This article is an excerpt from the Luno white paper, Traditional finance and crypto in Malaysia. For more insights about the intersection of TradFi and crypto, download the full report.

One of the defining features of crypto as an investment class is democratisation of access, with retail investors widely credited as the driving force behind its parabolic market cycles in 2013, 2017, and 2020.

However, this has changed in recent years, with major price movements increasingly now attributed to the actions of institutional investors and traders.

This interest has become increasingly evident in Malaysia, where institutional attitudes towards crypto appear to be growing more optimistic after exchange-traded funds (ETFs) were approved in the US earlier this year.

Up until about two years ago, the majority of interest in crypto assets we saw at Luno was from individual investors.

In the last year or so, we’ve seen a steady influx of interest in business accounts and other institutional-related services.

But while the interest is certainly there, institutions are still taking a cautious approach.

They’re working out how to enter the crypto space and what to do when they get there.

Regulating for a new era of crypto in Malaysia

A cautious approach to new technologies and asset classes is common in Malaysia, where institutions tend to be more cautious generally – especially when it comes to assets, like crypto, perceived to be high-risk.

One factor that could change this perception in Malaysia is the country’s proactive regulatory approach.

Malaysia’s regulatory regime, particularly since the introduction of the Digital Asset Exchange framework in 2019, is seen as a progressive model in Southeast Asia.

The Securities Commission of Malaysia (SC) has been open to discussions with crypto industry players and has continuously updated regulations to support digital assets’ growth while managing risk.

However, the landscape was different when these regulations were first released.

Malaysia’s regulatory framework was predominantly retail-focused, catering to individual investors. This reflected the landscape at the time.

The downside is that it means they are not necessarily always helpful for institutions.

Regulatory clarity, although evolving, still lacks a clear, cohesive framework for integrating crypto into traditional financial systems.

There is a framework, but when you start merging the two, the lines get a little blurred.

The good news is that regulators are willing to listen and engage.

At the SCxSC Fintech Summit 2024, for instance, there was a concerted effort by regulators to facilitate deeper conversations between traditional financial institutions and crypto players.

This open-door policy has played a crucial role in helping institutions feel more comfortable in exploring crypto asset investments.

A case in point explored later in this whitepaper is Malaysia’s first licensed fund managers to offer crypto products, Halogen.

They took their time to engage with regulators, walking them through their product flow.

That kind of collaboration with regulators is vital for institutions to feel comfortable jumping into the crypto space.

Malaysia’s unique demographic and economic context

The country’s diverse demographics add an additional layer of intrigue to institutional crypto adoption.

Malaysia has a unique blend of ethnic groups, including Malays, Chinese, and Indians, with distinct cultural and economic perspectives.

This diversity influences attitudes toward emerging technologies like cryptocurrency.

A significant demographic consideration is the role of Islamic finance.

Malaysia is a global leader in Islamic finance, with Sharia law detailing stringent guidelines on ethical investments.

The intersection of cryptocurrency and Islamic finance presents both opportunities and challenges.

While digital assets are deemed as permissible to be traded on regulated platforms such as Luno, there remains a divide among Muslim investors regarding the permissibility of investing in cryptocurrencies.

While there is growing interest in crypto among institutional Muslim investors, the question of whether digital assets are Sharia-compliant remains a significant barrier.

Some Muslim investors are still unsure whether products like staking are Sharia-compliant.

It’s a fragmented market, with some welcoming crypto as a yield-generating product, while others question its permissibility.

Again, engagement is key if Malaysia is going to take advantage of crypto. And it seems to be happening.

The presence of Malaysia’s Shariah Advisory Council plays a key role in determining the permissibility of crypto assets in Islamic finance.

The SC, through the SAC, has gone to great lengths to determine if these cryptocurrencies are indeed Shariah-compliant. Otherwise, they are generally considered ‘permissible’ unless explicitly deemed haram (forbidden).

This nuanced approach helps bridge the gap between Islamic finance and cryptocurrency, though continued engagement with regulators is needed to provide clearer guidelines for institutions that wish to offer Sharia-compliant crypto products.

Collaboration with each other the key to institutional adoption

While regulatory and ethical concerns are undoubtedly significant challenges to institutional adoption, the biggest obstacle to overcome continues to be strategic.

This is a new asset class and many are looking to pioneers in the space such as Halogen to blaze a trail, so they can gauge how crypto assets can be integrated into institutional portfolios without exposing them to undue risk.

For institutions, the primary challenges in entering the crypto space are expertise, risk management, and governance.

How do they get into this space in a manner they can control? At the individual level, investors have their own risk appetite.

But when you get into institutional-level investments, there are many layers: risk structure, governance, boards of directors, and so on.

Many institutions we’ve talked to say simply that they don’t have the right knowledge or expertise to manage crypto assets. This can be solved through collaboration.

The crypto space is maturing globally, so there are lessons to be learned by looking abroad, whether that’s the US, Europe or Asia.

But if Malaysia is going to lead the way then institutions also need to work together and share insights about how to best succeed in the country’s own unique circumstances.

Malaysia is now at a crossroads, with increasing pressure for traditional players to explore crypto assets as part of their investment strategy.

As cryptocurrency continues to gain traction globally, Malaysia’s institutions will need to overcome a number of challenges to fully capitalise on the potential of digital assets.

Regulators, exchanges, and institutions will all need to work together to get there.

For more insights about the intersection of TradFi and crypto in Malaysia, download Luno’s full report here.

Featured image credit: Edited from Freepik