By Dr Zati Ilham Abdul Manaf & Dr Sodiq Omoola

The 2022 collapse of FTX.com – a digital asset and cryptocurrency exchange – along with its over 135 affiliate companies around the world has triggered fears of contagion in the crypto market and caused some investors to lose their investments. This, along with the bankruptcy protection filing of crypto firm BlockFi in November 2022, has caused the general public to lose interest in digital investment. However, after a disastrous year in 2022, Bitcoin and other major cryptocurrencies surged to their highest levels in months as of January 2023, as US inflation continues to moderate. This indicates a spark of renewed interest in digital investment, but also a greater call for comprehensive regulation.

Due diligence

Potential investors in digital assets are advised to exercise caution amid market uncertainty. Before investing, it is imperative to conduct thorough research and due diligence to fully comprehend the technology, the company behind the asset, and the associated risks. There are several crucial aspects to consider, including legality, accessibility, and security. Additionally, it is essential to have a plan in place for after death, as this is a frequently overlooked aspect. By taking these considerations into account, investors can make informed decisions and approach digital asset investments with confidence.

In terms of legality, investors should take the time to familiarise themselves with the regulations in their jurisdiction. For example, the Securities Commission of Malaysia (SC) has established a regulatory framework to support digital investment management services and protect investors. Companies looking to offer these services must obtain a licence from the SC. A list of licensed and recognised fintech players can be found on the SC website. This is a useful resource for investors who want to ensure that they are investing in a company that has been vetted by a regulatory authority.

When it comes to Non-Fungible Tokens (NFTs), the regulatory landscape is still evolving. Currently, there are no specific regulations in place for NFTs. However, they may fall under the definition of digital tokens under the Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019. It is important for investors to stay informed about developments in the regulatory landscape and to consult with legal experts if they have any concerns.

Syariah compliance

For concerned Muslims, it is also important to consider the Syariah compliance aspect of any investment. This involves ensuring that the investment is in line with Islamic principles and values. For example, investments in companies involved in activities that are considered haram (forbidden) under Islamic law, such as gambling or alcohol, would not be considered Syariah-compliant. Investors who are concerned about Syariah compliance can research and consult with experts in the field to ensure that their investments align with their values.

Potential investors in digital assets must consider security and accessibility. While blockchain technology offers security, instances of security breaches, scams, and hacks are rising. Digital asset holders must take extra precautions to protect their assets, such as being diligent with their private key or password. To safeguard assets, store them in a hardware wallet or use a multi-sig wallet. Storing assets with a cryptocurrency exchange can expose them to potential security risks, so it's best to keep only a minimum amount for trading. Investors must consider security and accessibility to protect their investments.

Digital estate plan

In addition to considering the legality, accessibility, and security of their digital assets, potential investors must also plan for what happens to their digital assets after death. This can be done through creating a comprehensive digital estate plan. The plan should include a list of all digital assets, instructions for distribution, the appointment of a trusted digital executor, and proper security measures to ensure the protection of the assets. It is also recommended to make the plan legally binding as part of a will or codicil.

In case a formal digital estate plan is not in place, another option is to create a secure list of all digital assets and passwords, and share it with intended beneficiaries. This informal approach can still provide some level of protection and ensure the transfer of digital assets after death. It's important to remember that without proper planning, digital assets could potentially be lost or become inaccessible to loved ones. By taking the time to create a digital estate plan, investors can ensure that their digital assets are properly protected and passed on to the intended recipients.

In conclusion, when considering digital asset investments, potential investors must pay attention to three key factors: legality, accessibility, and security. It is essential to familiarise oneself with the regulations in their jurisdiction, ensure that the investment is Syariah-compliant (if applicable), and take extra precautions to protect digital assets from potential security risks. Moreover, planning for after death is equally important, and investors can create a comprehensive digital estate plan to protect their digital assets and ensure that they are passed on to the intended beneficiaries. By taking these considerations into account, investors can make informed decisions and mitigate risks associated with digital asset investments.

-- BERNAMA

Dr Zati Ilham Abdul Manaf and Dr Sodiq Omoola are both from the Civil Law Department, Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia (IIUM).

This article is produced from a study sponsored by the Harun M. Hashim Law Centre at IIUM.