Crypto License in Malaysia
Malaysia's SC RMO-DAX License
Malaysia’s regulatory approach, led by the Securities Commission (SC), has effectively integrated the digital asset sector into its traditional capital markets. The cornerstone of this framework is the Recognized Market Operator – Digital Asset Exchange (RMO-DAX) license. By classifying digital assets as securities, the SC imposes stringent standards on operators, demanding institutional-grade financial resilience and rigorous adherence to Technology Risk Management (TRM) protocols. Recent proposed amendments, including a significant increase in the minimum paid-up capital to RM 15 million and stricter rules on custody (the 90% Cold Storage Rule), solidify Malaysia’s position as one of Asia’s most credible and challenging jurisdictions for VASP compliance. This framework is essential for international firms seeking a compliant gateway into the Asian market, particularly for its unique integration of Shariah-compliant digital assets.
Foundational Legal and Financial Requirements: Establishing an Institutional Presence
The path to obtaining an SC RMO-DAX license necessitates the creation of a fully localized, financially robust entity. This ensures that the operational risks and legal accountability remain strictly within the Malaysian jurisdiction through the establishment of a local Sdn Bhd company. The localization mandate is non-negotiable, requiring significant investment in physical infrastructure and locally resident senior management.
Financial Resilience: The Proposed RM 15 Million Capital Requirement and Adequacy
The regulatory move to triple the minimum paid-up capital reflects a global trend towards hardening capital requirements for high-risk financial technology firms. This capital is not merely a barrier to entry but a mandatory guarantee of financial stability.
The original multi-column table is broken into two mobile-friendly, two-column tables:
1. Minimum Paid-Up Share Capital
| Aspect | Details |
| Current Requirement | RM 5,000,000 |
| Proposed Requirement | Minimum RM 15,000,000 |
| Justification | To mandate institutional-grade financial backing, covering potential losses from security breaches, major operational failures, and ensuring investor confidence during market turmoil. |
2. Shareholders’ Funds (Digital Broker Model)
| Aspect | Details |
| Current Requirement | RM 5,000,000 |
| Proposed Requirement | The higher of: RM 7,000,000 OR 25% of the DAX’s annual operating expenses |
| Justification | Requires a deeper capital buffer for firms taking on proprietary or principal risk (counterparty risk) in the Digital Broker Model, proportional to their operational scale. |
The capital must be unencumbered and verified by independent auditors. Furthermore, the SC maintains the authority to impose additional capital or insurance requirements based on the DAX’s specific operational profile, trading volume, and perceived risk exposure, ensuring the financial structure is always commensurate with its complexity. The proposed increase to RM 15 million signals the SC’s intent to only license firms capable of absorbing significant financial shocks. This requirement ensures that public confidence in the digital asset market is maintained even during periods of extreme market volatility or operational failure. The capital adequacy must be demonstrated not only at the time of application but on a continuous basis, with quarterly reporting required to the SC.
Corporate Governance, Vetting, and Personnel Localization
The corporate structure of an RMO-DAX must be free from conflicts of interest and managed by highly competent individuals.
The Fit and Proper Test and Key Personnel Requirements
The “Fit and Proper” assessment applies continuously to all Directors, Substantial Shareholders, the Chief Executive Officer (CEO), the Chief Compliance Officer (CCO), and the designated Resident Wallet Manager. The test covers four dimensions:
Integrity and Honesty: Rigorous background checks, absence of criminal records or regulatory sanctions, and a history of ethical conduct.
Competence and Capability: Proof of high-level experience, with a proposed minimum of five years in relevant capital market operations, IT security, or regulatory compliance.
Financial Soundness: Personal financial stability to ensure no external pressures compromise professional duties, verified through solvency checks.
Reputation: The individual’s public standing must not jeopardize the integrity of the capital market, encompassing public scrutiny and past business dealings.
Board Oversight and Internal Controls
The Board of Directors is ultimately accountable for the DAX’s compliance culture. Key requirements include:
Independent Directors: The Board must include non-executive directors who demonstrate independence and challenge management decisions effectively, constituting a significant minority.
Mandatory Committees: The Audit Committee and Risk Management Committee must be formalized, with the latter specifically defining and monitoring the technology risk appetite and cyber resilience strategy.
Internal Audit Function (IAF): The IAF must be independent, adequately resourced, and tasked with conducting annual audits not only of financial statements but also of the effectiveness of AML/CFT, custody, and TRM controls, reporting directly to the Audit Committee.
The establishment of a robust three-lines-of-defence model is explicitly mandated, with the Risk Management Committee playing a critical role in determining the operational and technological boundaries of the DAX. The CCO’s role is elevated to a senior management function, requiring a direct reporting line to the Board or its relevant committee, emphasizing the non-negotiable nature of regulatory adherence.
Technology Risk Management (TRM) and Client Asset Safeguarding: The GTRM Mandate
The SC’s Guidelines on Technology Risk Management (GTRM) treat technology as a systemic risk. Compliance with these guidelines is highly prescriptive, focusing on resilience, security, and asset isolation. The DAX must demonstrate that its technology stack is built to institutional standards, capable of handling high transaction volumes with minimal latency, and offering seamless, secure connectivity to regulated banks and clearing institutions.
Custody and Key Management: SC Compliance with the 90% Cold Storage Rule
Protecting client digital assets is the highest technical priority. The rules mandate a physical and operational separation between client holdings and the DAX’s own capital.
Segregation and Trust: Client digital assets must be strictly segregated and accounted for, never commingled with the DAX’s proprietary funds. This segregation must be verifiable on-chain.
The 90% Threshold: At least 90% of all customer-held digital assets for each listed token must be stored in wallets that are not connected to the internet (cold storage), using verifiable multi-signature schemes.
Hot Wallet Collateralization: The portion in hot wallets (for withdrawal liquidity) must be fully collateralized by the DAX’s own unencumbered cold storage assets at all times. This means the DAX bears 100% of the risk for hot wallet compromises, not the client, providing a crucial layer of investor protection.
Exclusive Control and Localization
The SC addresses the systemic risk posed by multinational DAX operations where control may reside outside the local jurisdiction:
Direct Access Mandate: The Malaysian RMO-DAX entity must maintain direct, exclusive, and uninfluenced access to its wallet addresses and key management systems, ensuring full operational autonomy.
Prohibition on External Influence: Any external or affiliated party, including a foreign parent company, is explicitly prohibited from holding control, co-signatures, or any form of influence over the private keys used for client custody.
Resident Wallet Manager: The Resident Wallet Manager must be a Malaysian resident and a senior manager with the delegated authority and personal responsibility for all key ceremonies, administration, and risk mitigation.
The SC mandates the use of certified cryptographic modules and robust physical security for the cold storage infrastructure. Regular, surprise audits may be conducted by the SC or its designated agents to verify the integrity of the key generation and destruction ceremonies. The DAX must document a clear, multi-layered access control framework, detailing which individuals have access to the seed phrases or backup recovery mechanisms.
Operational Resilience and System Integrity Requirements
The DAX must prove it can function reliably under duress and recover rapidly from failures.
BCP and DRP: The DAX must implement and annually test its BCP and DRP. Testing must demonstrate that the RTO (Recovery Time Objective) and RPO (Recovery Point Objective) for critical systems—like the trading engine and custody solution—are met, with results reported to the SC.
System Monitoring and Auditing: Mandatory use of Security Information and Event Management (SIEM) systems for 24/7 logging and anomaly detection. Annual, independent Penetration Testing (Pen Test) and vulnerability assessments must be performed on all critical infrastructure to identify and remediate vulnerabilities before licensing is finalized (AIP condition) and continually thereafter.
The SC requires evidence of segregation of duties within the IT and security teams to prevent single points of failure or internal collusion. Change management protocols must be formalized and auditable, ensuring no unauthorized changes are made to the trading or custody environment. Real-time monitoring of market data integrity and order book stability is also mandatory to prevent technical manipulation.
AML/CFT Compliance and Market Integrity: The VASP Role
As a Virtual Asset Service Provider (VASP) and a Reporting Institution under the AMLA 2001, the DAX is mandated to act as the first line of defense against money laundering and terrorism financing (ML/TF). This involves aligning closely with standards set by the Financial Action Task Force (FATF).
Implementation of the FATF Travel Rule and Transaction Monitoring
The SC mandates a rigorous transaction monitoring system to comply with global standards.
Customer Due Diligence (CDD) and EDD: Compliance requires adhering to e-KYC standards set by Bank Negara Malaysia (BNM). Enhanced Due Diligence (EDD) must be applied to all high-risk accounts, including Politically Exposed Persons (PEPs) and transactions involving high-risk jurisdictions.
Travel Rule Mechanism: For crypto transfers exceeding the FATF threshold, the DAX must implement technology to collect, hold, and transmit the required originator and beneficiary information to the counterparty VASP using approved protocols. Failure to transmit this data securely can result in the rejection of a transaction, placing the compliance burden squarely on the VASP.
Transaction Screening (KYT): Mandatory use of specialized blockchain analytics tools to continuously screen and monitor wallet addresses for links to known illicit sources (e.g., sanction lists, darknet markets, mixing services, or ransomware funds).
The DAX must maintain detailed records of all transactions for a minimum period (typically seven years), readily available for inspection by the SC and BNM. Training programs for all relevant staff, particularly the CCO and compliance team, are mandatory and must be conducted annually to ensure they are current with evolving ML/TF typologies and regulatory updates.
Market Integrity and Listing Framework Evolution
The SC is moving towards a market-driven, yet highly accountable, asset listing model.
The Shift to Operator-Led Listing: The proposed framework shifts the burden of detailed due diligence from the SC to the licensed DAX operator. This accelerates time-to-market but significantly increases the operational liability of the DAX.
Minimum Eligibility Criteria: For a DAX to list a new digital asset, it must satisfy stringent criteria, including: a Technical Security Audit (evidence that the asset’s underlying protocol has undergone a comprehensive, independent security audit); Trading History (the asset must have been traded for a minimum of one year on a FATF-compliant VASP); and comprehensive Disclosure and Team Vetting (information regarding the issuer, the development team, the utility, risk profile, and any history of manipulation or security failures must be collected, verified, and disclosed).
Market Surveillance: DAXs must implement automated systems for detecting and preventing abusive trading practices, such as wash trading, spoofing, and market manipulation, reporting suspicious activity promptly to the SC.
This reliance on the DAX to perform thorough due diligence on new assets necessitates the employment of dedicated asset research and legal teams, treating the listing decision with the same rigor as an IPO underwriter. The DAX must also establish clear de-listing procedures, triggered by security vulnerabilities, loss of Shariah compliance status, or severe breaches of market integrity.
Request more information
The Shariah Compliance Dimension: A Unique Market Differentiator
Malaysia leverages its status as a global leader in Islamic finance to create a specialized, compliant market segment.
The Role of the Shariah Advisory Council (SAC)
The Shariah Advisory Council (SAC) of the SC is the ultimate arbiter of Islamic finance laws in Malaysia. Its ruling that trading digital assets on registered DAXs is permissible (Halal) is critical.
Market Access and Trust: This ruling legitimizes digital asset investment for the large Muslim investor base in Malaysia and the broader ASEAN region, acting as a significant market differentiator.
Screening Methodology: The DAX must implement internal diligence to ensure that the token’s underlying utility and the use of the issuance proceeds do not involve prohibited activities such as: Riba (Interest or usury), Maysir (Gambling or speculation defined as excessive risk/zero-sum), or Gharar (Excessive uncertainty or ambiguity in contracts).
IEOs and Shariah-Compliant Fundraising
The SC also regulates Initial Exchange Offerings (IEOs), providing a compliant fundraising pathway. IEO Operators, like DAXs, are subject to SC oversight and must ensure that the digital token issuance and the issuer’s business activities comply with SAC’s Shariah screening methodology for listed companies.
Comparative Analysis and Operational Landscape
Understanding the RMO-DAX framework requires placing it within the broader Malaysian and global regulatory context.
SC RMO-DAX vs. LFSA: The Jurisdiction Trap
This is a critical distinction for international firms that cannot be overlooked. The original multi-column table is broken into two mobile-friendly, two-column tables to ensure viewing compatibility:
1. SC RMO-DAX (Securities Commission) Overview
| Aspect | Details |
| Target Market | Domestic Market: Malaysian citizens and residents. |
| Governing Act | Capital Markets and Services Act (CMSA) 2007. |
| Capital Requirement | High (Proposed RM 15 million paid-up capital). |
| Mandate | Strict Investor Protection and market integrity in the local economy. |
| Key Restriction | Must operate only in Malaysia. |
2. LFSA (Labuan Financial Services Authority) Overview
| Aspect | Details |
| Target Market | Offshore Market: Non-Malaysian citizens and international entities. |
| Governing Act | Labuan Financial Services Authority Act 1996. |
| Capital Requirement | Lower and flexible (aimed at international operations). |
| Mandate | Tax efficiency and international business facilitation. |
| Key Restriction | Must NOT market services or transact with Malaysian residents. |
The fundamental difference is the market they serve: SC RMO-DAX is the exclusive gateway to the domestic market, while LFSA licenses are strictly for non-Malaysian offshore business. International firms must choose their licensing path carefully, as the SC does not permit “passporting” from Labuan to the mainland market.
Interconnected Entities: DAC and IEO Operators
Digital Asset Custodian (DAC): Any entity providing custody services beyond the DAX’s own integrated system must register as a DAC and meet equally stringent TRM and custody auditing requirements, focusing heavily on physical key security and indemnity insurance.
Initial Exchange Offering (IEO) Operator: These platforms act as gatekeepers for token fundraising, conducting initial due diligence on issuers under SC guidelines.
The SC mandates that RMO-DAXs must enter into formal, SC-approved agreements with any DAC they utilize, ensuring clear lines of liability and operational standards.
The RMO-DAX Application and Continuous Compliance Lifecycle
The application process is deliberately lengthy, often spanning 12 to 18 months, as it is designed to test the applicant’s endurance and dedication to institutional standards.
Stage 1 & 2: Preliminary Submission and Detailed Due Diligence
Pre-Submission Setup: Local incorporation (Sdn Bhd) and full deposit of the paid-up capital (RM 15 million), confirmed by bank statement and auditor’s letter.
Regulatory Business Plan: Drafting of the comprehensive Regulatory Business Plan with detailed 3-5 year financial projections, risk assessments, and a clear market entry strategy.
SC Review and Vetting: Intensive scrutiny of the business model, financial projections, and the Fit and Proper status of all key personnel. The SC assesses the unique value proposition and how the proposed DAX will enhance the Malaysian capital market.
Stage 3: Approval-In-Principle (AIP) and Operational Readiness
The AIP is conditional, granting the applicant a timeframe (typically 6-12 months) to meet final operational and technical prerequisites before full registration. This is the most crucial and failure-prone stage.
Physical and Personnel Setup: Confirmation of the fully established Malaysian office and the employment of all required local personnel (CEO, CCO, Resident Wallet Manager), with employment contracts verified.
Mandatory Audits: The applicant must commission two independent, non-affiliated third-party audits: Independent Operational Audit (verification that all internal controls and compliance manuals are fully implemented) and Independent Technology and Custody Audit (to verify the 90% Cold Storage Rule and GTRM standards).
Failure Point: Failure to pass either the Independent Operational or the Technology/Custody Audit during the AIP phase is the single largest cause of license application rejection.
Continuous and Ongoing Compliance Obligations
Registration is the beginning, not the end. The RMO-DAX is subject to perpetual compliance:
Annual Submissions: Submission of audited financial statements, compliance reports, and the mandatory AML/CFT Assurance Report to the SC.
Regulatory Change Management: The DAX must demonstrate proactive monitoring of new SC circulars, BNM advisories, and FATF changes, implementing necessary policy and system updates promptly.
Annual Custody Audit: The independent audit on the effectiveness of the custody solution must be renewed annually, specifically verifying key management access and asset segregation.
Market Reporting: Real-time reporting of trading data, suspicious transactions, and system outages to the SC.
Malaysia’s regulatory paradigm, anchored by the SC RMO-DAX framework, has successfully institutionalized the digital asset market within the traditional capital market structure. By classifying digital assets as securities, the SC has imposed rigorous standards on exchanges, particularly concerning financial resilience, corporate governance, and technology risk management (TRM). The RMO-DAX license represents one of the most credible and stringent registrations in Asia, granting access to a compliant, institutionalized market, underpinned by robust risk controls and the unique benefit of Shariah compliance.
FAQ
The difference is the market focus. The SC RMO-DAX regulates the domestic market (Malaysian citizens and residents) under the CMSA, requiring higher capital and strict consumer protection. The LFSA license regulates the offshore market (non-Malaysians) with a favorable tax and operational environment, but it is strictly forbidden from targeting the domestic Malaysian market.
The Digital Broker Model involves the DAX acting as a counterparty to client trades, meaning the DAX takes on principal risk and is exposed to greater market and liquidity volatility (as opposed to a pure order-matching exchange). The higher RM 7 million Shareholders' Funds requirement provides an essential financial buffer to cover potential trading losses and ensure market stability.
This rule mandates that the local RMO-DAX entity must have exclusive and direct control over its operational and custody systems. It specifically prohibits the foreign parent company or any affiliate from holding control or influence over the private keys or system operations. This enforces a substantive local presence and independent governance for the Malaysian DAX.
Client fiat funds (MYR) are protected by mandatory segregation into Trust Accounts held at a licensed Malaysian commercial bank. These accounts must be kept strictly separate from the DAX's own operational funds, ensuring client funds are protected and readily available even in the event of DAX insolvency.
The Shariah Advisory Council (SAC) provides the legal certainty that trading digital assets on registered exchanges is Halal. This opens the market to a large, specialized base of Shariah-conscious investors. Any new asset listed by a DAX, while initially assessed by the operator, must ultimately align with SAC's principles, avoiding prohibited activities like gambling, interest (riba), or unethical financing.
The SC mandates two distinct annual audits. The Technology Audit, typically part of the overall internal audit plan, assesses IT governance, change management, and security controls. The Custody Audit is highly specialized, requiring an independent firm to specifically verify: the current balance ratios (90% cold storage compliance), the integrity of the key generation and recovery processes, and the physical/logical security of the hardware holding the private keys.
The current RMO-DAX license primarily focuses on centralized exchange and brokerage models (order book and digital broker). Involvement in DeFi (Decentralized Finance) or complex algorithmic trading, particularly if it introduces new, unvetted systemic risks or involves cross-border DeFi protocols, generally requires specific, prior approval from the SC. Such activities would likely trigger stricter financial and risk management requirements under the existing RMO Guidelines, especially concerning liquidity and smart contract risk.
If a DAX's paid-up capital falls below the minimum RM 15 million threshold, the SC will typically issue a formal directive requiring immediate rectification. Failure to restore the capital within a defined grace period (e.g., 30 to 90 days) can lead to the revocation of the RMO-DAX license. The regulator treats persistent failure of financial adequacy as a direct threat to investor protection, often leading to market restriction or eventual license termination.
The RMO-DAX (as the originating VASP) is responsible for ensuring the Travel Rule requirements are met if a client initiates a transfer off-platform to a wallet address. If the DAX cannot obtain the required beneficiary information (because the receiving party is an unhosted wallet or a non-compliant VASP), the DAX may be required to block or reject the transaction under the AML/CFT framework, or only permit low-value transfers.
The SC enforces governance through the Exclusion of Affiliate Control clause and its power over the local Malaysian entity's license. If the foreign parent's actions compromise the local DAX's compliance (e.g., interfering with key management or technology access), the SC can sanction the local DAX's board and revoke the RMO-DAX license, effectively barring the foreign entity from the Malaysian domestic market.
The independent TRM audit must cover all critical systems, including: 1) The core Trading Engine and matching system; 2) The full Custody Solution (key generation, storage, and signing process); 3) The Data Centre (physical and logical security); 4) The AML/CFT Transaction Monitoring System; and 5) The Change Management and Software Development Lifecycle (SDLC) processes to ensure secure code deployment.