KUALA LUMPUR: They have an estimated collective market capitalisation of US$133.23 billion, bigger than the three biggest companies on Bursa Malaysia combined -- Malayan Banking Bhd, Tenaga Nasional Bhd and Public Bank Bhd -- and a 24-hour turnover of some US$3 billion, which was the tally on a random Thursday, i.e. Sept 21. 

We're talking about cryptocurrencies, encrypted digital money that went live just a few years ago and seems to be edging its way into the mainstream.

And with the advent of these currencies, central banks are faced with a major dilemma -- how to regulate them or should they even be allowed into a country in the first place?

In The Edge Malaysia's cover story for the week of Sept 25-Oct 1, 'The cryptocurrency conundrum', assistant editor Ben Shane Lim examines the issues surrounding the rise of cryptocurrencies like Bitcoin and Ethereum, and the dilemma the development brings to central banks around the world.

Last week, Bank Negara Malaysia indicated that guidelines for cryptocurrencies were being drafted, and should be ready by year end. It is unclear what tack the central bank will take, and it declined to comment when contacted.

Like Second Finance Minister Datuk Seri Johari Abdul Ghani said: "Before Malaysia can embark on this digital currency, we first need to have proper regulations. Anything to do with any alternative currency, Bank Negara needs to be consulted first. Without an effective regulation, this blockchain technology can be subject to abuse by promoters.”

There are largely two areas that need to be addressed, the weekly pointed out. First is the pressing matter of regulating -- or outlawing, though that's less likely -- the ongoing trading activity in cryptocurrencies. 

There are now dozens of ways for Malaysians to access exchanges to buy and trade in Bitcoin, as a quick online search will show. And once the actual Bitcoin is purchased, there is little that regulators can do to monitor the flow of funds.

So Bank Negara is expected to tighten controls on intermediaries that facilitate and bridge the cash-to-cryptocurrency gap. The key motive will be to apply capital controls and prevent the use of cryptocurrencies for money laundering and other illicit purposes, the weekly highlighted.

Secondly, the central bank has to consider the potential value of blockchain, distributed ledger technology and cryptocurrencies, as a technology with possible applications in financial markets that may not even be conceived yet. Yes, "it is conceptual, but the returns could be huge".

And what if regulators could catalyse further development of blockchain-related technologies in Malaysia within a robust framework? Like how Malaysia, a relatively small country in the global financial landscape, managed to pioneer and develop Islamic banking and finance?

Interestingly, some industry players are more than open to the idea of regulation. “We are pro-regulation. In fact, we believe cryptocurrencies should be regulated sooner rather than later. Otherwise, we could end up in a similar position that China faced,” said Kelvyn Chuah, the co-founder of SINERGY Technologies (M) Sdn Bhd, a Penang-based cryptocurrency start-up.

Chuah was referring to the clampdown by Chinese authorities on cryptocurrency trading as well as initial coin offerings this year, which resulted in Bitcoin trading activity in China coming to a near standstill almost overnight.

Renminbi, according to analytics site bitcoinity, used to account for over 90% of Bitcoin trading prior to the clampdown. Today, China accounts for less than 8% of the global Bitcoin trading activity. The heavy-handed and reactionary approach created uncertainty and has driven trading activity away from China, the weekly observed.

“Don’t get us wrong. We think that China did the right thing. They had to tighten controls. But they did it a little too late and it has been highly disruptive for the market, setting it back,” said Chuah. 

In the fallout, traders have since fled to more stable regulatory environments like Japan. But it's not because Japan has allowed cryptocurrency to run rampant.

In fact, by Oct 1, any Bitcoin or “alternative coin” exchange or money transfer business that wants to operate in Japan must come under the regulatory supervision of Japan’s Financial Services Agency and be subject to annual audits.

It is not an outright endorsement, but definitions of what denotes a virtual currency have managed to wrangle the anarchical spirit of cryptocurrency out of the shadows and under regulators’ scrutiny, the weekly wrote.

Today, some 10% of all Bitcoin transactions are done in yen. Besides Japan, other relatively cryptocurrency-friendly countries include those with already low reliance on physical cash, like Estonia, Denmark, Sweden, the Netherlands and Finland. The US hosts the highest number of Bitcoin users and reportedly, the largest number of Bitcoin automated teller machines. 

In Asia, countries like South Korea and the Philippines have moved to introduce regulations on cryptocurrencies this year.

Looking ahead, what sort of hypothetical framework could Malaysian regulators put together that will allow cryptocurrencies to develop as an industry?

To read more about cryptocurrency, what could be done, how, and the issue surrounding the underlying value of this digital currency, pick up a copy of The Edge today at newsstands near you. Or save by subscribing to us for your print and/or digital copy!

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Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.