The Financial Instrument Test: A brief analysis.


The cur­rent ‘talk of the town’ for all Blockchain & Cryp­to-enthu­si­asts is an inno­v­a­tive test for­mu­lat­ed by the Mal­ta Finan­cial Ser­vices Author­i­ty (MFSA) enti­tled: the Finan­cial Instru­ment Test.

This analy­sis and ‘deter­mi­na­tion’ will be the manda­to­ry barom­e­ter for all forms of enter­pris­es propos­ing to intro­duce DLT [Dis­trib­uted Ledger Tech­nol­o­gy] Assets into ‘Blockchain island’. More­over, it will be the prime respon­si­bil­i­ty of the pro­posed VFA Agent to ensure that the test is con­duct­ed prop­er­ly whilst hav­ing tak­en into con­sid­er­a­tion the nature and resid­ual assess­ment of the pro­posed DLT Asset.

In this con­nec­tion, it is worth briefly dis­cussing this pio­neer­ing test and how rep­re­sen­ta­tives of Dr. Wern­er & Part­ner can aid in help­ing you set up a VFA approved busi­ness initiative/project.

MFSA Requirement.

To note that Arti­cle 47 of the Vir­tu­al Finan­cial Assets Act, 2018 specif­i­cal­ly states that the MFSA [apt­ly termed the ‘Com­pe­tent Author­i­ty’] ‘shall intro­duce a test applic­a­ble to issuers, VFA agents and license hold­ers for the pur­pose of deter­min­ing whether a DLT asset qual­i­fies as Elec­tron­ic Mon­ey, a Finan­cial Instru­ment, Vir­tu­al Finan­cial Asset (VFA) or a Vir­tu­al Token’.

Pri­ma facie, the test is in a way struc­tured into ‘three’ main cat­e­gories which for the sake of sim­plic­i­ty and coher­ence will be termed as the Vir­tu­al Token Test, the MIFID Test and the Elec­tron­ic Mon­ey (E‑Money) Test.

The Virtual Token Test.

When propos­ing a DLT Asset, it must first be deter­mined whether the ‘asset’ or ‘token’ is a Vir­tu­al Token. Vir­tu­al Tokens can be defined as pure util­i­ty tokens in that they are sole­ly issued for the spe­cif­ic pur­pose of con­sump­tion of ser­vices by the issuer of a relat­ed enti­ty and have no oth­er pur­pose. If a DLT Asset qual­i­fies as a Vir­tu­al Token, it will fall out­side the def­i­n­i­tion of a Vir­tu­al Finan­cial Asset.

To deter­mine if a DLT Asset is a ‘Vir­tu­al Token’, one must con­sid­er two key ele­ments. 1) Its Exchange­abil­i­ty [Vir­tu­al Tokens are usu­al­ly exchange­able sole­ly with­in the DLT Plat­form] and 2) its ‘Pur­pose’ [as pre­vi­ous­ly stat­ed, the Vir­tu­al Token’s util­i­ty is restrict­ed sole­ly to the acqui­si­tion of goods or ser­vices]. If the token hypo­thet­i­cal­ly allows for auto­mat­ic swap­ping out­side the lim­it­ed net­work of the DLT Plat­form, the asset would not qual­i­fy as a Vir­tu­al Token.

The MIFID Test.

If the pro­posed DLT Asset does not qual­i­fy as a Vir­tu­al Token, the asset will be sub­ject to a sec­ond lay­er of test­ing i.e. whether the pro­posed DLT Asset qual­i­fies as a Finan­cial Instru­ment in terms of the Mar­kets in Finan­cial Instru­ments Direc­tive (the ‘MIFID test’).

A DLT Asset will be deemed to be a ‘Finan­cial Instru­ment’ if it pri­mar­i­ly qual­i­fies as:

  • A Trans­fer­able Secu­ri­ty.
  • Mon­ey Mar­ket Instru­ment.
  • Is a Unit in a Col­lec­tive-Invest­ment-Scheme.
  • A Finan­cial Deriv­a­tive
  • An emis­sions allowance under MIFID.

The MFSA’s Guid­ance note to the Finan­cial Instru­ment Test pro­vides a very robust and in-depth appli­ca­tion of MIFID require­ments. What is cru­cial to under­stand is that any pro­posed DLT Asset that has a payments/money exchange func­tion­al­i­ty will tech­ni­cal­ly speak­ing fall out­side the scope of MIFID. The test in itself ‘by-pass­es’ MIFID if the DLT Asset would con­tain fea­tures which would there­fore be sim­i­lar to an instru­ment of pay­ment. This will deter­mi­na­tion will cer­tain­ly be cru­cial in solv­ing the FIT ‘rid­dle’.

Transferable Securities’.

One of the most impor­tant con­sid­er­a­tions will cer­tain­ly be that per­tain­ing to ‘Trans­fer­able Secu­ri­ties’ since tokens might hypo­thet­i­cal­ly have rights akin to nor­mal cor­po­rate shares. For Tokens to be clas­si­fied as ‘Trans­fer­able Secu­ri­ties’, they would need to be 1) Exchange­able and nego­ti­at­ed on Cap­i­tal Mar­kets 2) Have rights which ren­der the DLT Asset sim­i­lar to a share/bond and 3) would not serve as a medi­um of exchange. This is why the def­i­n­i­tion of a trans­fer­able secu­ri­ty excludes instru­ments of pay­ments.


In terms of ‘Finan­cial Deriv­a­tives’, one must always take into con­sid­er­a­tion ANY ‘under­ly­ing con­tract’ to deter­mine whether the pro­posed DLT Asset is actu­al­ly licens­able under MIFID. Four prin­ci­pal require­ments would need to be sat­is­fied for any token to qual­i­fy as a Deriv­a­tive i.e. 1) Con­tract Type (DLT Asset would be the equiv­a­lent of an option, future, swap or any oth­er Deriv­a­tive], 2) DLT Asset would have an under­ly­ing asset in terms of MIFID, 3) the DLT Asset would be in accor­dance with con­di­tions applic­a­ble in terms of MIFID [Set­tle­ment] and 4) Pur­pose (the DLT Asset would have an under­ly­ing pur­pose equiv­a­lent to a con­tract of dif­fer­ence).

The E‑Money Test.

The final stage of the test would be to deter­mine whether the DLT Asset would qual­i­fy as ‘Elec­tron­ic Mon­ey’. (The E‑Money test). The Euro­pean Cen­tral Bank notes that Elec­tron­ic mon­ey (e‑money) is broad­ly defined as an elec­tron­ic store of mon­e­tary val­ue on a tech­ni­cal device that may be wide­ly used for mak­ing pay­ments to enti­ties oth­er than the e‑money issuer. The device acts as a pre­paid bear­er instru­ment which does not nec­es­sar­i­ly involve bank accounts in trans­ac­tions.

This test can be par­tic­u­lar­ly chal­leng­ing when tokens might be ful­ly backed by FIAT cur­ren­cies or if the pro­posed token has ‘redemp­tion’ facil­i­ties. In this con­nec­tion, in order for a DLT Asset to ‘qual­i­fy’ as Elec­tron­ic Mon­ey and hence­forth fall out­side of the scope of the Vir­tu­al Finan­cial Assets Act, 2018, the MFSA has estab­lished three main deter­min­ing cri­te­ria:

The first per­tains to Issuance and Redemp­tion (i.e. the DLT Asset would need to be issued at par val­ue on the receipt of funds by the issuer and redeemed sole­ly by the issuer), sec­ond­ly the DLT Asset would need to rep­re­sent a claim on the issuer and third­ly, the DLT asset should be used for the pur­pose of mak­ing a pay­ment trans­ac­tion and is accept­ed by a natural/legal per­son oth­er than the issuer of the said DLT Asset as a pay­ment.


Since the ‘test’ is inher­ent­ly a ’neg­a­tive’ test, it stands to rea­son that if the pro­posed DLT Asset ‘fails’ all three tests accord­ing­ly, it will be by default sat­is­fy the require­ments of a ‘Vir­tu­al Finan­cial Asset’ and the new reg­u­la­tion would hence­forth be applic­a­ble.

Here at Dr. Wern­er & Part­ner, our qual­i­fied per­son­nel will be more than will­ing to act as your per­son­al prospec­tive VFA Agent and help you draw up your busi­ness plans/proposals as per local leg­is­la­tion.

You can con­tact us accord­ing­ly to dis­cuss any ICO, Token Gen­er­a­tion Event or Blockchain-relat­ed idea by send­ing an email to:

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 with up with any of our rep­re­sen­ta­tives to seek fur­ther infor­ma­tion, please con­tact us for an appoint­ment.


About Dr. Michael Calleja

Dr. Michael Calle­ja, born on the 07.01.1988, stud­ied law at the Uni­ver­si­ty of Mal­ta from 2006 till 2012. He grad­u­at­ed Bach­e­lor of Laws & Euro­pean Stud­ies in 2009 with a Sec­ond Class Upper Degree and grad­u­at­ed Notary Pub­lic in 2010. He suc­cess­ful­ly defend­ed his the­sis enti­tled: ‘Beyond the Bosman Rul­ing: Con­trac­tu­al Dis­putes in Foot­ball and the Spe­cif­ic Nature of Sport in the Euro­pean Union’ in 2012 and obtained his Doc­tor of Laws (LL.D) accord­ing­ly.

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