The SC is cognisant of the rapid evolution and growth of technology and innovation in relation to various capital market products and services. In this regard, the SC has observed a growing interest among capital market participants who wish to offer tokenised capital market products or carry out regulated activities relating to tokenised capital market products.
In general, capital market participants are keen to explore the tokenisation of capital market products due to the benefits that such technology brings, such as, asset programmability through automated processes, fractionalisation of assets, reduction in the settlement time, increased operational efficiency, immutability of records and increased potential for innovation.
Notwithstanding the above, the SC has observed that the offering of tokenised capital market products in Malaysia is still relatively at a nascent stage. Further, the SC recognises that opportunities arising from these technological advancements also come with new risks, including:
- Technology and cyber risk, such as, blockchain forking, network outages and cyberattacks;
- Anti-money laundering (AML) risk arising from potential misuse of anonymity features of the technology;
- Operational risk particularly relating to the processes for transferring and recording token ownership, and the maintenance of ‘on-chain’ records; and
- Legal risk concerning the enforceability of rights and obligations embedded in a token.
In an evolving technology landscape, it is pertinent that issuers and RMOs seeking to adopt DLT to tokenise or facilitate the tokenisation of capital market products, understand and have the necessary proficiency in utilising DLT, as well as implement appropriate safeguards and measures to manage the risks associated with the use of such technology. In this regard, the SC proposes that the responsibilities of an issuer who wishes to offer tokenised capital market product or an RMO who wishes to facilitate the offering of tokenised capital market products on their platform must:
- (a) ensure compliance with existing requirements relating to the underlying capital market product as set out in the relevant laws, rules and guidelines in addition to complying with the requirements relating to tokenisation as set out under the Framework;
- (b) put in place mechanisms to ensure consistency in the legal and beneficial title of the tokens with the underlying capital market product;
- (c) be able to demonstrate sufficient understanding and proficiency in utilising DLT, implementing the relevant governance measures and safeguards to ensure operational soundness of the tokenisation process including the management of minting and burning of tokens during subscription and redemption.
In addition to existing disclosure requirements relating to the underlying capital market product, the SC proposes that an issuer intending to offer tokenised capital market products, must include the following information in the relevant disclosure document:
- how a tokenised capital market product derives its value;
- the representation of ownership of the tokenised capital market product;
- the tokenisation arrangement including whether the off-chain or on-chain record and settlement are taken to be final and official (including how the underlying capital market product will be immobilised);
- where any benefit (e.g. dividends, bonus units, or any other benefits related to the tokenised capital market product) is accredited through the tokenised capital market product, the value and how it would be valued or redeemed;
- business continuity plans for events concerning DLT such as cyber security attacks;
- the type of blockchain network and the characteristics of the same; and
- associated risks in relation to the tokenisation process and technology being used for example, cyber security risk, system outage, possibility of undiscovered technical flaws, etc.
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