On 30th July 2021, the Securities Commission Malaysia (SC) announced enforcement actions against Binance, because Binance had illegally operated a digital asset exchange (DAX) in Malaysia[1]. Binance is a hugely popular DAX with Malaysian investors, due to the wide variety of cryptocurrencies that are tradeable on it coupled with low transaction fees.

This ban by the SC comes hot on the heels of a similar ban by the UK’s Financial Conduct Authority back in 30 June 2021.

What is a DAX and what laws apply to it?

Binance operates one of the world’s largest DAX by trading volumes, which allows the trading cryptocurrencies or digital tokens in exchange for other assets. In using a DAX, users can purchase goods and services, raise funds, and trade online instantaneously using cryptocurrencies or digital tokens.

However, under Malaysia’s Capital Markets and Services Act 2007, operating such a trading platform or facility requires registration with the SC as a “Recognized Market Operator”[2], and full compliance with all the regulatory requirements and Guidelines[3] prescribed by the SC.

To obtain such approval, DAX operators must comply with stringent anti-money laundering regulations[4], which present stumbling blocks to many. The SC also imposes stringent ongoing obligations on registered DAX operators which include managing of conflicts of interests, reporting requirements, internal audit and risk management. These rules protect investors and public interest.

What are the potential penalties of Binance’s breach? 

Due to Binance operating without SC’s authorisation, they have committed a breach of sections 7(1) and 34(1) of the Capital Markets and Services Act. The violation of this act may amount to a fine of not exceeding RM10 million or imprisonment for not more than 10 years, or both.

It remains to be seen whether the SC can or will pursue such prosecution, given that none of Binance’s 4 entities are registered in Malaysia. 

What happens next?

The SC has ordered Binance to stop its operations in Malaysia including its website and mobile application, marketing activities in Malaysia and its Telegram group accessed by Malaysian investors, within 14 business days from 26 July 2021.

The SC also urged the public to cease trading and withdraw their investments immediately, with a warning against dealing and investing through an illegal DAX.

As of now, only four DAX operators have been authorised by the SC; this includes, Luno Malaysia, MX Global, SINEGY Technologies, and Tokenize Technology[5]. Binance users may transfer their cryptocurrencies to these 4 regulated DAX operators, and had better do so quickly.

Ultimately for the users of an unlicensed DAX there is little or no meaningful legal recourse for any lost coins, locked or suspended accounts after the 14 business day deadline lapses, nor will there be any recourse under the consumer protection laws here either.

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[1] https://www.sc.com.my/resources/media/media-release/sc-takes-enforcement-actions-on-binance-for-illegally-operating-in-malaysia

[2] Section 34 of the Capital Markets and Services Act 2007

[3] Guidelines on Recognized Markets (“Guidelines”) revised on 17 May 2019

[4] Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001) and the Guidelines on Prevention of Money Laundering and Terrorism Financing for Capital Market Intermediaries

[5] https://www.sc.com.my/regulation/guidelines/recognizedmarkets/list-of-registered-digital-asset-exchanges

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This article was written by Shawn Ho with assistance from Leia Inanna (Intern) .  Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds.  Feel free to contact us if you have any queries.

 

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