MALTA – A LEADER IN DLT REGULATION

Throughout its colourful history, the island of Malta tended to be at the centre of things, being commercial activity in the Med, acting as the nurse of the Mediterranean, a fortress at times of war and most recently as a hub for financial services. Malta is now on the verge of becoming a major hub for Distribution Ledger Technology (DLT) or the Blockchain.

A recent online article on CNN.com argued that Malta is about to become the “world’s first blockchain island”. While other countries are still waiting for other tried and tested legal frameworks and are passing just laws on blockchain and cryptocurrency, Malta comes with more detailed and comprehensive regulations.

It is expected for Malta to 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 as blockchain/DLT service providers and services which they offer, including the setting up of cryptocurrency exchange.

According to the CNN, “Malta believes the island can become a haven for cryptocurrencies like Bitcoin“. Could the blockchain help in the education’s transformation? And in the transport one? Malta’s Prime Minister, Dr. Joseph Muscat, has set his sights on having the blockchain used for voting on smartphones and protecting the privacy of healthcare information. This drive is making Malta an appealing destination for the up and coming fintech industry.

The underlying technologies of DLT.

Nowadays, we are witnessing the proliferation of DLT, or as most commonly known, blockchain. Two major technologies underpin DLT:

  • Private key, which is a form of signature that provides ownership of a transaction and provides evidence that it comes from a legitimate source.
  • The presence of an extensive network whose primary purpose is to validate the transactions and by that confirm they have all witnessed the same thing at the same time.

Combining the security key with the verification from the network allows a safe and quick flow of transactions. This means that once the transaction has been shared and authenticated nobody can reverse it. With Security as another important property, the extremely strong cryptography prevents anyone from being able to access the code and the signature.

 

But what is the Blockchain?

The following diagram provides a graphical demonstration of the blockchain.

The Blockchain has five important attributes:

1) A digital ledger that keeps a record of all transactions taking place on a peer to peer network.
2) All information transferred via blockchain is encrypted and every occurrence recorded and is not alterable;
3) It is decentralized, so there is no need for any central, certifying authority;
4) Encrypted information can be shared across multiple providers without risk of a privacy breach;
5) It can be used for much more than the transfer of currency; contracts, records and other types of data can be shared.
The Proposed Framework

The Maltese Government has over the past months been actively working on the development of a framework to oversee the uses of DLT and related service providers. Concurrently, on the 23rd October 2017, the MFSA (Malta Financial Services Authority) issued its first consultation document on a Proposed Regulatory Framework for Collective Investment Schemes investing in VCs. This consultation was concluded and the MFSA proceeded with the issue of a Feedback Statement on the 22nd January 2018 summarizing the response received from stakeholders and setting out MFSA’s position. On the 30th November 2017, MFSA published a Discussion Paper on Initial Coin Offerings, Virtual Currencies and related Service Providers.  This document followed the general principles set out in a statement issued by ESMA on the 13 Th November 2017. The purpose of the Discussion Paper was to present to stakeholders a proposed policy which will be adopted by the MFSA for the creation of a framework relating to ICOs and the provision of certain services in relation to VCs that currently fall outside of existing financial regulation. The discussions between the Government and the MFSA is on-going. The Discussion Paper presents a conceptual framework through which DLT Platforms can be subject to certification in Malta. This framework also considers the need to oversee the principal service providers to DLT Platforms. Separately through the MFSA, the framework extends to issuers of ICOs and certain service provides dealing in virtual currencies.

This consultation document relates to a legislative approach involving the promulgation into law of three proposed pieces of legislation:

MDIA BILL, TAS BILL AND VC BILL.

These steps intend to achieve Malta’s vision of becoming the ‘Blockchain Island’, but let’s focus in the most important one: VC ACT.

In November 2017, MFSA had issued a consultation document in relation to ICOs and the provision of certain services in relation to VCs which drew positive feedback from the industry. Under the proposed framework, a ‘Financial Instruments Test’ would be applicable to issuers and/or persons offering ICOs.

The Proposed VC Bill seeks to create a framework in the field of ICOs as well as a regulatory framework application to service providers offering certain services in relation to VCs falling outside the scope of the current legislative and regulatory regime when such activity is carried out in or from Malta.

The proposed VC Bill provides for the following:

  • ICOs which relate to those VCs which do not qualify as financial instruments under the European and national investment services legislation.

More specifically, the proposed VC Bill is set to integrate the high-level principles of the legislation applicable to initial public offerings, that must be adhered to by an issuer of VCs. In particular, it shall cover the information that needs to be communicated to the investors in the whitepaper and the additional transparency requirements applicable where the issuer intends to have a VC admitted to trading on an exchange.

  • Persons providing the services mentioned in the Discussion Paper in relation to the ICOs and VCs.

The VC Bill shall set out inter alia the licensing requirements, procedure and ongoing obligations applicable to such persons, which shall reflect the high-level principles enshrined in the existing EU financial services legislation in relation to the provision of investment services, financial markets and market abuse.

  • The functions and powers of the MFSA as the regulator responsible for this field of financial services.

The VC Bill will empower the MFSA with the necessary regulatory and investigatory powers largely reflecting those under other national financial services laws, including the powers to issue directives, to adopt and publish rules, to require information, to introduce the ‘Financial Instruments Test’, to suspend either an ICO or the trading of a VC on an exchange, and to require the determination of a ‘Financial Instruments Test’ to be audited by an external independent professional reviewer.

 

As Plethora we are taking a keen interest in this area with a view of assisting potential clients setting up corporate structures in Malta designed to render them a successful operator in the rapidly emerging blockchain industry.