As one of the first jurisdictions to have actively encouraged, drafted and enforced regulation in the cryptocurrency sphere, Malta has in recent years, positioned itself as a leader in this sector.
Dr Ian Gauci, managing partner at GTG Advocates, was one of the legal minds behind the Virtual Financial Assets Act (the VFA Act), which offered legal clarity to the issue and provision of services involving cryptocurrencies. The VFA Act created a distinction between different types of distributed ledger technology (DLT) Assets depending on their nature and attributed rights to the tokenholder. The VFA Act thus sought to regulate:
- Initial VFA offerings (IVFAOs), more commonly known as ICOs, and the listing of VFAs on a DLT exchange;
- VFA service providers; and
- The role of the VFA agent in the IVFAO and the service provider licensing process.
The enactment of the VFA framework also led to the creation of the Malta Digital Innovation Authority (MDIA) which makes Malta one of the few (if not the only) country which also has a dedicated digital innovation authority. The aim of the MDIA is to oversee the voluntary registration of innovative technology service providers and the certification of DLT platforms and related smart contracts categorised as innovative technology arrangements (ITAs).
The Maltese financial services regulator, the MFSA, has also sought to integrate the novelty of DLT assets into the traditional financial services sphere. Funds wishing to invest in VFAs thus do not require an additional licence, although they are expected to comply with certain supplementary conditions.
The rise of cryptocurrencies has also led to an increased interest in security token offerings (STOs) thus further bridging DLT technology with more traditional financial concepts.
Both authors have been involved in advising clients as well as offering legal advice to the relevant Maltese authorities on STOs.
As the primary regulator of VFAs and other DLT assets falling with its regulatory remit (primarily STOs, which are regulated under EU-harmonised financial services legislation), the MFSA also sought to foster a space to allow operators in the fintech sphere to test their innovations within a regulated environment for a specified period of time and under established conditions. In July 2020 the MFSA thus launched its fintech regulatory sandbox.
The sandbox applies to all fintech service providers as well as suppliers, which include start-ups, technology firms and established financial services providers that approve of technologically enabled innovation in their business models, applications or products.The MFSA’s sandbox caters for technologically enabled financial innovation, which could result in novice business models, processes, products and applications with associated material effect on both financial markets and the provision of financial services.
The MFSA’s sandbox is intended to augment the sandbox regulatory framework that was previously launched by the Malta Gaming Authority (MGA), the Maltese gaming regulator and a leading authority in its industry. The MGA’s sandbox allows gaming licensed operators to make use of VFAs in their systems. The first phase of the framework allowed authorised persons to accept VFAs as a means of payment. During the second phase of the framework, the MGA then started approving applications for the use of ITAs.
More recently, the MDIA issued a consultation document inviting stakeholders to submit their feedback on a technology driven ITA sandbox which aspires to effectively complement the MDIA’s ITA full certification framework. The ITA sandbox will ensure that regulatory certainty can be given to ITAs developed by small entities, and that a balance between perpetuating full certification and the adopted barrier entry approach and tackling financial and technical barriers for smaller entities is reached.
Looking to the future of crypto regulation
The proposal for an EU Regulation on Markets in Crypto-Assets (MiCA) is expected to bring changes to Malta’s VFA framework. Such an update to the VFA regime in Malta would indubitably continue to achieve the main objectives of financial service regulation while promoting rigorousness and efficacy.
Of particular importance is the definition of a ‘crypto-asset’ under MiCA. While the VFA Act provides for a narrower definition by outlining, by elimination, what constitutes a VFA, MiCA opts for a wider definition. Under the VFA Act, a VFA is defined as a ‘digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not (a) electronic money, (b) a financial instrument and (c) a virtual token’. On the other hand, the proposed Regulation considers a ‘crypto-asset’ to be a ‘representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology’.
MiCA also requires that prior to the issuance of crypto-assets to the public, agents are to submit the notification of crypto-asset whitepapers to the competent authorities. This would mean that although the crypto-asset whitepapers will not be subject to ex-ante approval, the competent authorities would be granted ex-post powers. The issuance of VFAs to the public is currently subject to a registration system that includes the appointment of a money laundering report office and undertaking of systems audits, which analyse any innovative technologies used by the issuer during the IVFAO.
While Malta has made a name for itself in the cryptocurrency sphere, one cannot forget that for many years prior to the enactment of the VFA framework, Malta had already established itself as a prominent financial services jurisdiction.
The MFSA’s vision and strategy is to develop Malta into a global fintech hub, taking into consideration the European Commission’s fintech action plan which seeks to harness the opportunities presented by technological innovation, and the Commission’s efforts to build a true digital single market. The MFSA aims to adopt regtech and suptech solutions and to educate the industry as a whole on the benefits and risks of fintech and related technologies.
The regulation of regtech providers is dependent on the nature of their activities. It must be noted that Maltese laws apply in a technology-neutral manner (bar some exceptions in relation to DLTs) and it is therefore the activity of the regtech provider that triggers regulatory implications and not the specific technologies utilised.
As part of its fintech strategy the MFSA has also highlighted the creation of a regulatory sandbox which may be used for robo-advisers.
The future of fintech
Fintech underlies the rate at which the financial services industry is being disrupted. It is seen as offering opportunities for startups to enter the market with innovative products that closely meet customer demands, while also allowing incumbent firms to improve their customer experience and meet changing customer needs.
This new wave also brings with it legal and regulatory uncertainty in areas such as cyber security, money laundering and the funding of terrorism.
As a niche firm focusing on technology law we acknowledge the opportunities and the challenges that this new digital revolution brings with it. We believe that any operator or even any jurisdiction that wishes to remain at the forefront of the financial services industry must embrace the innovation that the fintech sphere has to offer.