It is finally happening!
On 24th September of last year, the EU Commission published a proposal for the regulation of crypto assets: the “Markets in Crypto-Assets Regulation” (also known as: MiCA). Once MiCA is adopted and is in force, it will be directly applicable law across all EU member states.
What does this mean? – Briefly, it means that all issuers and service providers dealing with crypto-assets will be regulated.
Malta’s Approach in adopting a VFA Framework may be used as the basic preparation towards adopting and enforcing MiCA, meaning that Malta may be at the fore front of aligning its framework with the proposed regulation whilst achieving a seamless transition.
Unfortunately, Malta has adopted a strict framework so far, and such strictness may have led Malta to face a lack of business within the VFA industry.
The proposed text is accessible here: https://eur-lex.europa.eu/legal-content
A digital age calling for digital measures
“A digital and innovative single market for finance will benefit Europeans and be key to Europe’s economic recovery by delivering better financial products for consumers and opening up new financing channels for businesses.” – Valdis Dombrovskis, Vice-President of European Commission.
The proposal for the regulation of crypto assets forms part of the EU’s Digital Finance package. Such package further supports the potential of digital finance in terms of innovation and competition while endeavouring to mitigate the associated risks.
The EU Commission aims at making the EU a place which embraces the digital age and builds an economy which reflects new digital measures, such as the regulation of crypto assets.
European consumers and businesses are being faced with a new age within the financial sector, and an area which is dominating such sector is surely the crypto assets within the financial market.
MiCA is evidence that the EU supports innovation and that it strives to protect the consumers whilst also ensuring the integrity of exchanges.
The proposal covers both entities issuing crypto-assets and business which provide crypto related services such as digital wallets operators and cryptocurrency exchanges.
Regulating the unregulated
As the European Commission was still deliberating whether the EU needed crypto assets regulation, EU states moved ahead with their own regulations, with the smallest of them being at the fore front of such regulations.
Way back in 2018, the then Prime Minister of Malta presented the country as the ‘Blockchain Island’ given that at the time crypto assets where nowhere close to being regulated. Malta took a huge step towards innovation and introduced three bills as its Innovation Framework.
Malta regulated the unregulated virtual world including digital assets and virtual currencies, enacted a framework for technical service providers and established a body to certify blockchain deployments and smart contracts.
The Malta Financial Services Authority (MFSA) also introduced the financial instrument test to divide digital assets in four distinct categories based on their individual characteristics.
Licensing requirements for crypto related activities was made possible and also subject to AML/ CFT rules.
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Is there a way forward?
Some European countries embraced transformative technologies with top-down initiatives, while others have remained to simple investor protection warnings.
Malta’s success in being at the fore front of the regulation within an unregulated sphere may be seen again in aligning the VFA framework with the proposed regulation. Such success may only be seen if Malta takes a practical approach towards enforcing MiCA once it is adopted.
So far, Malta has adopted a strict framework, whereby the application for a VFA licence was not everyone’s cup of tea. Unfortunately, such strictness and hefty regulations led Malta to have less companies choosing it for their license.
Those involved in the sector realised that Malta was not being practical with its regulation, and clients were leaving to other jurisdictions which made it easier for start-ups to set foot in their country.
However, having a license in Malta, will serve as a strong steppingstone in being regulated within the EU.
Infact, one of the European Blockchain Observatory and Forum reports introduced a structure which ranks countries taking into consideration the regulatory maturity curve, basing it on specific characteristics.
- Stage I includes countries where blockchain and digital assets regulation is absent, except maybe for the occasional investor warnings issued by the relevant authorities.
- Stage II includes countries showing significant signs of involvement in the digital assets field, and thus adopting wider regulatory schemes.
- Lastly, countries under Stage III include countries that have adopted specific legislation that pertains to digital assets and have voted, published, or are actively developing a national strategy.
Conclusion
The future of finance is digital, and MiCA is a step towards innovation ensuring that risks are properly mitigated. Harmonised regulation will provide legal clarity and more certainty for crypto-asset bodies.
Having said that. MiCA is also a light at the end of the tunnel towards passporting; allowing operators authorised in one Member State to provide their services across the EU.
Malta is no longer alone in regulating the VFA industry and aligning its framework with MiCA whilst achieving a seamless transition is the only way forward in attracting more business towards to Malta, and in keeping up with the sector, finding a balance between regulation and attractiveness.
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.
