Blockchain Solutions Portfolio
November 1st 2018 saw the enactment of three important pieces of Maltese legislation in the Blockchain scenario: Virtual Financial Assets Act (VFA Act), Chapter 590 of the Laws of Malta (LoM); Malta Digital Innovation Authority (MDIA) Act, Chapter 591 LoM; and Innovative Technology Arrangements (ITAs) and Services Act, Chapter 592 LoM.
As the Regulator, the MFSA oversees the implementation of the VFA Act and the offering of four categories of VFA Licences to interested VFA Service Provider applicants as follows:
Licence holders authorised to receive and transmit orders and/ or provide investment advice in relation to one or more virtual financial assets and/ or the placing of virtual financial assets. Class 1 Licence Holders are not authorised to hold or control clients’ assets or money.
Licence holders authorised to provide any VFA service but not to operate a VFA exchange or deal for their own account. Class 2 Licence Holders may hold or control clients’ assets or money in conjunction with the provision of a VFA Service.
Licence holders authorised to provide any VFA service but not to operate a VFA exchange. Class 3 Licence Holders may hold or control clients’ assets or money in conjunction with the provision of a VFA Service.
Licence holders authorised to provide any VFA service.
Class 4 Licence Holders may hold or control clients’ assets or money in conjunction with the provision of a VFA Service.
The MFSA introduced a Financial Instrument Test with the objective to determine whether a Distributed Ledger Technology (DLT) asset, based on its specific features, falls to be regulated under (i) the existing EU legislation and the corresponding national legislation namely covering MIFID I and II and the E-Money Directive (in which case the provisions of the VFA would not apply), (ii) the Virtual Financial Assets (VFA) Act (in which case the provisions of the VFA would apply and applications relative to the same may securely be pursued) or (iii) is otherwise exempt (this is the case solely where the DLT asset under examination is classified as a virtual token so defined. The Test is applicable to (i) issuers offering DLT assets to the public or wishing to admit such DLT assets on a DLT exchange in or from within Malta; and (ii) persons providing any service and/or performing any activity, within the context of either the VFA Act or traditional financial services legislation, in relation to DLT assets whose classification has not been determined.
Issuers and requirement to register Whitepaper relative to VFA with MFSA
Initial Virtual Financial Asset Offering (IVFAO) means a method of raising funds whereby an issuer is issuing VFA and is offering them in exchange for funds. The VFA Act defines initial virtual financial asset offerings or as they are more commonly known, Initial Coin Offerings (ICOs) as ‘a method of raising funds whereby an issuer is issuing virtual financial assets and is offering them in exchange for funds’. This definition underscores the central role of initial VFA offerings as a means of raising capital by selling virtual financial assets to investors. By virtue of Article 3(1) of the VFA Act no issuer shall offer a virtual financial asset to the public in or from within Malta or shall apply for a virtual financial asset’s admission to trading on a DLT exchange unless such issuer draws up a whitepaper which is i) compliant with all the applicable requirements stipulated the VFA Act, and ii) properly registered with the MFSA in accordance with the applicable provisions of the VFA Act.
As required by Article 7(1) VFA Act an ICO issuer is required to appoint, and have at all times in place, a VFA Agent who shall be registered with the MFSA. A VFA agent is a person registered with the MFSA and who is authorised to carry on the profession of:
– advocate, accountant or auditor; or
– a firm of advocates, accountants or auditors, or corporate services providers, or
– a legal organisation which is wholly owned and controlled by persons referred to in paragraphs (a) or (b), whether in Malta or in another recognised jurisdiction, or any other class of persons holding authorisations, qualifications and, or experience deemed by the competent authority as possessing suitable expertise to exercise the functions listed under the VFA Act.
In addition to the VFA Act, the MFSA fintech regime presently comprises also the vital VFA regulations 2018 and a three-part Rule Book covering rules to specific to VFA Agents in Chapter 1, rules specific to VFA Issuers in Chapter 2 and rules specific to VFA Service Providers in Chapter 3.
The MDIA and the ITAS
The main innovative offering of the newly established MDIA regulator is that developers/owners of qualifying innovative technology arrangements (ITAs) may submit an application to the MDIA for certification of the same ITA for a period of 2 years at a time.
The MDIA may certify different ITAs for one or more specified purposes and with reference to:
– behaviours; or
As may be determined by the Authority, and which shall be stated in the certification.
For an application to be considered, the Applicant will need to include a justification as to why the certification is being sought. As detailed in the First Schedule of the ITA Act innovative technology arrangements are:
– software and architectures which are used in designing and delivering DLT and which qualify under the pertaining subsections;
– 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, by notice from time to time.
In addition to submitting itself to the MDIA, an ITA application is highly dependent on collaboration with two key functionaries as envisaged by the applicable law and which have been defined as ITA Service Providers as follows:
-System Auditors registered with the MDIA who are entrusted to carry out the review or audit services with reference to innovative technology arrangements provided by system auditors; and
-Technical Administrators registered with the MDIA who are entrusted with the technical administration services with reference to innovative technology arrangements.
The Proposal of a Fourth Bill
It is to no doubt that the implementation of the first three acts is a groundbreaking milestone with respect to our law. Despite this, advisor for Chain Strategies; Steve Tendon, feels that there should be the enactment of a fourth bill following the first three. This should be done, in order to monitor the notion of legal personality. Tendon gives rise to a very important fact; it is true that some technological arrangements are owned by corporate structure, despite this, some do not have ownership. Due to this flaw, Tendon proposes a fourth bill which would entail that with regards to technological arrangements, these should be registered with a legal person which would lead to the creation of a legal personality. Many labelling it as the Innovative Foundations Bill, legal personality would be attached to such a technological arrangement if there would be a physical or automated structure. Tendon argues, that, if the proper procedure would be followed then legal personality could be attached to these arrangements. He further argues that this could be done either by writing or by means of software code, this will entail accountability and would augment trust in a decentralized system.
What is Malta doing differently?
Unlike other leading countries in the cryptocurrency scene such as Liechtenstein, Malta is adhering more to the importance of the technological aspect first rather than the overall industry. Other countries have as their objective financial gains associated with the cryptocurrency field, Malta, on the other hand, are more into the evaluation of the technological aspect, this is carefully enlightened in the white papers of operators interested in coming to Malta to launch ICOs. Parliamentary secretary Silvio Schembri delved into this matter and explained as to why Malta is tackling this notion in a different manner;
“We are not looking at short term gains here, but rather at the long term evolution of block-chain and DLT technology. For example, if we think about the issuance of an ICO, operators typically present a white paper with the ICO details. While other jurisdictions are looking at the white paper to see if it’s certified, it’s the technology behind that white paper that implements what is written. Currently, no one is looking at the technology. That is something that we are doing differently, said Schembri.”
PKF Malta Portfolio Services Offering
We offer our professional services to both major and small operators including start-ups. Using our international network we can assist you to interact with other operators to increase your market potential.
At PKF Malta we are primed to provide advice that goes beyond simple conventional licensing requirements and pride ourselves in providing a one-stop-shop offering with the following professional assistance in relation to services centred on virtual financial assets:
- Setting introductory meetings with the licensing regulators, the Malta Financial Services Authority and Malta Digital Innovation Authority;
- Carrying out of necessary Due Diligence and scoping exercises;
- Carrying out of financial instrument test;
- Provision of Crypto AML reporting and compliance through outsourced partners;
- Company Formation;
- Office Space Allocation;
- Call Centre Services;
- Introduction to DLT friendly local Banks and international banks of and financial institutions offering account opening and payment solutions and assistance with account opening process;
- Payroll & Accounting;
- Commissioning of Financial Audit Services;
- Commissioning of Co-Location and 24/7 hosting service;
- VAT & Tax Advice; and
- IT Testing & Payment Gateway Services