an official bill actually being gazetted.

 

Let’s attempt to do just that. While law itself is a complex subject, to explore the applicability of laws in a hypothetical scenario, we need nothing more than common sense. We shall start by drawing the boundaries where cryptocurrencies may touch our lives, study how they will impact the status quo, and recommend changes required for the system to adapt.

 

Commerce is the sum of all interactions between market participants (buyers and sellers) in a marketplace. Different marketplaces regulate these interactions differently, and sometimes market participants interact with counterparts from other marketplaces. Currently there are only two marketplaces out there; Within Malaysia and Outside Malaysia. However with the arrival cryptocurrencies, there will emerge a new, Internet-based marketplace that will straddle these two.

Now commerce through the internet isn’t exactly new; platforms such as Amazon and Ebay have been around since the 90s. However these companies are still very much tied to legal entities in real-world jurisdictions. Commerce within the internet, enabled by technologies such cryptocurrencies, distributed platforms like Openbazaar, and smart contract tools like Ethereum is a different beast altogether.

Regulation of commerce traditionally revolves around legal entities; whether they are citizens, companies or societies. Legal entities are required to own assets, execute contracts, operate bank accounts, to sue and be sued, and be taxed on income. By and large our existing regulation handle these quite well; Malaysian and foreign-domiciled legal entities have conducted commerce here for decades.

The question of how Malaysian authorities should deal with commerce within the internet is difficult to answer as market participants may well be pseudonymous, and legal entities are optional. Even judging whether an interaction is within our jurisdiction is not going to be straightforward: If my computer decides to buy data from another computer without me knowing, why should it matter where either computer is located?

 

Since people are not going to wait around while we figure things out, commerce within the internet will likely remain Caveat emptor and Laissez faire for the foreseeable future. In the meantime, our most prudent course of action will be to introduce regulation at the interface between the clearly domestic and internet marketplaces. Consider the diagram below:-

 

 

Interaction 1 covers the dealings between Malaysian buyers and pseudonymous sellers from the Internet using cryptocurrencies. This covers both the innocuous (food, games, financial products etc.) and the questionable (drugs, guns and other contraband).

In facilitating the innocuous, there is no need to classify cryptocurrencies as legal tender, merely as a legal method of payment – there are simply too many cryptocurrencies out there to be considered. The difference comes into play in the fulfilment of debt obligations: should the Malaysian buyer buys on credit and defaults, then the pseudonymous internet seller may only demand repayment in Ringgit, if the dispute is to be mediated through our courts.

Impeding the questionable is more complicated. Acquisition of contraband is clearly illegal, however due to the peer-to-peer nature of cryptocurrencies, the flow of funds in these interactions are dispersed. Technically any member of the network can run afoul of our AMLA laws without knowing. It may be wise henceforth to split the act of acquiring contraband and the act of paying for it; the former which may be charged under existing laws, and the later which should be decriminalized.

 

Interaction 2 covers the dealings between Malaysian sellers and pseudonymous buyers from the internet. For simple businesses, allaying concerns should be straightforward. As long as an invoice is issued, GST should be still chargeable, regardless of buyer identity. The trading of cryptocurrencies themselves should GST exempt; for the same reason precious metals are exempted. Cryptocurrency holdings in corporate balance sheets must be marked-to-market on an annual basis, however capital gains tax (when we have one) should only chargeable when they are converted into fiat.

More complex cryptocurrency businesses will require a tailored approach; the most important of which are those regarding exchanges. These will become the heart of a mature local cryptocurrency ecosystem. Functionally similar commodity exchanges; cryptocurrency exchanges take fiat deposits from the public and allow secure storage and real-time trading with fiat on their platform.

These companies should first and foremost not be allowed to do fractional reserve lending similar to banks under FSA, or provide returns similar to an Interest Scheme – deposits taken should solely be for trading purposes. Guidelines regarding custodian funds, KYC, data retention and cybersecurity as stipulated in the MSBA should generally be adhered to, however since they are not issuers of cryptocurrencies themselves, these exchanges should be exempt from e-money regulations.

 

Interaction 3 covers the dealings between pseudonymous buyers and sellers within the internet. Bear in mind this includes all peer-to-peer online commerce (even between Malaysians citizens) and Malaysian-based entities issuing pure online offerings (including ICOs). As mentioned; these should remain beyond the purview of Malaysian authorities and as such, come with appropriate warnings attached.

 

As technologies such as cryptocurrencies, distributed marketplaces and smart contracts become widely deployed, we can imagine the bulk of Malaysian commerce migrating en masse into the internet. After all, why volunteer for friction when you don’t have to? Why opt for disclosure when you don’t have to? Why restrict your audience when you don’t have to?

As a result, boundaries between domestic and cross-border transactions will become amorphous, rendering legacy policies such as Withholding Taxes and Foreign Exchange Administration practically unenforceable.

 

Of course, commerce requiring sophisticated business logic (like infrastructure projects) will likely remain in fiat. Furthermore, after experiencing the inevitable scams, market participants may actually migrate back. Eventually an equilibrium will be reached, but what composition that future state of commerce will look like will be difficult to predict.

What we do know for certain is that many established norms by Malaysian authorities are facing looming obsolescence. They may not like the bumpy ride and may well be antagonistic to our efforts, but eventually, time will prove that you just can’t fight the future.

If you like my articles, please tip me – my BTC address is 3Ga7kDSoPwVQoiP1c8eMG7Nq8EUAKVAzop or scan the QR code at https://live.blockcypher.com/btc/address/3Ga7kDSoPwVQoiP1c8eMG7Nq8EUAKVAzop/

Older posts  – Part 1, Part 2 and Part 3.

Towards a mature Malaysian cryptocurrency ecosystem – Part 3

By on June 8, 2017

You can read Part 1 and Part 2 for the full context:

 

Businesses

Convincing Malaysian big businesses to adopt cryptocurrencies is a like engaging in an exasperating chicken-and-egg debate. They will be asking:

Where are the users?

What is the regulatory framework?

Who are the service providers?

To which the only way we can reply is: Do it and they will come!

 

You can imagine how unpopular this sounds in the boardroom. From their perspective, the marginal benefits of accepting cryptocurrencies today does not compensate for the significant uncertainties that come with implementation. Hence as cryptocurrency enthusiasts, we need to acknowledge that our holdings will not be directly spendable “out there” anytime soon. Which is fine.

 

Not only are there myriad workarounds, but shoving cryptocurrencies down the throat of corporate Malaysia is missing the point. We neither have an unbanked problem nor a banking crisis; i.e. there is not much to complain about with the current local financial system. So if we thoughtlessly echo the battle cries appropriate in other markets over here, we are going to sound like lunatics.
That being said; if we want to produce a mature Malaysian cryptocurrency ecosystem, then we must ensure our cryptocurrencies circulate around, and not just idling in everyone’s private vault. We do need to convince users to spend their holdings, and we do need to convince sellers to accept them. Otherwise we will only succeed in producing a community of speculators.
Since Malaysian big businesses are unlikely to support our agenda for now, we need to facilitate this circulation via an alternative strategy. Remember that cryptocurrencies enable seamless, frequent online transactions between individuals, or even between autonomous machines; a breakthrough we should leverage to create new, blue-ocean markets.

 

Such “peer-to-peer” online commerce has been around for a while (just look at all the Malaysians selling stuff on Facebook), but buyers and sellers in this space lack the sophisticated back-end systems of large e-commerce players. These are not highly automated operations – oftentimes terms are discussed and sales closed through direct negotiations between buyer and seller right within chat applications.

However with extreme personalization comes friction and scalability issues, especially when it comes to payment. An ad-hoc entrepreneur interested in selling some home-made lemang through Facebook during Ramadan wouldn’t bother setting up a legal entity, much less a merchant account to accept credit cards – hence would need to rely on cumbersome online banking transfers from his customers.

I believe it is in these situations where cryptocurrencies can shine. Imagine if we have for example… a widget that generates a self-destructing QR code out of a cryptocurrency address embeddable in WhatsApp or Facebook chat. Sellers can then share payment details and confirm receipt of any value from any customer in real time. This significantly cuts through the payments inconvenience for buyers and sellers alike in “peer-to-peer” online commerce.

 

It is often the simplest technology that achieved the most widespread adoption. Cheap, QR-code enabled peer-to-peer micropayments area already exploding in China (albeit these are driven by centralized providers). Since I don’t see a prevalence of these solutions in Malaysia yet, it is a golden opportunity for cryptocurrencies to take the ball over here and just run with it.
The beauty of peer-to-peer commerce is that it can grow with minimal regulatory and support systems oversight, but it will not produce the quantum leap in adoption that we need. Eventually we as the community will have to go back to courting those finicky Malaysian big businesses. The good news is, once we have a vibrant peer-to-peer commerce scene, the answer to the “Where are the users?” question becomes self-evident.

 

Next comes regulation. In this regard we have to accept that a) no Malaysian big business will sign up cryptocurrencies without a clear regulatory / risk framework and  b) crafting that regulatory framework is solely up to us and the authorities. I will elaborate on this in a future post but for now, let’s assume through our perseverance, we managed to produce something favourable.

The final requirement for business adoption of cryptocurrencies is the availability of service providers. These include payment processors, system integrators, lawyers, accountants and auditors – all necessary to incorporate cryptocurrencies into existing workflows. For SMEs, there are further requirements that these solutions be off-the-shelf, compatible with popular back-end ERP suites, and acquirable at reasonable cost. Hopefully members of the community can help exploit these opportunities locally, or help import solutions already released elsewhere.

 

I hope by approaching the issue in a stage-by-stage manner, we can encourage Malaysian sellers to accept cryptocurrencies directly as a method of payment within the medium term. They managed to make it happened in Japan recently, and results have been spectacular to say the least.

Penang Bitcoin Meetup 3 June 2017 with Nas from Senangbit

By on June 2, 2017

Meet Nas and the geng 3 June Sat 1030pm-1145pm at Penang, details here: https://www.facebook.com/events/299638167127931

Towards a mature Malaysian cryptocurrency ecosystem – Part 2

By on May 26, 2017

Users

Money is a network effect produced by social confidence in an abstraction. The more confidence we inspire that an abstraction is “Money”, the more valuable it becomes. After a while, collective confidence reaches critical mass, and the premise turns into a self-fulfilling prophecy. Likewise, if efforts to inspire confidence fails, that abstraction will never become Money, regardless of its merits.

In trying to introduce a new kind of Money to Malaysians, the challenge is getting the ball rolling. This is especially difficult since Malaysians already have the Ringgit (MYR); which most of us are quite comfortable with. Past experiments to introduce new kinds of Monies to Malaysians achieved nowhere near enough critical mass to rival the Ringgit. Most ended up only achieving limited traction (Celcom’s Aircash, MOL’s MOLePoints), or decent traction only in a limited context (TouchNGo).

Obviously when compared with these archaic iterations, the merits of cryptocurrencies are almost universally superior. Most cryptocurrencies are designed to be fungible across platforms and are tradable on bitcoin/alt-coin exchanges, therefore users have no fear of being trapped inside the ecosystem of centralized providers. While we won’t have much trouble arguing for the technical merits of cryptocurrencies, we too would not be able to produce network critical mass if we are ignorant of the social marketing required for propagation.

Producing a network critical mass requires vast resources, primarily because users demand incentives to participate. These incentives can range from free services, to subsidized pricing, to preferential treatment. Without generous VC investments subsidizing customer acquisition costs, networks such eBay, Uber and Facebook will never grow large enough to mature. The market forces governing the growth of these networks is also true for cryptocurrencies.

While we don’t have access to billions of resources like they do, what we do have (and they don’t) is a distributed, aligned, passionate grass-roots movement willing to spread the cryptocurrency gospel. For the moment, it seems word of mouth is our most viable marketing tool. Not to worry, with some push and guidance, even the most reticent amongst us can be galvanized to be effective preachers.

In marketing lore; it is said that is easiest to sell existing products to existing customers, harder to sell new products to existing customers, and hardest to sell new products to new customers. In proselytizing cryptocurrencies, we should focus on the second category and avoid the third. This means starting with friends, families and clients whom we can personally handhold throughout the on-boarding process, instead of public recruitment drives.

Allow me to illustrate. Signing up for cryptocurrencies is easy, but the journey towards proficiency is long. Typically newcomers go through several phases before their level of engagement can produce a multiplier effect on network propagation:-

 

Proficient peers are most effective in aiding us to achieve network critical mass, much more so than simple evangelists. Increasing their ranks should be top priority; if you notice your circle of friends, families and clients being stuck at a particular phase, then I implore you to aid them in escalating their engagement.

The hardest part of course, is convincing a total newcomer to start experimenting in the first place. Most of us enthusiasts are willing to immerse ourselves in the homework required to appraise the technical merits of cryptocurrencies. However contrary to impulse, diving straight into the deep end is not the best way to make an elevator pitch to a newcomer.

We are going to need some… conversational finesse if we escalate engagement without sounding like a hippy cyberpunk fanboy. People have diverse backgrounds, and will be most receptive to our proposition if we take the time to tailor our message to fit their archetypes. For example…

  • 1. If the newcomer is a rational capitalist, then cryptocurrencies are one of the best technology bets available to retail investors right now.
  • 2. If the newcomer is a libertarian right wing, then cryptocurrencies are a viable personal insurance against degradation of the nation state.
  • 3. If newcomer is an edgy teenager, then cryptocurrencies are a cool way to leapfrog age restrictions when trying to participate in the internet economy.

…and so on and so forth. Proselytizing cryptocurrencies, like everything else in life, requires attention, homework and practice to do well.

Lastly, I advise against including any disclaimers in your pitch, for the same reason you don’t hear disclaimers during Friday prayers or Sunday mass. When you are preaching a complex subject matter, it is best if your sermons are passionate and unwavering. Those who hesitate garner few followers.

It is not unwarranted nor immoral to demand a modicum of faith when guiding newcomers to the door. Once within of course, they are free to judge for themselves.

Read the Part 1 earlier, and reposted at Steemit, click like if you love my article.

 

Towards a mature Malaysian cryptocurrency ecosystem – Part 1

By on May 16, 2017

bitcoins for sale, malaysia

If you are reading this, then likely you are a Malaysian cryptocurrency enthusiast like myself, and as enthusiasts are apt to do, from time to time we indulge in dreams where cryptocurrencies have taken over the world.

The promise of cryptocurrencies is as compelling now as it was when I first heard of them in 2011; anyone should be able to conduct commerce with anyone else, on anything, anywhere, at an affordable cost, without unwarranted delays, restrictions, uncertainty or surveillance. The promise is both refreshingly liberating and uncomfortably scary, as it should be; otherwise it will have nowhere near its current disruptive potential.

The rational part of us maintain our involvement with cryptocurrencies as experimental; a front row seat to witness the impact brought about by one of the world’s greatest recent innovations. The irrational part of us secretly hope our modest bet today will bring great wealth and freedom to us in the future. Both are justified, and both require work.

Let’s be honest, the current Malaysian status quo is not as accommodating to cryptocurrencies as we would like. Only a small fraction of our society understand what they are, much less own and use them day to day.

Propagating something meant to function as “Money” requires a confluence of factors to induce a self-reinforcing, positive feedback loop – the loop is what attracts new users and encourages old ones to increase engagement.

The factors involved in generating this loop are technological, legal and psychological, and we should be concerned with them all. “Money” is a network effect produced by social confidence after all, and concentrating on one factor while missing the others means ignoring important pieces of the puzzle.

When I say “a mature Malaysian cryptocurrency ecosystem”, here is what I mean:-

Any Malaysian individual can procure, store, spend and trade cryptocurrencies seamlessly without restrictions, or fear of legal repercussions.

Any Malaysian business can quote prices in, store, receive and spend cryptocurrencies seamlessly without restrictions or fear of legal repercussions.

Cryptocurrencies are legally treated in its own unique category; the buying & selling of which do not attract any value-added tax, the transmission of which are exempt from any money service or exchange control laws, and the lending and borrowing of which are exempt from any banking laws. In other words, the purview of the Malaysian government shall encompass the Ringgit and extend to the interface between the Ringgit and cryptocurrencies, but no further.

There exist cheap, diverse, widespread, localized POS / ERP solutions that allow cryptocurrency integration into business processes. Local accounting and auditing firms should also be able to verify ownership and mark-to-market the value of cryptocurrency holdings in corporate balance sheets.

There exist a healthy number of well-capitalized, professionally-managed, prudently regulated local cryptocurrency wallet / exchange / merchant service providers.

There exist a healthy number of well-incentivised, prudently-regulated individual / merchant acquirers that market cryptocurrencies and onboards new users into the ecosystem.

There exist robust government executive and judicial branches to educate, regulate, enforce and resolve disputes related to cryptocurrencies, as far as it is reasonably practicable for them to do so. Dealings in cryptocurrencies shall by and large remain caveat-emptor and laissez-faire indefinitely.

I believe it is important that we produce a mature Malaysian cryptocurrency ecosystem, as surely similar measures are being pursued by other competing societies. Cryptocurrencies may be fringe now, but they herald the era where barriers in time and cost to capital flows are going to be miniscule. If we do not consciously make it attractive for capital to remain and circulate within our own economy, then it will just migrate elsewhere overnight.

Imagine if half your salary is paid in Ringgit and the other half is paid in cryptocurrencies. Your Ringgit holdings enter our local financial system and end up in local loans such as mortgages and credit cards. Your cryptocurrency holdings on the other hand are kept private; unusable by anyone else.

Now imagine if it is trivial for you (and everyone else) to convert between the two holdings; instinctively you would maintain the one that provides the highest risk-adjusted returns. Unless our local financial system can provide something superior, it may progressively be starved of capital.

That being said, I do not believe the Ringgit will be upended by cryptocurrencies any time soon. Local taxes will always be paid in Ringgit after all, and there are inherent advantages in sovereign fiat (stability, enforceability) that ensures its preference in certain applications. The difference between the coming and the current paradigms is that for the first time, the Ringgit will have to compete for usage.

Ideal conditions for adoption of cryptocurrencies in Malaysia will not just spontaneously emerge while we wait in silence, and the community must be willing and able to manufacture this outcome proactively. The challenge is to figure out a rational, logical progression to do so, and coordinating efforts to maximize traction within a reasonable timeframe.

In this series of posts, I will try to elucidate the steps required to produce a mature Malaysian cryptocurrency ecosystem over the medium term. Your feedback is most welcomed, and these posts will be regularly updated as new facts are discovered and action points are refined.

Stay tuned.

If you like my articles, please tip me – my BTC address is 3Ga7kDSoPwVQoiP1c8eMG7Nq8EUAKVAzop or scan the QR code at https://live.blockcypher.com/btc/address/3Ga7kDSoPwVQoiP1c8eMG7Nq8EUAKVAzop/

 

Posting this week’s thoughts on the crypto token powered platform at https:[email protected]/towards-a-mature-malaysian-cryptocurrency-ecosystem-part-1

 

 

Pamela Morgan Explores Initial Coin (ICO) Offerings from a Legal Perspective

By on April 28, 2017

Attorney Pamela Morgan Explores Initial Coin Offerings from a Legal Perspective

https://bitcoinmagazine.com/articles/attorney-pamela-morgan-explores-initial-coin-offerings-legal-perspective/

“The law cares about how you use these technologies…If you use it like a stock, you’re probably going to be regulated as if it’s a stock.”

See Dr Pavel live at MaGIC Cyberjaya tonight! 25 April 2017.

By on April 25, 2017

See Dr Pavel live in MaGIC Cyberjaya tonight! 25 April 2017.
Registration starts 645pm.

CLICK HERE TO REGISTER FOR THE EVENT

Location: MaGIC Cyberjaya
Address: Block 3730, Persiaran Apec, 63000 Cyberjaya, Selangor, Malaysia

About Dr. Pavel Kravchenko:

Co-Founder of Distributed Lab, a decentralized systems expert, university lecturer and public speaker on an open-source course about cryptocurrencies and conduct it across the world with having passion about solving complex and challenging problems.

Having background is information security, software development and project management, he is always excited about new technologies coming out such as Bitcoin, Ethereum, mesh networks etc and he believes they will change finance, law, ecology, media industries dramatically. He is also building scientific lab that is devoted to solving problems in cryptocurrency sphere.

#malaysia
#blockchain
#bloktex