Democratising Investments Through Digital Investment Services

Technological advancements and changing consumer behaviours continue to shape the capital markets. Increasingly, consumers are demanding for more data for decision-making, personalised investing experience, and investment options, including alternative assets through digital channels.

E-wallets with embedded finance has played a pivotal role in meeting these evolving demands as they seamlessly integrate financial services into their platforms, while offering users not only a secure and convenient means of managing their funds but also expanding access to digital investment services.

Since 2016, the SC has been facilitating the provision of digital investment services that enhances accessibility and convenience in the financial landscape with the registration of four new e-service providers and one new DAX in 2023.

Digital Investment Management
The introduction of the digital investment management (DIM) framework in 2017 has enabled both new and established market participants to embrace digitisation and foster the creation of innovative and more efficient approaches of providing capital market products and services to investors.

As at end 2023, DIM has grown 400 times in total AUM, valued at RM1.6 billion. While the DIM AUM constitutes less than 1% of total AUM in the fund management industry, there has been a steady upward trend, with a 15% growth in 2023. DIM has increasingly expanded its reach to beyond Klang Valley, empowering more investors to gain access to a range of DIM investment opportunities. (Refer to Figure 2 - Snapshot of DIM industry).
FIGURE 2
Snapshot of DIM industry
E-Services Platform
The e-services platform (eSP) framework introduced in 2020, has further enhanced the digital landscape of Malaysia’s capital market. The framework enables platforms like e-wallets and e-payment service providers to democratise the online distribution of capital market products, such as unit trusts, making them accessible to a diverse range of investors. To date, 43 capital market products have been facilitated through these platforms, allowing seamless and wider access to investment opportunities for everyone.

Since 2021, the cumulative value of subscriptions to capital market products distributed on the eSP has exceeded RM18 million. Notably, in 2023 alone, subscriptions stood at RM12 million, constituting 67% of the total subscriptions since inception. The market has also witnessed continued interest in eSP with a 27% increase in the number of accounts created in 2023, compared to 2022.
Digital Assets Market Overview
The first half of 2023 saw a subdued digital asset market, in line with global markets. This was primarily driven by residual effects of the FTX collapse towards the end of 2022 which carried into 2023. The fallout of FTX had a ripple effect on the crypto ecosystem with investors being more cautious and aware of potential risks in digital assets. In the third quarter of 2023, trading volume in Malaysian DAX saw an uptick, in line with global market trends largely driven by Bitcoin and Ethereum prices surging on news of international asset managers interest in issuing for crypto ETFs in the US. Trading value were especially high with an over 300% increase in trading volume across regulated DAXs especially after US SEC ruled in favour of Ripple.

“2023 was a year of expansion in the digital asset ecosystem in products and services across the capital markets”.

Across regulated DAXs, retail investors made up over 72% of the investor segment, signalling this asset class is primarily a retail driven market below the age of 45. DAXs added Avalanche (AVAX) and Polygon (MATIC) tokens to their trading platforms in 2023, bringing the total number of tokens traded across DAXs to 11, driven by demand from investors for more trading pairs.
Digital Asset Focus for 2023
In 2023, IEO operators launched their platforms allowing issuers to fundraise through token issuance. This medium of fundraising supported the issuance of securities tokens which are tokenised representations of traditional securities; as well as enabled the issuance of utility tokens which often grants access to unique goods and services. These platforms have assisted in broadening investor access to digital assets. Recognising the rising demand from traditional investors to have exposure to digital assets, 2023 saw the entry of crypto funds which provide sophisticated investors exposure to Bitcoin and Ethereum.

Furthermore, the SC has granted approvals-in-principle to three local DAC, among them, one has gone live in 2023. DACs serve to safekeep digital assets in a protected environment using advanced security measures to prevent hacking attempts or unauthorised access, paving the way for regulated players and investors to securely store their digital assets. Incumbents have been reliant on third-party technology service providers for their custodial services but new entrants in the local market have enabled DAXs, IEOs, fund managers (FMs) and other institutions to leverage off their custodial solutions.

While promoting innovation, investor protection remains paramount in the capital market. With the advancements of technology and maintaining competitiveness in the market, the SC will explore using cases with high propositions alongside industry partners. Use cases which have been highlighted from industry feedback include eKYC through Digital Identity and asset tokenisation.

Asset tokenisation has been a prominent topic within the capital market which essentially enables better investor access and increases liquidity of traditional securities through tokenisation. There has been a growing interest among local incumbents to explore tokenisation of traditional assets such as fixed income instruments and fund products in 2023.

Mitigating Systemic Risks And Promoting Financial Stability

Enhanced Risk Governance Framework

In 2021, the SC-wide risk governance framework was enhanced as part of an overall initiative to have an effective integrated and predictive risk surveillance to maintain regulatory agility.

The structured risk governance framework integrated the wider spectrum of risks such as technology, cyber and conduct risk at the SC’s Systemic Risk Oversight Committee (SROC) and Accounting, Market and Corporate Surveillance Committee (ACMS).

Intensified surveillance

The SC continued to intensify its surveillance of systemic risk to maintain market resilience and stability. Regular SROC engagements were held to deliberate concerns emanating from various segments across the capital market. Domestic equity and bond market, foreign fund flows and trade participation continued to be monitored closely for potential stress points.

In addition, measures and economic stimulus packages introduced by the government to weather the impact of COVID-19, market trading conduct and the financial position of listed companies were among the focus areas for discussion.

Thematic assessments

The SC also conducted thematic assessments covering investors’ fund flows, the position of firms, and policy decisions to ascertain the possible impact on the capital market. In 2021, the SC reviewed and enhanced its crisis indicators on potential emerging risks in the
capital market.

The enhanced crisis indicators provided a reference point for escalation to SROC when the identified indicators and triggers materialised and ensured prompt response to manage and prevent any issues of concern that might lead to a systemic crisis.

Joint regulatory discussions

In 2021, the SC conducted frequent joint regulatory discussions with other authorities such as Bank Negara Malaysia (BNM) and Labuan Financial Services Authority (Labuan FSA) to identify systemic risk concern areas within the financial and capital markets in Malaysia.

Monitoring of various components of the capital market

The SC continued its efforts to undertake a methodological and integrated approach to ensure any potential systemic risk was being monitored, mitigated, or managed. Figure 1 highlights the findings from the following risk assessments on the various components of the capital market.