During the SCxSC Fintech Summit 2024, the Securities Commission Malaysia (“SC”) announced that it will be introducing a regulatory sandbox (the “Sandbox”) to support the testing of innovative capital market products and services that would otherwise not fully fit within existing regulatory frameworks. This announcement from the SC attracted the attentions of many industry players in the blockchain and fintech space, not just those in Malaysia, but also existing blockchain and fintech businesses operating in neighbouring countries.
Fast forward to 17 February 2025, SC has followed up on its announcement with the issuance of the Guidelines on Regulatory Sandbox (the “Guidelines”). The Guidelines serves as a document to guide interested persons on how to apply to be a participant in the Sandbox, which also sets out basic requirements and terms and conditions that applicants and registered participants are expected to comply with. Since the announcement of the Sandbox, we have received numerous einquiries regarding its application process. In this article, we are going to set out some key points concerning the Sandbox, along with some of the key details of the Guidelines which we believe interested parties should take note of.
1. What is the Window of Application to Participate in the Sandbox?
The application for the Sandbox will officially open from 15 April 2025 until 31 May 2025. Interested parties will have to submit their application for the Sandbox to SC during this period.
2. When and How Will the Successful Applicants be Announced?
If an applicant submits a valid application for the Sandbox, SC will take approximately 2 months to evaluate the application to consider whether the applicant is eligible to participate in the Sandbox. Eligible applicants will be notified so by SC.
3. How do I Apply for the Sandbox?
Interested persons can apply for the Sandbox by filling up the application form prescribed by SC and submit the same to SC alongside the necessary supporting documents. Before submitting the necessary documents however, an applicant is required to request for a pre-consultation session with SC. The purpose of the pre-consultation session is for SC to have a preliminary assessment of the suitability of the applicant’s intended capital market product or service to be tested in the Sandbox. For this, an applicant will have to submit to SC its business plan when requesting for a pre-consultation session and the business plan is to contain information that could demonstrate the applicant’s eligibility to participate in the Sandbox as further elaborated below.
4. Eligibility to Participate in the Sandbox
In applying to participate in the Sandbox, an applicant will be required to demonstrate to the SC in its business plan that it fulfils the eligibility criteria sets out under the Guidelines. The Guidelines listed a total of 13 eligibility criteria. Instead of reproducing all 13 of the criteria in this article, we have identified a few of the pertinent ones based on our experience assisting clients enrolling into other similar regulatory sandboxes in the past.
(i) Innovative capital market product or service
Given the objective of the Sandbox, it is no surprise that an applicant will have to first demonstrate that the capital market product or service that it seeks to offer is innovative. To meet this requirement, an applicant will be expected to show that the proposed capital market product or service is not currently available in Malaysia’s capital market due to the lack of an existing regulatory framework that can cater for it, or that the offering of such capital market product or service will only be possible with significant number of exemptions or variations from the requirements of existing framework.
(ii) Regulatory impediment
To justify an applicant’s participation in the Sandbox, an applicant will also have to identify the requirements or gaps in the existing regulatory framework that are posing as impediments to the implementation of the proposed capital market product or service. Similar to the previous point, an applicant is expected to satisfy the SC that the proposed capital market product or service cannot be rolled out in Malaysia under existing regulatory framework due to (i) inability to fulfil the requirements of existing regulatory framework given the nature of the proposed capital market product or service; or (ii) the existing regulatory framework directly or indirectly prohibits the proposed capital market product or service.
(iii) Appropriate governance arrangements
In addition to the above, an applicant will have to demonstrate to SC that it has put in place appropriate governance arrangements to offer the proposed capital market product or service. Common governance arrangements that we have seen implemented by clients would entail the likes of operational policies and guidelines and working processes. These governance documents will have to be suitable for not just the period in which the product or service will be offered in the Sandbox, but also on a commercial scale, on the assumption that the proposed capital market product or service is approved by the SC to be offered outside of the Sandbox.
(iv) Product or service readiness
In assessing the eligibility of an applicant, SC will also consider the readiness of the capital market product or service proposed by the applicant. To show readiness, an applicant must be prepared to conduct a user journey simulation, showing end-to-end how a new user can be onboarded to the applicant’s product or service, utilise the applicant’s product or service, to eventually exit from the investment in the capital market product or service. This is usually done by conducting a demonstration using either a fully functional or semi-functional prototype of the applicant.
(v) Risk management
Every business venture will come with its own set of risks, even more so for business ventures involving innovative technology or those involving novel products or services. In applying to participate in the Sandbox, an applicant will have to satisfy SC that it has assessed the risks involved in offering the intended capital market product or service, and that adequate risk mitigation or management control, policies and procedures will be put in place to address the inevitable risks. Applicant will also have to show that its risk management plan sufficiently addresses the winding down of the business or ceasing the offering of the capital market product or service in the event the applicant is unable to continue its business or operations.
5. How do I Prepare for an Application?
Given the limited application window for the Sandbox, any person who may be interested to participate in the Sandbox should make adequate preparations for the application. To start, an interested applicant should first assess whether the intended capital market product or service would meet the eligibility criteria set out under the Guidelines. In making such an assessment, it would be helpful to engage an external legal counsel to review the nature of the intended capital market product or service against the existing regulatory framework. The opinion of an external legal counsel will also be helpful in demonstrating to the SC of the regulatory impediment faced by the intended capital market product or service. In addition, any person intending to apply to participate in the Sandbox should also retain the services of an external legal counsel to review its business plan to ensure that it sufficiently addresses all the eligibility criteria set out under the Guidelines.
There is always the saying that regulation is constantly playing catch-up with innovation. SC’s effort in implementing the Sandbox however stands as a strong testament that regulation is “catching up”. While it is still early to comment on the impact of the Sandbox, it is heartening to see the willingness of the SC in taking the initiative to promote innovation in the capital market offerings. We are hopeful that through the implementation of the Sandbox, there will soon be innovative capital market products or services (e.g., blockchain-based P2P financing platform, tokenized real-world assets) in the Malaysian market.
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Any person with innovative capital market products or services should not let this golden opportunity go by – if you wish to find out whether your intended capital market product or service is eligible for testing under the Sandbox, or if you would require legal services to review your business plan for submission to participate in the Sandbox, or if you simply wish to know more about the Sandbox, please do not hesitate to reach out to the Technology Practice Group at Halim Hong & Quek. Halim Hong & Quek has been awarded Fintech Law Firm of the Year in 2024 and ranked as Tier 3 in Fintech and financial services regulatory by Legal 500, Band 2 in Fintech by Chambers and Partners.
About the authors
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.
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Ong Johnson
Partner
Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”),
Fintech, TMT Disputes, TMT Competition, Regulatory
and Compliance
johnson.ong@hhq.com.my
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