World 1st Comprehensive DLT Legislation enacted in Malta

Three Maltese Bills regulating DLT& Blockchain, Crypto & Service Providers become Law.

Dr. Priscilla Mifsud Parker co-authored with Sarah Vassallo | 02 Jul 2018

Malta DLT Legislation img

Today, the 4th of July, the Maltese Parliament has made history when it approved the third and final reading which will see the three bills regulating blockchain-based businesses and their service providers, as well as cryptocurrencies and initial coin offerings become law. Following the assent of the President of Malta and publication in the Government Gazette, Malta will become the first jurisdiction in the world to have laws which comprehensively cover the treatment of cryptocurrencies, the launch of initial coin offerings and subsequent treatment of assets offered to investors as well blockchain/DLT service providers and services which they offer, including the setting up of cryptocurrency exchanges.

Indeed, Malta’s efforts in the past year to become a true Blockchain island are bearing tangible fruit, and several industry players, including Binance which is one of the largest cryptocurrency exchanges in the world, have recognised Malta’s prowess in the field and chose to set up shop here owing to the jurisdiction’s open-minding and blockchain and crypto friendly legislation. Okex has also commenced recruiting staff in Malta. Indeed, Malta has truly become the Blockchain Island. 

A true World First DLT Law 

Although there are other jurisdictions which have passed laws seeking to regulate the cryptocurrency and blockchain space such as the Isle of Man, no other country has sought to delve in detail on the regulation of such disruptive technologies for a variety of reasons. Firstly, many states would be more willing to wait until there is a legal framework which has been tried and tested by other states or approved by bodies such as the European Union. Secondly, the scope behind cryptocurrencies and distributed ledger technology (or blockchain) was to create a decentralised ecosystem that is not intrinsically tied to traditionally centralised institutions such as banks. Some have reiterated that the creation of cryptocurrencies and blockchain was to exclude the involvement of regulators in favour of unfettered technological development and innovation, however, the lack of regulation only managed to create a sense of unease with respect to the use of cryptocurrencies, particularly when offered to the public who would not be fully aware of the risks involved in such transactions. The lack of legal guidance has set back individuals or entities seeking to set up businesses rather than promoted growth. Thus, it was imperative that a legal framework is created within which business could operate in a way that is compliant with existing legislation and that certain safeguards are implemented particularly to ensure consumer protection, market integrity and financial stability. At the same time, any regulation could not be so overly onerous that it stifles innovation. 

The Maltese regulator has sought to strike a balance between these competing interests. Indeed, it had already done so successfully over a decade ago when Malta become the first country to comprehensively regulate Remote gaming. Building on our experience as innovators and Malta’s success as a financial services and gaming hub, Malta sought to take this challenge head on and provide a world-first, fully comprehensive legal framework that addresses a number of problems faced by the industry. 

The Three Blockchain & Cryptocurrency Acts 

The three acts work seamlessly together to provide the industry with a comprehensive framework. 

The Malta Digital Innovation Authority (‘MDIA’) Act

The MDIA Act provides for the establishment of a new authority, the MDIA, which was specifically created to promote and development of the innovative technology sector in Malta through the proper recognition and regulation of relevant innovative technology arrangements and related services. The MDIA shall be led by Mr Stephen McCarthy as its CEO and shall ensure that businesses accepted as Technology Service Providers and the services which they offer are carried out in a transparent and honest manner. 

The Innovative Technology Arrangements and Services Act (the ‘ITAS Act’)

The ITAS Act sets out the regime applicable for the registration of Technology Service Providers and the certification of Technology Arrangements. An innovative technology arrangement would include software and architectures  which  are  used  in  designing  and delivering DLT, smart contracts and related applications, including decentralised autonomous organisations, as well as other similar arrangements, and any  other  innovative  technology  arrangement  which  may  be designated  by  the  Minister, on  the recommendation  of  the  Authority. This wide definition makes the legislation future proof as it envisages the possibility of adding other innovative technology arrangements as the technology develops. 

The Virtual Financial Assets Act (the ‘VFAA’)

The scope of the VFAA is to provide a proper framework within which ICOs and crypto exchanges would operate in. In respect of ICOs, it also provides specific requirements for the drafting of a whitepaper. 

The VFAA comes as a breath of fresh air in an industry where there is very little clarity as to how assets are to be treated. Most countries agree that cryptocurrencies are not to be considered as currencies or legal tender but are very often used as a form of investment or asset. This has caused a lot of blurred lines where several distributed ledger technology Assets (DLT Assets) such as cryptocurrencies or tokens issued in an ICO would qualify as financial instruments under the relevant MiFID directive but the issuers have not applied for the proper licenses due to the confusion surrounding the classification of DLT assets.

To mitigate this problem, the Maltese legislator has also created the Financial Instruments Test (the ‘Test’) which determines the category under which a DLT asset falls. Companies seeking to set up an ICO in or from within Malta, companies which issued DLT assets overseas but wish to carry out a related activity in or from Malta and all other entities which shall be dealing with DLT-assets shall need to take this Test. The Test defines all cryptocurrencies and tokens as DLT assets and classifies them into three categories: virtual tokens, financial instruments and virtual financial assets.

Firstly, the Test will determine whether the DLT asset can be considered as a virtual token and would fall outside the scope of regulation. A virtual token is a token which does not have any value outside of its platform and thus cannot be traded or exchanged outside of its platform. A ‘utility token’ would generally be considered as a virtual token. 

Secondly, the Test will enquire whether the DLT asset qualifies as a financial instrument under MiFID and the local Investment Services Act. A ‘security token’ would generally be captured under the aforementioned legislation. 

Thirdly, if a DLT asset cannot be classified as a virtual token or as a financial instrument, it will be captured by the new Virtual Financial Assets Act once it becomes law, and will be considered a Virtual Financial Asset.  

 

Looking to set up in Malta?

At Chetcuti Cauchi, our Fintech specialists have been one of the pioneers following the developments in the industry and penning consultation documents as requested by the Government as it sought to understand the best way to regulate this industry. This has given us significant insights and positioned us at as one of the top law firms for enterprises seeking to:

Our multi-disciplinary nature as a firm allows us to work closely with various departments in the firm, including our Corporate, Intellectual Property, Gaming and Tax departments in order to help clients set up their physical presence in Malta and become compliant with the new Acts. Our lawyers and financial services specialists at Chetcuti Cauchi Advocates provide bespoke solutions to clients by combining the traditional legal fabric with new technologies. Led by Nicholas Warren, our Fintech Practice strives to assist clients in this burgeoning and evolving sector of law, which is set to reshape the financial services sector as we know it.

If you would like more information as to how the Financial Instruments Test may impact your business once you set up in Malta, or are interested in the setting up of a DLT company, an ICO, a cryptocurrency exchange, or alternatively would like to set up a Crypto Fund in Malta, we welcome you to get in touch with our specialists at fsu@cclex.com. 



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