Binance's Malaysia comeback bid faces fresh scrutiny after US$6.3bil breach

KUALA LUMPUR: Binance's bid to regain a foothold in Malaysia could face tougher regulatory scrutiny following a US$6.3 billion (RM25.6 billion) security breach that has renewed concerns over the cryptocurrency exchange's ability to protect customer assets.

Industry players contacted by Business Times said the incident raises questions about Binance's cybersecurity safeguards, operational resilience and capacity to manage risks, potentially complicating its efforts to secure regulatory approval in Malaysia.

The world's largest cryptocurrency exchange confirmed it had been engaging the Securities Commission (SC) and Bank Negara Malaysia over the past 10 months to explore a licensed route to offer its products and services locally.

On Oct 31, a Binance spokesperson reportedly said discussions centred on the viability and structure of a licensed business model, but declined to disclose the specific licence being sought.

Halogen Capital founder and chief executive officer Hann Liew said the timing was challenging for Binance's regional team as it pursued registration as a registered market operator for digital asset exchanges.

He said the scale of the security breach would shift regulators' attention towards operational resilience and systemic risks, with the SC and Bank Negara likely to scrutinise the incident's root cause, remediation measures and safeguards for local customer assets.

"We expect both the SC and Bank Negara to conduct deep-dive inquiries into the incident's root cause, scrutinise post-mortem remediation and process enhancements, and demand absolute certainty that local Malaysian client assets and infrastructure can be completely ringfenced from offshore operational vulnerabilities," he added.

Liew said regulators will place significant weight on an exchange's cybersecurity and compliance track record, adding that digital asset custody and security remained among the industry's most important considerations.

"In fact, in our experience, digital asset custody and security is the highest-weighted item for our industry. Anything other than global best practices will no longer be sufficient," he added.

Beyond cybersecurity, Liew said regulators will also examine Binance's integrity, internal process controls and financial resilience, particularly given indications that human vulnerabilities and social engineering played a role in the breach.

He said independent third-party post-mortems and audits, evidence of corrective measures and the local segregation of customer assets would be important considerations before approval was granted.

KDX chief executive officer Chan Wei Chi said the security breach was only one aspect of the SC's broader assessment, with Binance still needing to demonstrate its ability to meet other regulatory requirements.

These include having sufficient local manpower, governance structures and adequate capital to support its Malaysian operations.

Chan said regulators should place significant emphasis on the exchange's global security track record, given that operators were responsible for safeguarding customers' assets.

He said Malaysian digital asset exchanges had so far avoided major security breaches by adopting conservative approaches to their operations and asset protection.

"The SC should assess Binance's operational DNA and determine whether it is inherently a risk-taking or conservative organisation.

"If it wants to secure a licence here, it must demonstrate that it can comply with local regulations while adopting a more conservative approach to its operations," he added.

Chan said Binance's global standing should not automatically translate into regulatory approval, noting that its operating practices would need to be assessed against the standards expected of local exchanges.

Chan further commented that Binance's security breach and regulatory history could weigh on its ability to build trust among Malaysian investors.

The company's growth had taken place largely outside the scrutiny of regulators, he added.

"Binance has become the largest player, but it got to where it is today without having to answer to regulators. It has been able to operate on its own terms, placing commercial growth above many other factors," he said.

Chan said the exchange will need to demonstrate its willingness to comply with local requirements and meet the standards established by existing Malaysian operators.

"The biggest question is whether Binance is prepared to abide by and respect Malaysia's regulatory requirements," he said.

The latest incident could add another layer to Binance's regulatory challenges in Malaysia, where the SC ordered the exchange to cease operating in July 2021 after finding that it had illegally operated a digital asset exchange without registration.

Although Binance was removed from the SC's Investor Alert List in 2024, it was added back on Oct 8 this year.

The security breach, which occurred on Oct 29, involved about US$6.3 billion in cryptocurrency assets and was reportedly the largest known crypto heist.

The US Federal Bureau of Investigation attributed the attack to TraderTraitor, a North Korean state-sponsored hacking group.

In response, Binance temporarily suspended withdrawals while investigating the breach and working with law enforcement agencies and industry partners to trace and freeze the stolen assets.

About US$3 billion was reportedly frozen on-chain, while Binance pledged to cover affected customers' losses using its corporate treasury and Secure Asset Fund for Users.

The exchange said it had replenished about 95 per cent of the affected assets and began restoring withdrawals in phases.

Liew said Binance had taken steps to restore confidence by making investors whole using its corporate balance sheet, but its longer-term credibility would depend on improvements to its security protocols and internal processes.

"What remains to be seen is their enhancements to their process or security protocols to ensure a hack of this size and nature becomes impossible going forward," he said.

Separately, Binance has also faced questions over the use of its peer-to-peer (P2P) platform to facilitate ringgit transactions through advertisements listed under other currency denominations.

Business Times has reached out to the SC and Bank Negara for further clarification on Binance's licensing discussions and whether the recent security breach could affect its proposed return to Malaysia.