This article first appeared in The Edge Malaysia Weekly on March 18, 2019 - March 24, 2019
WHILE retail participation in the local stock market has been subdued — at around 20% — for years now, there has been immense growth in investor participation in digital investing platforms, such as equity crowdfunding (ECF) and peer-to-peer (P2P) financing, especially among the younger generation of investors.
The capital markets seem to be shifting towards these alternative investments — mostly hosted on digital platforms — which is why the Securities Commission Malaysia (SC) is putting significant emphasis on the fact.
SC chairman Datuk Syed Zaid Albar says digitisation is key to make the markets more attractive and accessible, particularly to young investors.
“What investors want is definitely changing and the entire capital market is evolving. If you look at the capital markets of the 1990s and compare them with today’s capital markets, there is a world of difference,” he tells The Edge.
Since it started in Malaysia in 2015, ECF has raised RM48.87 million through 51 successful campaigns by 50 issuers. In terms of investor demographic, 71% were below the age of 45 while 35% were below 35.
And since 2016, there have been a total of 2,505 successful P2P financing campaigns by 643 issuers in Malaysia with a total of RM212.65 million raised. Similarly, a significant portion of participants were young investors — 87% were below the age of 45 and 57% were below 35.
“The ECF and P2P space, for example, shows strong participation by younger, more tech-savvy and risk-tolerant investors. They are more used to open data, and they value convenience and easy access,” says Syed Zaid.
The regulator’s digital initiative so far has focused on bringing in new business models and it has so far drawn in several digital natives, including online investment platform operator iFAST Capital, online equities trading platform operator Rakuten Trade and robo-advisor StashAway.
Rakuten Trade, for example, had more than 27,000 registered accounts as at March 1, with 80% of the account holders being below 40 years of age. Some 45% of the account holders were also new to the equity market, a testament to the role digital platforms can play in fostering inclusivity.
Syed Zaid says there are two more digital investment managers in the pipeline, following the approval of StashAway last year.
It is also important for local players to step up their game in order to compete with the rising number of foreign digital players, especially as many of the established platforms in Malaysia still require customers or users to register in the traditional “offline” way — filling in forms and submitting them at a physical location, for example.
This pales in comparison with platforms like Rakuten Trade and StashAway, which conduct the entire registration process online or via an app, making them more attractive to younger investors, who want speed and convenience.
The SC has set out to address this issue, working with other stakeholders through initiatives like the Brokerage Industry Digitisation Group (BRIDGe), which was established in August last year.
“We are working with incumbents through initiatives such as BRIDGe, which also brings together stakeholders, such as Bursa Malaysia, Bank Negara Malaysia and industry participants, to accelerate the digitisation of the broking industry, focusing on client on-boarding, post-trade and settlement as well as corporate actions,” says Syed Zaid.
Apart from these initiatives, another key area that the SC is addressing is the cryptocurrency or digital asset space, which has caught the interest of younger investors in recent years.
Regulating the digital asset space
In tandem with most of the other regulators in the region, the SC has decided to regulate the digital asset space as it sees practical use cases for digital assets in the capital market, including fundraising for early-stage businesses or projects through the issuance of digital tokens, and a potential market for secondary trading of digital assets.
“In line with the global trend, we are seeing increasing activity in the digital asset space. At present, we recognise that there is insufficient investor protection measures and transparency of information in place for this asset class.
“From conversations with our peers around the world, we believe the conversation on digital assets has turned towards having some form of regulation in place. We have engaged with regulators that have implemented regulations in order to learn from their experience, so that we can formulate an appropriate approach to our market,” says Syed Zaid.
In January, the SC introduced requirements for digital platforms that facilitate the trading of digital assets. Parties interested in operating an exchange platform in Malaysia were required to apply to the SC by March 1 in order to be registered as recognised market operators. They will then have to comply with, among others, know-your-customer requirements and have sufficient arrangements and processes in place to protect against the risk of loss, theft or hacking.
Syed Zaid says the SC has received 46 applications to operate digital asset exchanges and that it is assessing them. The review period is about two months, he adds.
Meanwhile, 21 existing digital asset exchange operators were ordered to cease operations and return all their clients’ assets by March 15 as they had failed to submit their applications to the SC.
About two months after the announcement of the rules for the exchanges, the SC released a proposed regulatory framework for initial coin offerings (ICOs) and is seeking public feedback on it. The framework is expected to address investor concerns about the legitimacy of digital asset exchanges and ICOs.
ICOs have created quite a stir in recent years amid numerous failed projects around the world despite raising millions, if not billions, in funds and outright scams that saw several issuers absconding with their investors’ money.
There have been several questionable ICOs in Malaysia as well, including EcoBit, a digital token that was claimed to be part of a carbon credit programme under the UN, which denied any association with the project.
The SC shut down several ICOs, such as the one by CopyCash Foundation, as well as LaVida Coin, which made the headlines due to the personality behind it — cosmetics millionaire Datuk Seri Hasmizah Othman, also known as Datuk Seri Vida.
However, Syed Zaid says ICOs can be a good and innovative way to raise funds, provided proper regulations are in place. He adds that the SC will handle this fundraising method in the same way it deals with ECF and P2P platforms.
“We have undertaken a public consultation on the proposed regulatory framework for ICOs, which includes investment thresholds and disclosure requirements for whitepapers.
“Once the SC has completed the public consultation stage, we will review all feedback and announce the relevant guidelines in early 2Q2019,” he says.
One of the notable requirements is that listed companies are prohibited from doing ICOs, unless they establish a separate entity to carry out the exercise, because the pricing and valuation of the company’s listed shares and the rights of existing shareholders may be impacted.
Similar to the ECF and P2P financing frameworks, an ICO issuer is required to approach an SC-approved third party to host the ICO and assess its whitepaper.
There is also a maximum cap of RM100 million that can be raised via an ICO with at least half of the proceeds to be utilised in Malaysia.
Asked if the proposed regulations would deter startups and companies from doing ICOs, Syed Zaid says the rules are necessary to ensure the safety of investors. “Our main duty is to make sure the industry grows through innovation, but we will also manage the risks and ensure investors are protected.”
However, he reiterates that these are only proposed regulations and are subject to change after the regulator has reviewed public feedback. “We maintain that the SC is generally open to all types of issuances as long as they are genuine and productive. In other words, we need to ensure that the investor is protected, that there is a legitimate business model and value proposition, and that the people behind it are fit and proper.”
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