The fintech landscape in Malaysia is undergoing a major, fast-paced transformation, accompanied by growing institutional adoption. This can be seen across a broad spectrum of developments, from the tokenisation of capital market products, including Malaysia’s first tokenised sukuk issued by Khazanah with a nominal value of RM100 million, to the establishment of the Digital Asset Innovation Hub (“DAIH”), which is exploring the potential use cases of tokenised money, such as central bank digital currencies (“CBDCs”), tokenised deposits and stablecoins, for settlement, remittance and broader payment purposes.
Concurrently, Malaysia has also entered another significant phase of legal development, and this time on the judicial front. In the recent decision of Lee Ee Foong v Ong Seow Lee, the Court of Appeal affirmed that while digital assets may not currently be recognised as legal tender in Malaysia, they may nonetheless constitute valid contractual consideration for the repayment of a debt where such mode of repayment has been agreed to and accepted by the creditor.
Without delving too deeply into the facts or the Court of Appeal’s decision, which are relatively straightforward, the matter arose from a friendly loan of RM70,000 that was repaid through the transfer of units of Litecoin, and this mode of repayment was accepted by the creditor. The Court of Appeal ruled that, since the creditor had accepted the Litecoin without objection, and while digital assets may not presently be recognised as legal tender, it was nevertheless indisputable that digital assets carry value and may constitute valuable contractual consideration. Therefore, where the creditor has agreed to and accepted digital assets as the mode of repayment, the transfer may constitute valid contractual consideration, and in this case, since the 50 units of Litecoin had been properly transferred to the creditor, the Court of Appeal held that the debt had been fully discharged.
Of course, there is no doubt that the factual and appellate positions in this matter are not particularly complicated. What is considerably more significant, however, is the deeper commercial implication arising from the Court of Appeal’s recognition of digital assets as valuable consideration.
In Malaysia, we are definitely seeing strong and growing interest among banks, financial institutions, fintech companies and even licensed moneylenders in understanding whether digital assets may be used as collateral for loans or other financing arrangements. While we know, as a matter of law, that digital assets are no longer foreign to Malaysia’s legal and regulatory landscape. However, the more practical concern for lenders has often been whether the courts would recognise digital assets as assets of value and give effect to contractual arrangements involving them. Hence, in this respect, the Court of Appeal’s decision could not have been more timely, as it firmly affirms that digital assets have value and may constitute valid contractual consideration, provided that the arrangement is properly structured.
More importantly, this sets the wider stage for what may be legally and commercially possible when structuring digital asset-backed loans and financing arrangements in Malaysia.
At a conceptual level, a digital asset-backed financing arrangement operates in much the same way as a conventional secured loan. In a conventional secured financing arrangement, a borrower may provide assets such as property, shares, fixed deposits or other valuable assets as collateral. Under a standard financing structure, if the borrower defaults, the lender may enforce its security and liquidate the collateral to recover the outstanding amount. Similarly, at a conceptual legal level, a digital asset-backed loan or financing arrangement follows the same underlying principle, except that the collateral may consist of digital assets such as Bitcoin or Ether.
Of course, taking the Court of Appeal’s decision into account and extending the analysis one step further, even if a digital asset-backed loan or financing arrangement is conceptually and legally capable of being structured, the technical and operational aspects of using digital assets as collateral will be materially different from those applicable to other forms of assets. Because ultimately, the central question is not simply whether digital asset-backed financing is technically or legally conceivable. The more important question is always how the arrangement should be structured so that the lender’s rights are legally enforceable, operationally executable, and sufficiently protected against the risks that are unique to digital assets.
Therefore, based on our existing advisory work and the market trends that we are observing, this article explores the top 5 key considerations for any bank, financial institution, fintech company or lender looking to explore digital asset-backed financing. Of course, while these considerations are certainly not exhaustive, they definitely provide the most essential starting points for the development and structuring of a digital asset-backed loan or financing arrangement.
Key Consideration 1: Not All Digital Assets Are Created Equal
The first and most fundamental consideration is the type of digital asset that may be accepted as collateral.
While digital assets are increasingly being recognised in Malaysia, the truth is that, just like conventional assets, not every digital asset is created equal. Although digital assets may conceptually be used for collateral purposes, however, not every digital asset would necessarily be suitable or advisable for such purposes.
Fundamentally, when selecting the appropriate digital asset as collateral, the lender must consider several key factors, including market capitalisation, liquidity, trading volume, volatility, regulatory recognition and how quickly the asset may be liquidated during periods of market stress. These factors will be crucial in determining whether a particular digital asset is suitable to serve as collateral.
For an initial digital asset-backed financing product in Malaysia, Bitcoin would likely represent the most defensible starting point, as it is indisputable that Bitcoin presently has the deepest liquidity, the widest market recognition and the longest trading history among digital assets. The last thing a lender would want is to discover, at the point of enforcement and liquidation, that there is insufficient market liquidity to sell the collateral without causing a significant fall in its price due to market impact. This risk is considerably more pronounced for smaller or less liquid digital assets, which may be exposed to greater price manipulation, thin trading volumes, exchange delisting, sudden price gaps and severe price impact during liquidation.
Therefore, as a starting point, carefully selecting and determining the appropriate digital asset would be the first essential step in structuring the collateral framework.
Key Consideration 2: The Loan-to-Value Ratio Must Reflect Digital Asset Volatility
Besides selecting the appropriate digital asset as collateral, the second key consideration is determining the appropriate loan-to-value ratio.
The loan-to-value ratio refers to the amount of financing provided relative to the value of the collateral. For example, where RM1 million worth of Bitcoin is used to support a RM500,000 loan, the initial loan-to-value ratio would be 50%, and this ratio is particularly important in the context of digital assets because of their inherent price volatility. Unlike property or fixed deposits, even Bitcoin remains highly volatile when compared with other forms of collateral.
Therefore, a conservative initial loan-to-value ratio of approximately 50% may represent a reasonable starting point, depending on the lender’s risk appetite. Otherwise, a lender that advances financing too close to the full value of the collateral may find that the collateral is no longer sufficient to cover the outstanding loan following a sudden market decline, and such a decline may then trigger margin-call requirements or liquidation thresholds under the financing arrangement.
Key Consideration 3: The Digital Assets Must Be Held by a Registered Digital Asset Custodian
The third key consideration concerns custody, which will sit at the heart of any digital asset-backed financing structure.
For many conventional assets, collateral may be deposited with a trustee, charged to the lender or held through established banking and securities infrastructure. Digital assets are somehow slightly different because they exist and are transferred through blockchain networks, where practical control over the collateral will ordinarily depend on the wallet architecture and the management of the cryptographic private keys required to authorise transactions, hence, the collateral should therefore be transferred into a proper custodian wallet under a properly structured custody arrangement.
In Malaysia, the provision of digital asset custody services is regulated by the Securities Commission Malaysia. It is therefore not legally possible to simply appoint an ordinary trustee or an unregulated technology provider to provide digital asset custody services for collateral purposes. At present, there are only three digital asset custodians registered by the Securities Commission Malaysia, namely CoKeeps Sdn Bhd, Gambit Custody Sdn Bhd and Jada Platform Sdn Bhd, and any financial institution seeking to accept digital assets as collateral for a loan or financing arrangement would be well advised to work with a registered digital asset custodian to ensure that the collateral is held within a regulated custody framework.
From a legal structuring perspective, the custody arrangement may be built around trust, segregation and control concepts. However, it should go considerably further than a standard safekeeping arrangement, where the custody agreement should also clearly define the lender’s instruction and control rights following a margin call, an event of default or the occurrence of a liquidation event. It should properly address wider digital asset-specific considerations, including private-key management, wallet segregation, authorised instructions and cybersecurity incidents. Ultimately, the lender’s contractual rights must correspond precisely with the custodian’s systems, approval processes and practical ability to transfer or liquidate the collateral.
This illustrates why although custody of digital asset collateral may conceptually resemble the appointment of a trustee or custodian for conventional collateral, however, its implementation is materially different. A digital asset-backed financing arrangement will naturally require the involvement of a registered digital asset custodian and must address distinct operational and deeper technical challenges.
Key Consideration 4: The Enforcement and Liquidation Mechanism Must Work in Practice
After resolving the custody considerations, the fourth key consideration is the proper execution, enforcement and liquidation structure, as this effectively completes the financing structure by ensuring that the lender is able to carry out proper enforcement and liquidation in the event of default.
As the digital assets will be held in custody by a registered digital asset custodian, the financing, security and custody documents should clearly identify the events that will trigger liquidation. These documents should also address a wider range of contractual, legal and operational considerations, including how the liquidation will take place, who may instruct the custodian, whether prior notice must be given to the borrower, which digital asset exchange or broker will execute the sale, how the sale price will be determined, how transaction fees and price slippage will be treated, and how the sale proceeds will be applied.
Ultimately, the central purpose of collateral is to enable the lender to enforce and execute its rights effectively. A watertight structure is therefore crucial, not only from the perspective of the legal documentation, but also in ensuring that the lender, custodian, broker and trading platform are functioning as parts of one complete enforcement process, with each party understanding precisely when it must act, whose instructions it may accept and how the collateral will ultimately be converted into recoverable proceeds.
Key Consideration 5: The Financing Structure Must Fall Within the Proper Regulatory Perimeter
The fifth and final consideration concerns the nature of the underlying financing arrangement and the wider regulatory perimeter within which it operates. Whatever form the product may take, a digital asset-backed financing arrangement cannot exist outside Malaysia’s established financial regulatory framework if it is to be legally recognised and enforceable.
Depending on how the product is structured, the financing may fall within banking, Islamic banking, moneylending, consumer credit or capital markets regulation. The applicable legal requirements will differ depending on who provides the financing, who the borrower is, whether the arrangement is conventional or Shariah-compliant, and whether any additional regulated activity is involved. For example, a facility offered by a licensed bank will involve a different set of regulatory, prudential and risk-management considerations from financing provided under a moneylending framework.
Therefore, understanding the digital asset is only one part of the analysis. The wider legal and regulatory framework governing the financing must also be carefully considered to ensure that the overall structure is properly authorised, legally sound and practically enforceable.
Closing Thoughts
Digital asset-backed financing is undoubtedly a growing area of interest, although much of the Malaysian market remains at an exploratory stage. Banks, financial institutions, fintech companies and lenders are increasingly considering how such arrangements may be structured and, judging from the wider global direction, the use of digital assets as collateral appears to be a matter of when rather than whether.
As the considerations above illustrate, however, digital asset-backed financing presents a distinct set of legal, technical and operational challenges. It requires more than conventional financing knowledge and demands a proper understanding of blockchain technology, digital asset custody, financial regulation, collateral management and enforcement mechanics, all of which must work together within one coherent structure.
Given the novelty and complexity involved, banks, financial institutions and lenders exploring such arrangements should seek advice from fintech lawyers who genuinely understand both financing structures and the underlying mechanics of digital assets. This will be essential to ensure that the arrangement is legally sound, commercially practical and operationally capable of being implemented and enforced in practice.
If you have any questions on digital asset regulation, digital asset-backed financing, custody arrangements, tokenisation or the structuring of fintech and digital asset products in Malaysia, please feel free to reach out to the partners in our Technology Practice Group, Ong Johnson and Lo Khai Yi, for a consultation. We have extensive experience advising on fintech, financial services, digital assets, blockchain, digital platforms, technology arrangements and regulatory licensing matters in Malaysia, and would be pleased to assist businesses in navigating the legal, regulatory and operational considerations involved.
The Technology Practice Group of Halim Hong & Quek continues to be recognised by leading legal directories and industry benchmarks. Recent accolades include FinTech Law Firm of the Year at the ALB Malaysia Law Awards (2024, 2025 and 2026), Law Firm of the Year for Technology, Media and Telecommunications by the In-House Community, FinTech Law Firm of the Year by the Asia Business Law Journal, a Band 2 ranking for FinTech by Chambers and Partners, and a Tier 3 ranking by Legal 500. The strength of the practice is further reflected in the individual recognition of its partners, including a Band 1 ranking for FinTech by Chambers and Partners within the Technology Practice Group.
About the authors
Ong Johnson
Partner
Head of Technology Practice Group
Fintech, Data Protection,
Technology, Media & Telecommunications (“TMT”),
IP and Competition Law
johnson.ong@hhq.com.my
◦
Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”), Technology
Acquisition and Outsourcing, Telecommunication Licensing and
Acquisition, Cybersecurity
ky.lo@hhq.com.my.
More of our articles that you should read:
