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 be 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 eventually have one) should only be 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 to 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 currencies 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.
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Older posts – Part 1, Part 2 and Part 3.