Cryptocurrency, Initial Coin Offerings and Maltese Regulation
The Malta Government is developing and pushing forward a national strategy for Malta to embrace cryptocurrency and blockchain innovation. Malta aims to become a pioneer in such technology so that the financial technology industry within the country will continue to thrive and grow.
The Malta Financial Services Authority (MFSA) issued two consultation documents with regards to Virtual Currencies:
1. Regulation of Collective Investment Schemes Investing in Virtual Currencies.
On the 23 October 2017, the MFSA issued a Consultation Paper on the Proposed Regulation of Collective Investment Schemes investing in Virtual Currencies (VC) and on the 22 January 2018 a Feedback Statement on the Consultation Paper on the Proposed Regulation of Collective Investment Schemes investing in Virtual Currencies was issued. MFSA took into consideration the feedback they received and on 29 January 2018 published specific supplementary licence conditions applicable to Professional Investor Funds investing in VCs. These supplementary licence conditions aim at providing a robust regulatory framework which seeks to ensure investor protection, market integrity and financial soundness of Collective Investment Schemes that invest in VCs.
In order to achieve these objectives, the Supplementary Conditions introduce specific requirements both during authorisation stage as well as on an ongoing basis thereafter:
• Competence – ensuring that the parties involved have sufficient knowledge and experience in the field of information technology, VCs and their underlying technologies, including but not limited to the Distributed Ledger Technology (DLT).
• Risk Warnings – include in its offering documentation risk warnings in relation to proposed direct and/or indirect investment in VCs.
• Quality Assessment – ensure that the appointed investment manager carries out appropriate research in order to assess the “quality” of the VCs being invested into.
• Risk Management – ensure that prior to investing in any VC on behalf of the Professional Investor Fund (PIF), the investment manager assesses whether the risk profile of the said VC falls within the scope of that PIF’s risk management policy.
• Valuation – ensure that the appointed service providers have the business organisation, systems, experience and expertise necessary to conduct the required verification and valuation of the PIF’s investments in VCs.
2. A Discussion Paper on the Financial Instrument Test
The MFSA has issued a Consultation Paper on the Financial Instrument Test (Test). This paper follows up on the Discussion Paper on Initial Coin Offerings, Virtual Currencies and Related Service Providers which was issued on 30 November 2018, where it was suggested that a mandatory test should be in place to determine the legal status of the initial coin offerings (ICO), digital currencies and related service providers.
Under the consultation paper a DLT asset is defined as either (i) a virtual token (VT); (ii) a virtual financial asset; or (iii) a financial instrument that is intrinsically dependent on, or utilizes, DLT. The Test will consist of two stages to determine how a DLT asset should be classified. The first being whether a particular DLT asset qualifies as a VT. If the answer is in the negative then the second stage would determine whether the DLT asset would qualify as a financial instrument under Markets in Financial Instruments Directive (MiFID). If the answer would again be in the negative, then the DLT asset would qualify as a Virtual Financial Asset under the Virtual Financial Assets Act (VFAA).
This proposed Test is intended to determine whether a DLT asset, based on its specific features, falls under:
i. Existing EU legislation and corresponding national legislation (such as MiFID); or
ii. The proposed VFAA (which name has been changed from the Virtual Currencies Act); or
iii. Will otherwise be exempt from any regulation.
MFSA is considering the introduction of this test as a mandatory requirement in accordance with the new Act, both for an ICO, cryptocurrency exchanges and for other intermediation services of DLT assets, by persons who would carry out activities of these assets in or from within Malta.
The consultation paper is proposing that non-licensed individuals, who provide a service or perform an activity in relation to a DLT asset, in or from within Malta, will also, be required to conduct the Test, in order to establish which regulatory framework is applicable. The MFSA is proposing that both the Test and the respective determination should be reviewed by an external reviewer.
The test is expected to consist of twelve checklists so that it would be easier to determine the classification of the asset. For a user of the Test to determine whether the DLT asset falls within the scope of the existing EU legislative and regulatory framework or otherwise, such users must assess and compare the DLT asset with the set of predetermined checklists. The first requirement from the checklist focuses on VT under the VFAA, while the remaining checklist focuses on the various financial instruments under MiFID.
The VFAA will provide a legal framework that will apply a principle based approach to regulation supplemented by MFSA guidance, rather than detailed rules which could possibly restrict innovation, or regulate any business associated with VC.
If a DLT asset does not qualify as a Financial Instrument but fall s under the remit of the VFAA, then the VFAA will provide a framework for the regulation of the Issuer and the Exchange Platform. MiFID trading platforms which are interested in listing and trading DLT assets that do not qualify as Financial Instruments would need to set up a subsidiary solely for this purpose in relation to which a separate licence under the VFAA would need to be obtained.
EMD is in a position to advise and assist cryptocurrency and ICO 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.