Malta has developed a progressive approach towards distributed ledger technologies and cryptocurrencies, to the extent that we have now have a regulated framework. The VFA Act is an innovative legislation which regulates Initial Virtual Financial Assets Offerings and outlines their licensing requirements, entitled The Virtual Financial Assets Act, 2018.
Now, if you are a Service Provider you may have some unanswered questions or difficulties in understanding such framework. For this reason, here are some answers you might find useful when applying for the license.
Are there any key differences between DLT and VFA ?
As per the VFA Act 2018, a virtual financial asset (VFA) is a “form of digital medium recordation that is used as a digital medium of exchange.” The meaning of a Virtual Financial Asset as per the regulatory framework of Malta, is computed in a ‘negative format’. Thus, a VFA is a form of digital recordation that is NOT electronic money, a financial instrument and neither a Virtual (Pure Utility) Token. On the other hand, a Distributed Ledger Technology (DLT) refers to a system of database whereby the information is documented, shared and harmonised across a network of several nodes. Prior to offering any VFA Service the Licence Holder is required to determine whether the DLT assets qualifies as a VFA by undertaking the Financial Instrument Test
How to establish whether an asset is a VFA?
Prior to offering any VFA Service one is required to determine whether the DLT assets qualifies as a VFA by undertaking the Financial Instrument Test. This test needs to be signed by the Administrators and endorsed by Compliance Officer. In case of doubt an external legal opinion should be obtained. The test will determine whether the DLT asset falls within the definition of a VFA.
Are there any licensing requirements under the Act
Person wishing to provide a VFA service shall apply for a VFA Services Licence from the MFSA (Competent Authority). Such person must appoint a VFA Agent for such purposes.
Are all licences the same?
| VFAA Class 1 | Licence Holder authorised to receive and transmit orders and /or provide investment advice in relation to one or more VFA and/or placing of VFA. | not authorised to hold or control clients’ assets or money |
| VFAA Class 2 | Licence Holder authorised to provide any VFA service; may hold or control clients’ assets or money in conjunction with the provision of the VFA service | Not authorised to operate a VFA exchange or deal for their own account |
| VFAA Class 3 | Licence Holder authorised to provide any VFA service; may hold or control clients’ assets or money in conjunction with the provision of a VFA service | Not authorised to operate a VFA Exchange |
| VFAA Class 4 | Licence Holders authorised to provide any VFA Service; may hold or control clients’ assets or money in conjunction with the provision of a VFA service | |
What shall be taken into consideration for the Application for Service Provider Licence?
MFSA shall take the following into consideration when granting a licence:
- Protection of investors
- Protection of Malta’s reputation
- Promotion of innovation, competition and choice
- Reputation and suitability of the Applicant and its connected parties.
- Application must be a fit and proper person
- Applicant must be compliance with all requirements under the Act, Rules and VFA Regulations.
Can there be passporting of services within the EU?
A Licence Holder wishing to exercise a European Right shall notify the MFSA of its intention in writing prior to the provision of or to hold itself out as providing any VFA Service in another Member State. To do so, the Licence Holder is required to carry out an internal assessment (including a legal opinion from a lawyer of such other Member State) to determine whether the laws of the Member State allow for the provision of such services.
Are there any capital requirements?
Initial capital requirements for each respective class of VFA service Providers:
| VFA Service Licence | Initial Capital Requirement (EUR) | ||
| Class 1 | (i) | 50,000 | OR |
| (ii) | 25,000 and PII | ||
| Class 2 | 125,000 | ||
| Class 3 | 730,000 | ||
| Class 4 | 730,000 | ||
Is Substance in Malta a Requirement?
Applicant must be established in Malta. A person providing, or holding itself providing a VFA service in or from within Malta needs to be in possession of a valid licence issued by the competent authority otherwise it would be In breach of the Act.
Is the Fitness and Properness Assessment a requirement?
Applicant is to provide the VFA Agent with any information it may require for the VFA Agent to carry out the fitness and properness test on the applicant. The onus of proving that the applicant is fit and proper rests with the applicant and its VFA Agent. the fitness and properness assessment applies to the applicant’s qualifying holder; beneficial owner; board of administration members; senior manager; MLRO; Compliance Officer; Risk Manager and any other person who will effectively direct the VFA business of the applicant. The fitness and properness must be met at all times, including on an on-going bases post licence
Do I need a Systems Auditor?
If applicant has an ITA, then must appoint a Systems Auditor by means of a letter of engagement in the form set out in the Rules, who must be approved by the MFSA. Systems auditor responsible for reviewing and auditing the Applicant’s ITA. The Systems Auditor must issue an audit report on the ITA to be shared with MFSA. The MFSA may also oblige the Applicant to have a Systems Auditor in place at all times after the Licence has been granted.
What do Licence Holders need to do in transitory provision?
- Must comply with the RuleBook on best efforts basis
- Engage the services of VFA Agent
- Provide evidence to MFSA that successfully passed fitness and properness assessment of VFA Agent
- Provide evidence to MFSA that has appropriate systems in place to satisfy AML/ CFT requirements
- Within 12 months of entering into force of the VFAA (i.e. 1 Nov 2018) to apply to MFSA for a licence in terms of Art 14.
Disclaimer*
The above-mentioned article is simply based on independent research carried out by Dr. Werner and Partner and cannot constitute any form of legal advice. If you would like to meet up with any of our representatives to seek further information, please contact us for an appointment.
