Dr. jur. Jörg WernerAmong blockchain and crypto enthusiasts, few topics are currently as significant as the innovative "Financial Instrument Test" introduced by the Malta Financial Services Authority (MFSA).
The results of this analysis are binding for any entity looking to introduce DLT [Distributed Ledger Technology] assets on the "Blockchain Island". Under the Virtual Financial Assets Act (VFAA), a VFA Agent is responsible for ensuring this test is carried out correctly, taking into account the nature and specific features of the proposed DLT asset.
In this article, we take a closer look at this pivotal test. We also outline how Dr. Werner & Partners can support you in structuring your project to comply with local regulations.
Requirements set by the MFSA
Article 47 of the Virtual Financial Assets Act explicitly states that the MFSA (referred to as the "competent authority") will introduce a test to determine whether a DLT asset submitted by an applicant constitutes Electronic Money, a Financial Instrument, a Virtual Financial Asset (VFA), or a Virtual Token.
At first glance, the test is divided into three categories. For simplicity, we will refer to these as the Virtual Token Test, the MIFID Test, and the Electronic Money (E-Money) Test.
The Virtual Token Test
When assessing a DLT asset, the first step is to determine if the "asset" or "token" qualifies as a Virtual Token. Virtual Tokens are defined as pure utility tokens used solely to access services offered by the issuer and serving no other purpose. This is typically the case if the token is used exclusively as a medium of exchange within the provider's platform. If a DLT asset is classified as a Virtual Token, it does not fall under the definition of a Virtual Financial Asset—meaning the VFAA does not apply.
To determine if a DLT asset is a "Virtual Token," two core aspects must be considered:
- Convertibility: Virtual Tokens can generally only be exchanged within the DLT platform.
- Purpose: As mentioned, the utility of the Virtual Token is restricted solely to the acquisition of goods or services. For example, if a token could be automatically swapped outside the limited network of the DLT platform, the asset would likely not be classified as a Virtual Token.
The MIFID Test
If the proposed DLT asset is not classified as a Virtual Token, it undergoes a second assessment to see if it should be treated as a financial instrument under the Markets in Financial Instruments Directive (MIFID).
A DLT asset is considered a "Financial Instrument" if it primarily falls into one of the following categories:
- A transferable security
- A unit in a collective investment scheme
- An emission allowance under MIFID
The MFSA's guidance on the Financial Instrument Test provides a robust and detailed application of MIFID requirements. Crucially, any proposed DLT asset that features payment or money exchange functionality technically falls outside the scope of MIFID. The test essentially ensures that MIFID is not bypassed simply because a DLT asset includes features similar to a payment instrument. Determining the primary intent is key to solving this part of the puzzle.
Transferable Securities
One of the most critical assessments involves "Transferable Securities," as tokens can theoretically carry rights similar to standard company shares. For tokens to be classified as "transferable securities," they must:
- Be negotiable and tradable on capital markets;
- Carry rights that make the DLT asset similar to a share or bond; and
- Not serve as a payment instrument (which is why the definition of a transferable security excludes payment instruments).
Derivatives
Regarding "Financial Derivatives," one must always consider any underlying contract to determine if the proposed DLT asset is licensable under MIFID. Four main requirements must be met for a token to be classified as a derivative:
- Contract Type: The DLT asset is equivalent to an option, future, swap, or other derivative.
- Underlying Asset: The DLT asset has an underlying asset as defined by MIFID.
- Settlement: The DLT asset meets the settlement conditions applicable under MIFID.
- Purpose: The DLT asset has a fundamental purpose corresponding to a contract for difference.
The E-Money Test
The final phase involves determining whether the DLT asset should be classified as "Electronic Money." According to the European Central Bank definition, electronic money is the electronic storage of monetary value on a technical device that is widely used for making payments to entities other than the issuer. The device itself acts as a prepaid bearer instrument that does not necessarily involve bank accounts in transactions.
This test can be particularly complex if tokens are fully backed by fiat currencies or if the proposed token has "redemption possibilities." In this context, the MFSA has established three key criteria to determine if a DLT asset qualifies as electronic money (and thus falls outside the scope of the Virtual Financial Assets Act):
- Issuance and Redemption: The DLT asset is issued at par value on the receipt of funds by the issuer and is redeemable solely by the issuer.
- Claim: The DLT asset represents a claim on the issuer.
- Usage: The DLT asset is used for executing payment transactions and is accepted as payment by a natural or legal person other than the issuer.
Conclusion
Since the test is inherently a "negative" test, the logic follows that if a proposed DLT asset fails all three specific tests (Virtual Token, MIFID, and E-Money), it defaults to meeting the requirements of a "Virtual Financial Asset," making the new VFAA regulations applicable.
At Dr. Werner & Partners, our qualified team is available to assist you with the legal classification of your project and support you in preparing your business plans and applications in accordance with local legislation.
You can contact us to discuss any ICO, Token Generation Events, or blockchain-related concepts by sending an email to: info@drwerner.com.
Disclaimer: The article above is based on independent research by Dr. Werner & Partners and does not constitute legal advice. If you would like to meet with one of our representatives for further information, please contact us to arrange an appointment.
