MFSA issues Supplementary Conditions for Crypto Funds

Ensuring Investor Protection & Market Integrity for PIFs investing in VCs

Dr. Priscilla Mifsud Parker co-authored with Sarah Vassallo | 30 Jan 2018

Cryptocurrency

The Malta Financial Services Authority (“MFSA”) had launched a consultation document which outlined a draft regulatory framework for Malta Professional Investor Funds investing in Virtual Currencies. Following a call for feedback from practitioners, the MFSA unveiled its publication on Supplementary Conditions applicable to Professional Investor Funds (“PIFs”) investing in Virtual Currencies (“VCs”). This regulatory update has set the legal framework for Maltese Crypto funds, wherein the Professional Investor Fund, the Maltese hedge fund aimed at seasoned investors, can now be used to invest in cryptocurrencies. Investors seeking to venture the high-risk investment market of VCs can now do so while operating within a sound regulatory framework in Malta. 

The Supplementary Conditions serve as a first step in the right direction, and have heralded the first regulatory effort towards achieving a comprehensive rulebook for industry practitioners seeking to operate in the industry. The MFSA sought to create a robust regulatory framework which safeguards and ensures investor protection, market integrity and the financial soundness of collective investment schemes which invest in VCs. To achieve this aim, the Supplementary Conditions have introduced specific requirements which must be adhered to inter alia by Collective Investment Schemes investing in VCs, both at authorisation stage as well as on an ongoing basis thereafter.

Supplementary Conditions for Crypto Funds 

Competence

It is crucial that several parties involved in the fund have sufficient knowledge and experience in the field of information technology, VCs and their underlying technologies which includes, but is not limited to distributed ledger technology. 

Risk Warnings

Owing to the volatile nature of VCs, risk warnings in relation to the proposed direct or indirect investment in VCs must be included in the offering documentation. 

Quality Assessment

The appointed investment manager must carry out appropriate research to assess the ‘quality’ of the VCs the fund will be investing in. 

Risk Management 

The investment manager must also assess whether the risk profile of the VC in question falls within the scope of that PIF’s risk management policy. This must be done prior to investing in any VC on behalf of the PIF. 

Valuation 

The appointed service providers must have the business organisation, systems, experience, and the know-how necessary to conduct the required verification of the valuation of the PIF’s investments in VCs. 
The supplementary conditions have been inserted as additional provisions under the revised Part A- The Application Process and under section 9 of Appendix I to Part B- Standard License Conditions. Part A and Appendix III to Part B have also been revised to reflect the amendments proposed in the Consultation on the Proposed Revised Rulebooks applicable to Collective Investment Schemes issued by the Authority on 27 December 2016.

Our Fintech Practice

At Chetcuti Cauchi we welcome the innovations which the financial services sector is currently undergoing and seek to provide bespoke solutions to our clients by fusing together traditional legal notions with new technologies. 

Should you wish to set up a meeting to discuss how you could be one of the pioneers to explore Malta's potential as a fintech hub or to discuss the setting up of a crypto fund in Malta, kindly contact us on fsu@cclex.com and we'd be happy to call you back. 


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