Conditions applicable to Crypto Hedge Funds

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


In October 2017, 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”). 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. 

The MFSA sought to create a sound 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. 

Preliminary Meeting between Promoters of PIFs investing in VCs and MFSA

Promoters of the Scheme seeking to invest in VCs are required to hold a preliminary meeting with the officials of the MFSA during the Preparatory stage of the application process which should take place prior to the submission of an application for a licence. 

The Application Process: Additional Application Documents

Part A of the Application process now provides that PIFs investing in VCs will need to submit additional application documents to the MFSA. Such documents include: 

  • •An assessment by the governing body that the proposed service providers have business organisation, systems, experience and expertise in the field of information technology, Virtual Currencies and their underlying technologies, including but not limited to the Distributed Ledger Technology, to act as service providers to PIFs investing in Virtual Currencies.
  • If a PIF appoints a third-party Manager, it must be shown that the proposed Manager has set up an Investment Committee in line with SLC 9.8 of Appendix I to Part BII of the Investment Services Rules for Qualifying Professional Investor Funds,  together with the terms of reference regulating the procedures of the Investment Committee of the said Manager.
  • Proof is required that the Investment Committee Member/s has/have sufficient and proven track record of trading on an established Virtual Currency exchange.

The MFSA may request additional information be given if required when processing an application for a license. 

Supplementary Conditions for Professional Investor Funds investing 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. Additionally, both Part A and Appendix III to Part B have 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.    

The Supplementary Conditions necessitate: 


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. 

Section 9  highlights the requirement of competence of the Governing Body, the Investment Manager, the Investment Committee which must be made up of at least three members, the administrator (if appointed), the custodian (if appointed), the compliance officer, the Money Laundering Reporting Officer, and the auditor. At least one person in the Governing Body and the Investment Committee must have sufficient knowledge and experience in the field of information technology, VCs and their underlying technologies.

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 VCs the fund will be investing in. 

The manager must take into account the investor/s and/or issuer/s, the applicable protocol/s and underlying infrastructure, the availability and reliability of information and the providers thereof and the service providers involved and the exchange/s where the virtual currency is traded. 

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. 

The manager must also implement a liquidity management system which will allow him to monitor the liquidity risk of the scheme, conduct stress tests and ensure that the liquidity profile of the investments of the Scheme complies with its underlying obligations. 


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. Valuation must be carried out by an external valuer with no direct or indirect links to the scheme. 

PIFs investing in VCs directly or through a trading company/SPV

Section 9 under Appendix I of Part B outlines the supplementary license conditions applicable to PIFs investing in VCs which need to be complied with if the funds are doing so directly or through a trading company/SPV. (The latter must also comply with the requisites under Section 3 of the appendix.). For a scheme to fall under Section 9, it must be established as an investment company, a limited partnership or a unit trust. 

Collective Investment Scheme created through ICOs

If the units of a collective investment scheme have been created through an Initial Coin Offering (“ICO”), it shall be deemed to comprise a direct investment in VCs and must also comply with Section 9. 

Self-Managed Schemes – PIFs investing in VCs

PIFs Investing in VCs may also be self-managed, and will thus be subject to the above regulations.

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Key Contacts

Dr Priscilla Mifsud Parker

Senior Partner, Corporate, Tax & Immigration

+356 22056122

Mr Steve Muscat Azzopardi

Director, Trust & Corporate Services, CCA Interserv Ltd

+356 2205 6328

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