MalaySIA outlines strategies for digital securities in the capital market sector

In a significant move towards embracing digital innovation, Malaysia's Securities Commission (SC) has proposed a comprehensive regulatory framework for tokenised capital market products. The aim is to ensure investor protection, market integrity, and technology risk management while promoting responsible innovation.

The framework, outlined in the SC’s May 6, 2025 consultation paper, seeks public feedback on various aspects, including governance controls, registration, record-keeping, technology risks, and additional requirements for licensed intermediaries dealing with these tokens.

Key Regulatory Approach Details:

The proposed framework distinguishes between two main categories of tokens:

Digital Twin Tokens: These tokens represent a direct digital copy or “twin” of an existing conventional capital market product held in traditional form outside the tokenisation platform. They maintain a one-to-one linkage and legal link to the underlying asset.
Digital Securities: These tokens inherently exist natively on the blockchain and function as securities in their own right, without requiring a linked traditional asset to exist separately.

Entities offering or dealing with these tokenised products must be licensed and adhere to strict governance controls, including compliance with AML/KYC, ensuring investor protection, disclosure requirements, and safeguarding technology risk management.

The framework emphasizes technology risk management to address the unique vulnerabilities of tokenised assets, such as cybersecurity, operational resiliency, and smart contract auditability. It also contemplates integration with Malaysia’s broader digital asset ecosystem to provide a regulated environment fostering digital innovation while ensuring financial stability.

The approach enables inclusive access to capital markets, improving liquidity and investor diversity by facilitating fractional ownership and easing cross-border investments, which is a significant benefit for Malaysian SMEs and the broader economy.

Initially, the focus of the framework is on digital twin tokens, not natively digital blockchain assets often referred to as "digital securities". However, the SC has indicated that digital securities will be addressed in future frameworks.

Meanwhile, Bank Negara Malaysia, the central bank of Malaysia, is developing wholesale Central Bank Digital Currency (CBDC) capabilities. Their initial focus is on wholesale applications, with retail payments being adequately served by existing systems.

The regulation of tokenised capital market products will be technology neutral, treating similar products and services similarly regardless of the underlying technology. The proposed framework permits the use of permissionless public blockchains, but additional controls and risk mitigation measures are required.

It's worth noting that all legislation inherently has a bias towards the technology that existed at the time the laws were passed, as observed by a recent European Commission adviser. This insight underscores the importance of the SC’s forward-thinking approach to regulating the rapidly evolving digital capital markets landscape.

[1] Securities Commission Malaysia (SC), Consultation Paper on Tokenised Capital Market Products, May 6, 2025, https://www.sc.com.my/-/media/files/consultation-papers/tokenised-capital-market-products/sc-consultation-paper-tokenised-capital-market-products.pdf [2] Bank Negara Malaysia, Wholesale CBDC, Accessed June 1, 2025, https://www.bnm.gov.my/en/wholesale-cbdc.html [3] Securities Commission Malaysia, Press Release: SC Launches Consultation on Tokenised Capital Market Products, May 6, 2025, https://www.sc.com.my/-/media/files/news/press-releases/sc-launches-consultation-on-tokenised-capital-market-products.pdf [4] Securities Commission Malaysia, Frequently Asked Questions on Tokenised Capital Market Products, May 6, 2025, https://www.sc.com.my/-/media/files/faqs/tokenised-capital-market-products/faqs-tokenised-capital-market-products.pdf [5] Securities Commission Malaysia, Regulatory Frameworks for Digital Asset Exchanges and Custodians, Accessed June 1, 2025, https://www.sc.com.my/-/media/files/regulatory-frameworks/digital-asset-exchanges-and-custodians/regulatory-framework-for-digital-asset-exchanges-and-custodians.pdf

MalaySIA outlines strategies for digital securities in the capital market sector