[CHAINALYSIS PODCAST EPISODE 60] Malaysian Crypto Regulations and Role of Third-Party Custodians for Consumer Protection

Episode 60 of the Public Key podcast is here! Our APAC-focused episodes continue as we venture into discussions about Malaysia with the CEO of MX Global, Fadzli Shah, and discover why Malaysia is one of the strictest crypto regulatory environments in Asia. 

You can listen or subscribe now on Spotify, Apple, or Audible. Keep reading for a full preview of episode 60.

Public Key Episode 60 preview: Strict Malaysian crypto regulations combined with mandated third-party custodianship

Our APAC-focused episodes continue as Ian Andrews ventures into discussions about Malaysia with the CEO of MX Global, Fadzli Shah, and discovers why Malaysia is one of the strictest crypto regulatory environments in Asia. 

Fadzli describes the Malaysian Crypto Regulations compared to other jurisdictions in the APAC region and substantiates the clarity in legislation as cryptocurrency is deemed as a security, and the burden and onus of regulation and compliance are on the cryptocurrency exchanges.

The conversation covers the importance of mandatory third-party custodianship and how that has helped with consumer protection and segregation of funds. He also describes the rate of institutional adoption and the best use cases to come out of the emerging Malaysian blockchain ecosystem.

Quote of the episode

“I think it is fair to say that Malaysia’s crypto regulations are, if not the strictest, but one of the strictest, you know, globally. So, you know, when I looked into the space, the comparison would be like Japan, they’re also equally very strict. And of course, you know, a lot of the regulatory environments, the jurisdictions are still evolving, and that’s why you can see like, you know, unfortunately, with what’s happened with FTX, you can even see like the appetite of the regulator in Singapore is also becoming less risk loving.” – Fadzli Shah  (Chief Executive Officer, MX Global)

Minute-by-minute episode breakdown

• (2:35) – Fadzli’s early foray into crypto and the challenges of getting the required licenses for MX Global in Malaysia. 
• (5:58) – Does Malaysia have one of the stricter crypto regulations in Asia?
• (8:45) – Are Bitcoin, Ethereum, and other crypto considered securities in Malaysia?
• (12:38) – In Malaysia, the regulators regulate the operators, not the public, when it comes to crypto.
• (15:45) – Thoughts on Central Bank Digital Currencies (CBDCs) and the evolution of digital payment transactions in Malaysia.
• (19:34) – The crypto demographic in Malaysia and the most common and unique use cases.
• (23:05) – Understanding the institutional adoption of crypto in Malaysia and what it means to hold crypto on the books.
• (26:15) – Is Singapore still trying to be a crypto-friendly jurisdiction?
• (29:25) The future of crypto assets may be real-world utility for NFTs and other blockchain technology. 

Related resources

Check out more resources provided by Chainalysis that perfectly complement this episode of the Public Key.

Speakers on today’s episode

• Ian Andrews * Host * (Chief Marketing Officer, Chainalysis) 
• Fadzli Shah  (Chief Executive Officer, MX Global)

 

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Transcript

Ian Andrews:

Hey everyone. Ian Andrews back with another episode of Public Key. Today I am joined by Fadzli Shah, Chief Executive Officer MX Global, the leading exchange in Malaysia. Fadz, welcome to the podcast.

Fadzli:

Thank you so much, Ian. Thanks for having me, and thanks for giving us the opportunity to share our viewpoint from I guess the other side of the world from where you are.

Ian Andrews:

It is definitely the other side of the world from where I am in Washington D.C. You and I had the opportunity to meet last year when I was in Singapore, and this has been one of the podcasts I’ve wanted to do ever since. I think your background and expertise in both the Malaysian crypto market but also across the region is one that our listeners are going to be really excited to hear. Maybe we can start with a bit of your background because I think you have a really unique entry point into crypto. You’ve done some amazing things throughout your career. Why don’t we start with that story?

Fadzli:

Well, I’ve been in tech my entire life, so I went to university in the UK and started and sold a couple of tech companies while I was over there. 2011, I came back to Malaysia thinking I have this crystal ball of knowing how to build a tech company because London and San Francisco were much more mature markets compared to KL, but I fell flat on my face because there’s so many parts of the ecosystem which are missing. From there I went into the VC space. We were backing founders and lo and behold, I think nine years into the VC run, I was given the opportunity to serve the nation. I joined a government agency, Malaysia Digital Economy Corporation, which oversees kind of the overall digital economy development. And it’s really that time, the two years I spent at MDEC that I kind of saw, “Wow, that’s this huge opportunity for this thing that I’ve kind of heard of before,” i.e. Bitcoin and cryptocurrencies and digital assets.

But when I was there, it became quite obvious to me that this could be something that you could really kickstart a brand new wave of innovation and build new industries upon. Leaving MDEC, I was just kind of feeling my way through trying to figure out what you really need to jumpstart this thing. And that’s where I eventually landed into, well, my hypothesis is really that crypto’s going to go regulated long term, right? The exchange element is super important and super critical to get right in the beginning, if not everything else can’t really thrive into fore.

Ian Andrews:

And I think you told me, I mean, on this regulation topic, that it took you well over a year to get the license for MX Global to operate just in the Malaysian market, right? I mean, it was a long and arduous process.

Fadzli:

Yeah, so in fact, I can’t claim all the credit. I’m not the founder of MX Global. My colleague, Jason, started the company off in 2017. We kind of commercialized in 2018 and 2019 is when the regulations in Malaysia were enforced and MX Global was one of the companies that didn’t get the license. It was an arduous kind of two year journey convincing and negotiating with the regulator to kind of launch what we felt was a compliant yet interesting enough version of an exchange that could work within the Malaysian regulatory sphere.

Ian Andrews:

I recall from our previous conversations that the regulatory framework that Malaysia has put in place is quite strict. I think we’re now seeing a lot of discussion globally about things like third party custodians being a good idea. That’s something that’s standard in traditional finance but had been absent in crypto. And we saw a number of failures last year where the sort of custodial responsibility was maybe not being done particularly well. Customer funds were getting co-mingled with the business funds and then losses were harming the investors. I think the situation you’ve been operating under though is you’ve always had a third party custodian requirement, right?

Fadzli:

Yeah. I think it is fair to say that Malaysia’s crypto regulations are, if not the strictest, one are the strictest globally. When I look into the space, comparable with Japan, they’re also equally very strict. And of course a lot of the regulatory environments, the jurisdictions are still evolving. And that’s why you can see unfortunately with what’s happened with FTX, you can even see the appetite of the regulator in Singapore, which even though they didn’t license FTX, but the sovereign fund had a relationship with FTX. As a reaction to that, you can see that their appetite is also becoming less risk loving. But yeah, you’re definitely right. Third party custody is something that at least in our jurisdiction is very strict. We don’t hold direct access or control over the digital assets. Neither do we hold direct excess over investors fiat deposits. In both instances we have to use third party operators and those have to continuously be reassured to the regulator.

Ian Andrews:

When you look across the region at other markets, I don’t think the approach Malaysia has taken is yet standardized. Maybe Japan has taken it this far, but I think rules are somewhat more lax in markets like Australia. We had Caroline Bower who runs one of the larger exchanges in the Australian market on the podcast last year, and I don’t think she’s having to do this for her exchange. What’s your prediction on the future? Is the approach that Malaysia’s taken, which is clearly I think a safer, more conservative one, does that become the standard that other markets will adopt?

Fadzli:

I don’t know if the Malaysian standard will be kind of the defacto standard, but I do generally see it a trend that a lot of regulations become more and more strict, right?

Ian Andrews:

Yeah.

Fadzli:

Malaysia actually, we operate within this clinical coalition of countries, the 10 nations of the Southeast Asia called ASEAN, and a comparable of that would be the EU. But the direction that both jurisdictions or cohort of jurisdictions have taken is very, very different. In the EU, it’s kind of was scattered and then now they’re calling for unified regulations across the entire EU. Whereas in ASEAN, the regulations are taking very different directions and even definitions across the 10 member states. Half of the 10 member states in ASEAN don’t even have regulations enforced. A simple example would be in Malaysia we don’t have, maybe for better or worse, we don’t have this argument of whether particular cryptocurrency is a security or a commodity.

In order for it to be traded in the regulated environment, it must be a security because it falls under the Securities Commission regulation. You don’t see projects in Malaysia trying to justify that they’re not a security or not a commodity, right? Most projects are trying to be a security, at least under the Malaysian definition, in order for them to be legally traded on exchanges such as ours. Whereas if you look at Indonesia, Indonesia said cryptocurrencies are commodities and so they’ve had many more exchanges. In Malaysia we have four regulatory exchanges. In Indonesia, they’ve had upwards of 18.

Ian Andrews:

Wow.

Fadzli:

I kind of lose track because guys are getting new licenses and some are kind like withdrawing. Things keep changing, but generally we’re not facing the same problems or the same issues that maybe you see in the United States. But I wouldn’t say that some of the decisions and episodes happening in the US are not affecting us. But generally you have at least at the base level, a high level of clarity in terms of the direction of regulation in Malaysia. And even if in markets like Indonesia where the definitions are different, they’re treating them as commodities, the regulatory clarity relative to a market like the US, it is a bit higher clarity here.

Ian Andrews:

It sounds amazing. I’m curious if all digital assets are considered to be securities, does that mean that there’s a registration process that has to happen and have things like Bitcoin and Ethereum gone through that registration process?

Fadzli:

Yes. The view of the regulator, and I don’t try to speak on behalf of the regulator, but obviously ourselves as operators under that jurisdiction, is that a cryptocurrency, in order to be traded in one of the regulatory exchanges must be a security. Of course, the natural question becomes what if something’s not security, can we trade it? And that’s still a gray area in Malaysia. So Bitcoin, Ethereum and seven other coins have been classified as securities and the process under which they go, this qualification, obviously when they started the regulatory exchanges, the regulator made decision on Bitcoin and Ethereum being securities, right? The other seven has been kind of like this march that we’ve done over the last three years where the exchanges as what they call recognized market operators, have to justify to the regulator that this new coin that you want to list is a security and how it meets the definitions of security, and to demonstrate whether there’s local demand.

Local demand’s very important in the Malaysian context because we are fiat linked centralized exchanges, so there’s no stable coins. Everyone coming in with ringgit fiat and if you want to withdraw fiat, it has to be ringgit. That’s why demonstrating that there’s local demand, i.e. because the ringgit is also restricted currency, right? Not everybody in the world has a ringgit account. That’s very important. I think it’s a similar approach in Indonesia, but both of these countries are very dissimilar to the Singapore context because Singapore is a lot more widely traded and the support for US dollar is, I guess in simple terms, it’s much more common to have a US dollar account in Singapore than it is to have a US dollar account in Malaysia.

Ian Andrews:

This is fascinating. If I were starting a new project and that project had a token, would I be able to apply and register that as a security or would it need to come from the regulated exchange?

Fadzli:

The process would be that if you were the project owner, you’d submit to the exchange, i.e. us. Your justification for how you meet the definitions in the regulations. And we would vet through that and if we agree, we would submit an endorsement. Basically we’d submit an application on your behalf to seek endorsement from the regulator and then it would be, I guess “legally” tradable on the exchange.

Ian Andrews:

Yeah, I think this is such an interesting approach because right now in the American situation, we have the complexity of … Well, are digital assets commodities or securities? But then we also have this conversation going on, particularly as it relates to any of the DeFi tokens about, well, if they are securities, who would go about registering them? Who actually has the authority to file appropriate disclosures? It’s not like there’s a board of directors or a CEO necessarily. The decentralization side of the equation gets much more complex, but it seems like it’s been solved in your market by saying, well, no, the trading venue has to register the asset. And that resolves the question of who has responsibility for vetting the quality and continuing to provide reasonable disclosure to the investor audience. That’s pretty powerful I think.

Fadzli:

Yes and no, right? I would agree that this kind of solves the problem, if you will, for fairly established cryptocurrencies of which there are very, very few. You’re talking about Bitcoin, Ethereum, maybe you can argue Bitcoin Cash, Litecoin, but if you imagine someone starting a brand new project, how do you establish market penetration before it being traded on the exchange? How do you get distribution of a new project? As much as we may be fairly mature and safe in some regards for the public going to crypto, there still remains gaps. For brand new projects, Malaysia, and we’ve had a few projects which are fairly new, two or three years into the market, fairly low market share in Malaysia, but respectable market cap globally, it becomes a challenge then to kind of say, “Do Malaysians really want this?” And then how do you maintain a healthy order book if the awareness for that token’s so small?

It becomes kind of like this catch 22 situation. You can’t build awareness because you’re not legally recognized. But at the same time, if you don’t have enough awareness then you wouldn’t have healthy trading volume. You don’t want the perception of you being a rockpool post listing in a regular exchange. We don’t have everything figured out. But I think if I were a regulator, I’m looking at it from a point of view of investor protection or specifically retail investor protection. And I think in that regard, the set of regulations that we’ve had to abide by Malaysia have done a fairly good job of minimizing the contagion as we call the aftermath of a few of deficits last year. We’re fairly sheltered in that way, but at the same time, maybe for the degens out there, it’s just not as exciting, volatile a market as they may want it to be.

Ian Andrews:

That may be a good thing, I’m not sure. But I’m curious as we start to talk a little bit about users, are citizens allowed to trade on non-regulated exchanges? Are you able to open an account on an international exchange that isn’t regulated in the country at all, and is it reasonably easy to transfer fiat out to that exchange and buy cryptocurrency that’s outside of the list of registered securities?

Fadzli:

So that’s a great question. I think what a lot of people have to understand is that regulators regulate the operators. They don’t regulate the public itself. They’ll regulate the ones providing the service. With MX Global, we’re regulated. We can advertise, we can be fairly open about the fact that we’re an exchange, but it is atypical for a regulator to go to the specific members of public and say, “You can’t do this or you can’t do that.” Malaysia’s fairly similar to other markets in the sense that if there were an international exchange that had in some way, shape, or form marketed to a specific country and that becomes evidence to the regulator, the regulator then may issue a cease and desist or a warning and then they would have to stop those activities. The simple answer is that it’s a buyer’s beware kind of approach.

If with your own property, i.e. your own money, you could in theory open up an account in any exchange anywhere in the world that would accept it. However, that relationship that you would have to that exchange is not governed under this jurisdiction. I think the big challenge for a regulator is that when a retail investor does that, not understanding fully the risk that they’re putting themselves in, of the recipient putting themselves through, the outcome’s never so well thought through. If something happens, they get burnt or they get wrecked, they’re going to be looking for someone to protect them and they’re going going to go to regulator and say, “Hey, I opened an exchange ABC, why didn’t you stop me? Why didn’t you save me?” Generally we advise a lot of our users and also the general public, it is entirely your call where you want to make an account if you can make an account, but you must be aware that it’s only these four exchanges which fall under the jurisdiction.

Now, on the question of can they go in and out of fiat, ringgit fiat fairly easily? That’s another interesting question, right? Strictly speaking, you can’t. Strictly speaking, if you have a bank account in Malaysia and you try to deposit into a foreign exchange, even using telegraphic transfer, the banks will query you. They will ask you why are you transferring to this company? Which to the bank’s knowledge isn’t an exchange. And in most cases it would be a bit difficult for you to complete that transaction. But of course in practice what happens is that a lot of people use P2P, right?

Ian Andrews:

Yeah.

Fadzli:

They’re doing P2P for stablecoins and then using that to go to wherever they want to go. Or even to that point, they might come out to MX by Bitcoin or Ethereum and then they might transfer that and then trade it on an unregulated exchange. We don’t necessarily discourage our users. We want our users to feel emboldened that they’re fully in control of their funds. Because even though we’re a centralized exchange, yes, not your keys, but really we want to honor them as your coins, but at the same time we try to invest quite a lot into letting them know what are the risks that they’re putting themselves into if they do this. But eventually, if it’s really their call to transfer it out to another exchange, we’ll honor that as we think is our duty as kind of a duty for operators to do.

I think no country in the world has really regulated P2P successfully, and of course by the nature of P2P, I think we can understand why, but for me that’s probably going to be one of the cornerstones of if you look at crypto 20, 30 years from now, there must be a more efficient alternative and a better user experience than P2P because to be honest, the deposit withdrawal experience on a regulated centralized exchange, it is inferior to the P2P experience. P2P is like, you transfer the money now, two minutes later you’ve got the digital assets. Personally, I think in the regulator space, you need to figure out something as good, if not better than that experience in order for you to gain the confidence of the overall market.

Ian Andrews:

What do you imagine that looks like? Is it a central bank issued digital currency? Is it a stablecoin maybe issued by a big bank or something else entirely? Do you have an idea?

Fadzli:

I have a couple of guesses, right? I think scenarios that could play out in a market like Malaysia. Number one, I think CBDCs, and this may be an unpopular opinion depending on the demographic view of your listeners, if CBDCs in small markets in Malaysia would be successful, it wouldn’t be because people recognize them as CBDCs. It’s just because they wouldn’t. I think CBDC adoption would probably come without the conscious appreciation by the user. They’re just using it to pay for stuff or they’re using it to honor transfers and if it works, then they’re … Nobody asks what’s the technology behind instant bank transfers today? Nobody does. That brings me to my second scenario I think is possible. Yes, number one, maybe CBDC is a way that countries Malaysia solve it. Number two is countries like Malaysia already have fairly efficient financial infrastructure in terms of internet banking.

We’re one of those classic cases where we went from a debit card economy to a credit card economy to an e-wallet economy. Today, you can send me money five or 10 different ways, not just my bank account. And I think if that were extended to the exchanges, instant bank transfers to credit, like the ringgit balance, personally, I think that will probably be the thing that changes the scenario the most for the users. The third really is that people by under set of conditions kind of revolt against the government and then there’s a huge distrust of a government and then suddenly you see this huge uptake into unbanking yourself and going into a stablecoin.

I’m pretty sure every central bank is confident that’s not going to happen in their country, but I wouldn’t count it out because there is in many countries a sentiment that you can’t really trust your bank or you can’t really trust the government. You just look at countries like Venezuela. I mean, they definitely think that, I would guess that they would think that they could have done a better job managing their money than putting it in the hands of banks.

Ian Andrews:

Yeah, yeah, absolutely. I’m curious, from a user base perspective, what is drawing people into crypto in your opinion, and what are they doing with it? Is it primarily an investment vehicle, is it something else? What do you see as the big drivers in the market?

Fadzli:

I think the classic term that we here thrown around is it’s an inflation hedge, right?

Ian Andrews:

Yeah.

Fadzli:

And I would say that yes, that’s definitely, maybe the users don’t call it an inflation hedge, but they do see it as an alternative to other stable yield assets. FOMO I think definitely plays a huge part in kind of crypto adoption in Malaysia. We can see it clearly from our demographic. In MX, the demographics are very clearly, the 24 to 37, 38 year old, these are guys who have friends who are crypto bros and tell them, even when we interview our users they say, “Oh, I have a friend who’s had outsized returns. I’m starting with the basics by buying Bitcoin. I’m starting with the majors” where at least the perception that they have is that it can’t go wrong. I guess they’re thinking long term, it’s going to be up and to the right and generally you’ll see you that the friction, the learning curve and friction going to crypto is actually quite arduous, right?

Ian Andrews:

Yeah.

Fadzli:

Once you want to go beyond a centralized exchange, you have to understand how self-custody wallets work. You kind of skip a heartbeat every time you transfer something over the Ethereum network, you have no idea whether is it really happening, is it really going through? We do see huge drop off of people who were so keen on going into crypto and starting off with Bitcoin thinking that they’re going to go into the alt coins. But then they kind of try that and they get the few and say, “Oh, it’s actually quite nerveracking.” Then we do get request of like, “Hey, there’s all these altcoins I would like to buy, can you make it available in MX?” And then we get back into the problem that I shared with you before. Well, yeah, it’s great if a hundred guys tell me they want have a coin, but is a hundred guys enough to make an order book, sustain an order book, right? And in most cases it’s not.

Ian Andrews:

How about things like staking? Is that becoming popular or particularly with the Ethereum upgrade that happened last year, it seems like globally there’s just been a huge awakening or interest in staking, but obviously here in the US we’re seeing some adverse rulings from regulators about the ability to offer staking products. Is that even legal in the Malaysian market?

Fadzli:

It is not something that’s outright illegal, but it’s something that we’re working through with the regulators. What I would say is that I think the regulator has an appetite for staking for the network. Like if you’re staking towards an Ethereum node and we provide that as a service from the MX dashboard straight into you staking into a pool, that might be something that from a risk mitigation perspective is acceptable. But kind of a general term of staking over the last few years has been conflicted. Those include yield farming, kind of all of the other things that have promised outside returns. I mean, a year ago, who wouldn’t want to put in some money for UST and earn way more than it costs you to borrow? But I think for those kind of cases, the regulator, I wouldn’t want to say can see right through it, but it’s fairly difficult to do a stress test on those kind of propositions and think that they might be safe for public.

I think for network staking, especially now with the recent upgrades in the Ethereum network, we might be looking at a product like that, but generally no form of staking has been offered on any of the regulatory exchanges yet. And I think Ian, our regulator’s not just learning from what’s happening on the ground in Malaysia, you also look at what’s happening in the neighboring countries and also in the major powerhouses. There has been at least one incident where a regulatory exchange has offered a staking product and that’s where the counterparty was the likes of lending protocols. And even though there was cross jurisdictional, the end effect was that the depositors from that legal, the licensed operator lost all chances of being made whole in recovery.

As operators, we do have to find fairly creative ways for fair challenges to make things work, but there have already been incidences where being too creative and making a product work eventually led to the retail versus eventually paying the full price. I would think appetite’s fairly low to introduce something like that to the general public.

Ian Andrews:

The borrowed lending experiment that kind of ran wild over the last two years seems to have not ended well for most participants. There were short term kind of unsustainable interest payments being made, but not enough lending activity and certainly not at a rate high enough on the loans being made to actually make that a real business. It was sort of a momentarily inflated by the asset prices going up I think, and maybe some venture capital dollars coming into the ecosystem, but obviously that ended particularly badly for retail investors. I’m curious about the institutional side. Where do the traditional banks and payment providers fall in regards to crypto?

Fadzli:

It’s similar to how I understand it’s playing out on Wall Street. You have demand from your high net worth clients. They’re trying to get to crypto and you as a bank provide that as a service, but in most cases can’t unless the entire value chain is regulated. There is space for innovation in terms of how institutions on ramp into crypto and obviously also off ramp in the regulatory space. This is something where we do know a few operators who are looking at something like what you see in Chicago where it’s listed on a non-crypto exchange. That’s one push to it and I think it makes a lot of sense because a few things have to come together in order for a company. I mean, not everyone’s Michael Saylor and can just force his way through, but kind of follow his conviction for Bitcoin.

But for a typical company, the three things that you need surety for, right? Number one is the tax treatment and that’s the first thing that working on the whole of last year. The number two is the on and off ramp can still be in your defacto or default currency. For most of our institutional investors, obviously it’s ringgit. And the third is that the regulator agrees that this product is safe. And I think that’s another approval that’s required in order for the companies to assure their own stakeholders that that’s a viable bet. I’m happy to note that as of the end of 2022, right around the end of November, the tax office in Malaysia came up with the tax guidelines in the treatment of cryptocurrency or digital asset related transactions.

I think that really helped with institutions understanding, at least from an accounting perspective what the exposure’s going to be like, how that’s going to be treated. What we’re waiting for next is kind of some of these products to materialize and be assessed by the regulator. As of today, the way to do it is have to open a institutional account on MX, but we understand from dealing with institutional clients that it’s beyond that. They don’t just need an exchange to trade on. They also want assurance that basically they don’t want to scalp the market every day. They don’t want dollar cost average. They have a separate set of needs that we will be working closely with the regulator to satisfy.

Ian Andrews:

That’s exciting. The tax treatment that was established, does that mean that the cryptocurrencies are treated like any other security that a company might hold on their balance sheet or is there any material differences?

Fadzli:

Yeah, so Malaysia, we have zero capital gain tax, right?

Ian Andrews:

That’s nice.

Fadzli:

So I think that’s maybe a good point for some of your listeners to consider setting up a company. We have 0% capital gain tax, but you also have to demonstrate that it was really a long-term hold holding. If you trade crypto, then it becomes business activity and then you’re subject to the corporate tax, which is up to 30% in Malaysia. But if it’s an investment, if it’s something that your company has on its books kind of as an alternative savings product and you can demonstrate that, then that’s I think what our companies are looking for. They’re looking to become passive investors in crypto and not necessarily traders.

Ian Andrews:

Interesting. Definitely friendlier tax treatment than we currently have in the US. I’m curious your perspective as we maybe move abroad to some other markets. There’s been a lot of news recently out of Hong Kong where I think mainland China had sort of ruled adversely against crypto. We saw all of the crypto miners kind of leave the country. It seemed like that there was some direction from China to the Hong Kong government and the Hong Kong government was kind of following that and it seemed like many of the crypto companies were starting to move out of Hong Kong. And then that position was recently reversed and I’ve seen a few declarations of Hong Kong’s ambition to become a digital asset financial center for the world. What are your thoughts on that? Is that perspective right? Because I’m viewing it from very, very far away obviously.

Fadzli:

Well, funny you should say that because the reason that we had to delay this recording because I was in Hong Kong all last week-

Ian Andrews:

Oh, perfect.

Fadzli:

… for the Web3 Festival in Hong Kong. I’d say a couple of things to this, I can’t comment on whether Hong Kong’s doing this under the directive of Beijing itself.

Ian Andrews:

Sure.

Fadzli:

But I think it is fair to say that Hong Kong doesn’t do anything without China being aware it’s doing it. And this is not exactly doing it in a very stealth way. I wouldn’t comment on whether China is endorsing this move, but I would bet that China’s totally aware that Hong Kong’s moving this direction. That’s number one. Number two, ironically I was in all of these three markets in the times that they tried to announce this, “We want to be a crypto hub of the world.” Hong Kong most recently, before that Dubai, and before that even Singapore, right?

Ian Andrews:

Yeah.

Fadzli:

You can see that the tale has played out differently in Singapore and Dubai. I think it makes a lot of sense for countries which are already primed as financial centers to want to become the future crypto center because it’s an alternative financial industry and market. Now what I think is really interesting that I saw in Hong Kong is that it wasn’t all the same players that I saw. To be honest, Dubai and Singapore, same guys, the same guys were exploring both of these markets for I think now in retrospect we kind of know, okay, well the main motivators were like, well, tax treatment, tax residency, a lot of things to do with tax, right?

Ian Andrews:

Yeah.

Fadzli:

But the use cases were very much, and maybe because it was also the flavor at the time, DeFi, kind of like stablecoins, everything to do with alternative finance. But in Hong Kong you see a lot of companies who are building what I would say more base level technologies. You look at custody solutions, you’re looking at things which are bridging. I even saw Hong Kong based stablecoin backed prepaid cards. The way that they’re looking at-

Ian Andrews:

Wow.

Fadzli:

… The way that they’re looking at digital assets is not just kind of, “Hey, let’s invest and let’s kind of try to ape in and moon in some sort of point.” It’s kind of like how do you build real utility with some of these digital assets? If my one week at Hong Kong I kind of meeting the kind of guys who are very serious about setting up or having set up in Hong Kong plays through, then I think what you’ll see in Hong Kong is a lot more kind of connection being made between TradFi and crypto. And I think that makes a lot of sense. And personally I think I view this as a giant sandbox by China, if I can say that, right?

 

I mean, I’m not saying that that’s something that’s going to happen in 12 months, but I would think from a policy perspective that may be how the bet’s made if you were China.

Ian Andrews:

It’s going to be fascinating to watch it. Now you brought up Singapore, they seem to have gone the other way since that declaration of, “We want to be the digital asset world financial center,” and the restrictions and limitations seem to have been increasing in the last few months. Is that what you saw in your visit there?

Fadzli:

Yeah, exactly. I mean, even when we were down there last in Singapore, at that point you hadn’t really witnessed the kind of full aftermath or reaction towards the big global failures of last year’s crypto, right?

Ian Andrews:

Yeah.

Fadzli:

But yes, Singapore four years ago kind of said, “Everyone come here and establish yourselves here. We love everything crypto. We’re going to be fully support it.” And I think to a large degree, the government and the monetary authority of Singapore, were trying to be facilitative. I think naturally some players in the industry were upset that maybe they weren’t an execution. There was some accusations that Singapore were kind of choosing winners. But I think that’s natural to expect that if you are invite a thousand companies and you expect your market to be regulated, you’re going to have to put them through some paces and then just reward the ones who make it through all the way.

Unfortunately for Singapore, some of those who were established either legally established in Singapore or just operating out of Singapore became infamous for the wrong reasons last year. I think that’s why they kind of reversed. I wouldn’t say reversed their position. I think they’ve contracted the position a little bit in terms of the openness, but I don’t think it’s game over necessarily for Singapore. I think Singapore has a plan to springboard again and make sure that the next iteration of Singapore’s crypto industry is innovative yet safe.

Ian Andrews:

Last question for you before we wrap up the podcast. What are you excited about as you look forward to the year? And this can be broadly across the crypto ecosystem or specific to things that you’re working on at MX Global. What’s on the horizon for you?

Fadzli:

Yeah, I see quite clearly that I kind of like a lot of the things like NFTs and digital art, if I can put it quite bluntly, avenues for pumps and dumps. Those are going away very fast, and if they haven’t gone away already, because I think the market has learnt how these things have operated and then I think the good folks at Chainalysis, in fact were telling me how you recognize those patterns. This happened enough times that I think the market’s starting to recognize that. And on the flip side of that, I think governments have really woken up to really what may initially have been a threat to governments in terms of the cyber currency. Not a lot them understand, “Well, we can address blockchain, but we can’t do that by completely ignoring crypto.” What we’re very excited at MX Global is that we believe a few markets which are going to try to be ahead of the curve, are going to try to prescribe how crypto can interact with the mainstay financial system.

So with Amex for example, we do believe that there is an opportunity for you to pay with your Bitcoin that interacts with the traditional financial system. The settlement for the merchant is still ringgit. And I think a lot of markets are going to lean towards that way because as you get more and more market participants, you want build out utility for them. And if that utility’s not trying to 5x, 10x on some NFT collection, which appeals to some people, yes, but I think if you look at broad base, right? People want to be able to spend the value that they’ve created. I think real world utility for crypto and not just NFTs, I mean, I heard utility for NFTs, it’s like crypto a hundred times last year, but I think real world utility with your cryptocurrency digital assets is the way to go in the near term.

Ian Andrews:

I love it. I couldn’t agree more. The perspective about better consumer protection, cutting down on rug pulls and bringing digital assets into the average user where they’re actually able to make their daily lives better is an amazing outlook. Thank you so much for joining us on the podcast and sharing your perspective. This was a terrific conversation.

Fadzli:

Thanks, Ian. Looking forward to seeing you guys again and the next time you’re on this side of the world, or the next time we get to visit the US. Thank you.

Ian Andrews:

Absolutely.