Blockchain Technology and Maltese Regulation
The Malta government as well as the Malta Financial Services Authority (MFSA) are promoting policies and developing regulation in relation to blockchain technology and cryptocurrencies with the aim of establishing Malta as the jurisdiction of choice, as well as, being the pioneer for cryptocurrencies and blockchain technology.
Blockchain technology is a digital and decentralized ledger known as a type of Distributed Ledger Technology (DLT) that records all transactions. Therefore, every time someone buys digital coins on exchanges, sells them, transfers coins or buys a good or service using virtual currency, a ledger records this transaction in an encrypted manner to protect it from cybercriminals. Below are some key features about blockchain technology:
• Due to Blockchain being decentralized technology, the intermediary is removed, which reduces costs and complexity;
• The DLT means that all members of the financial market share an identical system of records, which results in immutability and finality for the transactions concerned – this removes the need for reconciliations;
• The exchange of information is done in a synchronous and even manner and is continuously updated – which means that there is less risk of hacking the system;
• The Blockchain’s security and privacy protocols are based on the use of a “cryptographic hash function” which means that each chain is identified by its own “hash” key. The crypto hash is very complex and reduces the Blockchain’s susceptibility to fraud.
Maltese Legal Framework for Distributed Ledger Technology Platforms
A Consultation Paper entitled “The Establishment of the Malta Digital Innovation Authority; the Framework for the Certification of Distributed Ledger Technology Platforms and Related Service Providers; and a Virtual Currency Act” was issued on the 16 of February 2018 by the Government of Malta.
The proposed legislation, presents a conceptual framework for DLT platforms to be subject to certification in Malta. This framework also considers the need to oversee the principal service providers to DLT platforms. Separately through the MFSA, the framework extends to issuers of Initial Coin Offerings (ICO), as well as intermediaries that act as brokers, exchanges, wallet providers, asset managers, investment advisors and market makers in relation to Virtual Currencies (VC) that fall outside any existing financial regulation.
The proposal mentions that Malta will issue three separate pieces of draft legislation, these are:
1. The Malta Digital Innovation Authority (MDIA) Bill – which will provide for the establishment of an Authority to be known as the MDIA;
2. The Technology Arrangements Service Bill (TAS) – a regime which will be set up for the registration of Technology Service Providers and the certification of Technology Arrangements; and
3. A VC Bill – which will set out the framework for ICOs and the regulatory regime on the provision of certain services in relation to VCs.
The TAS Bill will focus on innovative technology arrangements and their uses which means that Malta can be at the forefront of taking advantage of new technology arrangements while concurrently protecting public interest. The TAS Bill will set out the legal framework for technology arrangements and their administrators and auditors of technology arrangements related to smart contracts.
On the 13 April 2018, the MFSA published a Consultation Paper on the Financial Instrument Test which was first introduced in MFSA’s discussion paper on ICOs, VC and related service providers released on 30 November 2017. This consultation paper clarified that the new proposed bill titled VC’s Act will no longer hold that name but will be referred to as the Virtual Financial Assets Act (VFAA). The aim of this paper is to determine whether a DLT asset, previously referred to as a VC, would qualify as a Virtual Token and if this answer is in the negative, then the test must determine whether a DLT asset would fall within the ambit of existing financial services legislation (such as Markets in Financial Instruments Directive II). If such asset falls outside the scope of existing legislation then the DLT asset would fall within the ambit of the proposed VFAA. Thus to summarise, the aim of this test is to see how a DLT asset is classified and regulated both in Maltese and EU legislation.
EMD is in a position to advise and assist blockchain operators with the Company set up, as well as with annual tax and accounting services, together with providing advice and assistance on the applicable regulatory regime.