At the national level, Malaysia continues to reject the incorporation of cryptocurrency into its financial system. Responding to a parliamentarian question, Deputy Finance Minister II, YB Yamani Hafez Musa, stated that cryptocurrencies are still not recognized as legal tender in Malaysia as they do not exhibit characteristics of universal money. Malaysia’s Deputy Minister of Communications and Multimedia had even proposed recognizing Bitcoin as a legal tender, making Malaysia to be the second in the world to recognize Bitcoin as legal tender. But, again, Deputy Finance Minister I, Dato’ Indera Mohd Shahar Abdullah, answered that the country has no intention of recognizing cryptocurrencies as legal tender.
Among its citizens, cryptocurrency is gaining attention, particularly after the Security Commission (SC) recognized it in 2019, allowing Malaysians to legally own cryptocurrency as digital assets. Recognized as a security and commodity, it is regulated by the Capital Markets And Services (Prescription Of Securities) (Digital Currency And Digital Token) Order 2019 under the Capital Markets And Services Act 2007. Additionally, several companies have been approved as recognized market operators, such as Luno, MX Global, SINEGY Technologies, and Tokenize Technology. From 2020 to 2021, the trading value of cryptocurrencies in Malaysia exceeded RM16 billion, increasing more than 562% compared to the previous corresponding period. Based on the increasing popularity, this article attempts to provide insights into the concerns associated with cryptocurrencies and considerations for their adoption at the federal level.
How Cryptocurrencies Work?
Cryptocurrency, digital coin, digital currency, virtual currency, e-wallet, and digital wallet are usually used interchangeably. However, these terminologies are technically different in their definition and underlying technology. Cryptocurrencies like Bitcoin (BTC), Ethereum (ETH), Ripple (XRP), to mention a few, are decentralized digital coins that have a stored-value developed on blockchain technology. Unlike digital currency, which the central bank usually controls, cryptocurrency has no issuing or regulatory authority that governs it. Instead, buying and selling cryptocurrency requires an electronic or digital wallet to store the coin’s value. It works similarly to platforms Malaysians are au fait with, such as Touch ‘n Go eWallet, GrabPay, Boost, Maybank E-Wallet (MAE), Shoppee Pay, and Lazada Wallet. These platforms, easily installed on smartphones, enable users to store money in their e-wallet for payment at physical stores or online shopping.
Additionally, cryptocurrencies like Bitcoin are online payment systems that allow electronic cash to be sent directly on a peer-to-peer basis without going through financial institutions. Although cryptocurrencies have all the currency features, it is unlike a fiat currency issued and controlled by a central bank. Instead, it is a decentralized system in which anyone with computer processing capabilities can connect to the network and self-create cryptocurrency. This process is called “mining”, which runs on blockchain technology. Notably, blockchain technology is not solely for cryptocurrency and has been developed for other applications like distributed ledgers and smart contracts. Briefly, blockchain technology is a distributed database or public ledger that contain records of all transactions which shared with all participating parties. Every transaction in the public ledger is verified with the consensus of the participating parties. This feature makes blockchain or cryptocurrency secure and has immutable records.
The primary blockchain concept for cryptocurrencies like Bitcoin is straightforward. First, when a new transaction is initiated, it will be broadcasted to all miners (also known as nodes). Miners are computer nodes that share their computing resources to verify a transaction and generate a block, and they are awarded Bitcoin units for their contributions. When it was launched, a miner received 50 units of Bitcoin for every new block created; however, up until May 2020, the reward had reduced in which a miner received only 6.25 Bitcoin units for every new block created. Each miner will find proof-of-work for that transaction, an answer, or a mathematical puzzle solution when a new block is created. The first miner who can provide work proof will broadcast the block to the network, while the other miners will verify it. The process will be repeated for a new transaction.
Three Concerns with Cryptocurrencies
Generally, decentralized cryptocurrencies are created to facilitate secure online transactions that cannot be altered and are permanently recorded in the public ledger. Many claim that cryptocurrencies are anonymous, but they are more accurately referred to as pseudonymous transactions. Anonymous means that the identity of a person who performs a particular transaction is unknown, while pseudonymous transaction means that the identity of a person who performs a transaction is known but it is concealed. The purpose of pseudonymity is to protect the privacy of individuals as part of human rights. When a person purchases or receives cryptocurrency, it requires an e-wallet to store the value and being assigned an alphanumeric address to receive and send the cryptocurrency. These addresses are an individual’s public key, which works in pair with a private key and is only known to the corresponding person. In the public ledger, the actual identity of a person sending or receiving the cryptocurrency is unknown; however, it can be traced. Such forensic tracing can uncover the real identities of these individuals. This has led to concerns of privacy leakage.
The private key that is paired with the public address is another concern for cryptocurrency owners. Public cryptography works using a pair of public and private keys and encrypts the information using a complex mathematical algorithm. It is part of the individual credential management akin to us managing our physical keys. However, unlike a physical key to access a door that may be replaced, the secret key is irreplaceable. The lost of such key will amount to a lost of access to the owner’s cryptocurrency. In other words, lost keys, including forgetting their details, equates to a loss of funds.
A third concern with cryptocurrency is the inability to “undo” transactions. Simply, successful transfers cannot be cancelled and set to return to their original state. This is unlike current financial systems which possess such transaction reversibility features to allow financial institutions to mitigate fraudulent activities. Therefore, cryptocurrency owners could also lose funds through theft and fraud with no avenues to seek assistance.
Towards Sustainable Cryptocurrencies
The sustainability of cryptocurrencies has been widely discussed in terms of ensuring that these assets can continue to exist in the long run with minimal impacts on the environment. Though cryptocurrencies may have high asset value, its mining incurs a large carbon footprint as it consumes massive energy and generation of electronic waste. Bitcoin mining, for example, uses specialized, high-powered computers and enormous computing power in solving complex puzzles to unlock Bitcoin transactions. Energy consumption for Bitcoin mining is estimated to be more than the usage of every refrigerator in the US. It also equates to almost the same energy consumption in global copper mining. Recently, more sustainable and green cryptocurrency mining models have emerged, such as SolarCoin, Algorand, and BitGreen.
These new platforms present a good start towards sustainable cryptocurrencies but initiatives to adopting them have yet to start in Malaysia. It is, thus, imperative for Malaysia to consider facilitating cryptocurrency mining using renewable energy especially if there is interest to increase the roles of cryptocurrencies in the country’s financial system. In addition to requiring collaborations between government agencies and industry players, initiatives such as creating of awareness and provision of incentives would assist in their adoption in Malaysia.
In light of continued preference for traditional cryptocurrencies in Malaysia, an added issue is mining by illegally tapping electrical supplies. Tenaga National (the national electricity provider) reported many cases of illegal electricity connections for cryptocurrency mining in Malaysia. Consequently, the significant increase in electricity consumption amounts to income losses estimated at $550 million from 2018 to 2021. To address this issue, Tenaga National proposed a new tariff for cryptocurrency mining operators and required them to apply for legal electricity supply.
Another sustainability aspect of cryptocurrency lies in asset inheritance. As the number of people owning digital assets with financial value is growing, there is an urgent need to bridge the gaps in handling the assets within estate planning. Importantly, how should cryptocurrency be distributed to the legal heirs upon the owner’s demise? Moreover, how can digital assets, particularly cryptocurrency, be planned and managed with Malaysia’s existing estate planning and management framework? Unfortunately, no country has a specific guideline or law that Malaysia can follow and replicate in terms of estate planning governance and regulation of crypto assets. Additionally, the nature of cryptocurrencies makes it difficult for inheritance. For example, private keys to access crypto assets are secret. Therefore, private keys are bound to disappear if the owners fail to make provisions for their heirs. The situation is even more complex if heirs do not know the existence of these assets. These assets do not vanish, but they often become inaccessible when the owners die. Therefore, in a sudden death with an unplanned estate, there is no way for cryptocurrencies to be retrieved, leading to uncounted assets for distribution to the heirs.
This demonstrates a need to form a sustainable estate planning system, especially one capable of protecting cryptocurrency so that heirs can inherit it just like any other type of asset. Cryptocurrency estate planning unites experts from multiple disciplinaries, including estate planning, computing, and legal. It might also involve cryptocurrency market operators for the possibility of internal mechanisms to support the estate planning from the beginning until the distribution to the heirs after the clients’ death.
CBDC as a Way Forward for Malaysia
The adoption of cryptocurrency in Malaysia is expected to grow exponentially among its citizen. However, its adoption at the federal level is unlikely in the near future. Based on the government’s current stance, it is clear that a decentralized cryptocurrency would remain as a security and would not be approved or accepted as legal tender or means of transactions between Malaysia and other countries. This stance is reinfored by the fact that decentralized cryptocurrency could lead to inappropriate use, including crimes. For example, cryptocurrency was demanded in online ransomware attacks like NetWalker. Further, there is also a potential increase in money laundering activities and scams related to cryptocurrency i.e. an increase in “white-collar crimes.” It may also be used for terrorism financing and human trafficking. Extensive use of decentralized cryptocurrency could also lead to cyrptojacking attacks where computing resources are hijacked and used to mine cryptocurrency.
Malaysia has considered adopting the central bank digital currency (CBDC), a digital version of a country’s fiat money and deemed to be better than decentralized cryptocurrency. By March 27, 2022, nine countries have launched their CBDC, with more countries expected to launch their CBDC. Malaysia has joined Dunbar, a project led by the Bank for International Settlements (BIS) Innovation Hub with Australia, Singapore, and South Africa to test a common platform for multiple CBDC. The project aims to enable cheaper, faster and safer cross-border payments using CBDC. What is currently required in the Dunbar project is the development of mechanisms for smooth technical communication between these multi-CBDC, including the formulation of governance and policies. Currently, cross-border transfer in Malaysia is solely dependent on Society for Worldwide Interbank Financial Telecommunications (SWIFT) banking system. Over decades, it provides secure and efficient communication between member institutions. However, the recent sanctions on Russian banks encourage countries to seek alternative systems for cross-border transactions. Many countries have taken immediate actions resulting from this sanction. For example, in the US, President Biden had released an executive order to several federal agencies to study cryptocurrencies and prepare the groundwork for a potential digital dollar; a new currency. Similarly, Bank of England worked with the Massachusetts Institute of Technology to study the digital pound. Collectively, these provide further impetus for Malaysia to adopt CBDC.