The Malta Financial Services Authority on Virtual Currencies

The Malta Financial Services Authority (“MFSA”) issued two consultation documents with regards to Virtual Currencies:

  1. A Consultation on the Proposed Regulation of Collective Investment Schemes Investing in Virtual Currencies. 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 Virtual Currencies (“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.
  2. A discussion paper on Initial Coin Offerings, Virtual Currencies and Related Service Providers issued on the 30 November 2017 which is relevant in respect of cryptocurrency exchanges. In this discussion paper, MFSA showed its intention to publish a Virtual Currencies Act (“Act”) which will provide a legal framework to regulate any business associated with virtual currencies.

The MFSA gave the industry a deadline until 18 January 2018 to receive feedback so that they can take into account all feedback provided when drafting the Act mentioned above. Consequently, it is estimated that this Act will be finalised in the first quarter of this year and it will be published by parliament towards the second quarter of 2018. A summary is provided below containing the salient points mentioned in the discussion paper in respect of the cryptocurrency industry.

The scope of the MFSA is to present to the industry a proposed policy that the MFSA can adopt to regulate Initial Coin Offerings (“ICOs”), VCs and any service provider involved in this industry. The aim of the discussion paper is to support new technology and innovation whilst protecting investors, financial market integrity and financial stability. The paper goes on to provide definitions of ICOs, VCs, Coins and Tokens to clarify any terms which might be ambiguous. The paper subdivides VC into (i) coins and (ii) tokens and further subdivides tokens into (a) securitised and (b) utility tokens.

With regards to the current state of regulation, the MFSA expressed that certain VCs and any related activities that fall within the scope of existing financial services legislation are regulated by the Investment Services Act, but other VCs and activities which fall outside the scope of the existing framework are not currently regulated. The Act would include a ‘Financial Instrument Test’ to determine whether the features of a VC, either on a stand-alone basis or within the contact of an ICO, constitutes a financial instrument under MiFID and other relevant EU legislation, specifically in the forms of transferable securities, units in Collective Investment Schemes, commodities and their respective financial derivatives contracts and financial contracts for difference.

Where the Financial Instrument Test indicates that a VC issued through an ICO qualifies as a financial instrument, an issuer then has to comply with relevant existing EU legislative framework which may include: the Prospectus Directive, the Markets in Financial Instruments Directive (“MiFID”), Alternative Investment Fund Manager Directive and national legislation. If it does not qualify as a financial instrument then the Act would be applicable.

The MFSA states that any existing investment services licence holders would need to set up a subsidiary solely for the purpose of providing services and activities in relation to VC that do not qualify as financial instruments. The subsidiary would require a specific licence under the Act. This provision will be applicable to Investment Services Licence Holders, Exchanges, Credit Institutions and Financial Institutions.

With particular reference to exchanges, as stated by European Securities and Markets Authority when a VC qualifies as a financial instrument and VC intends to apply for admission to trading on a secondary market then Prospectus Directive applies and such VC would be able to list and trade on a regulated market or a multilateral trading facility or organised trading facility defined under MiFID.

If a VC does not qualify as a financial instrument then the Act will provide a framework for the regulation of the issuer and the exchange platform. MiFID trading platforms which are interested in listing and trading VCs which 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 Act would need to be obtained.