‘Viva La Revolucion!’ shouted the throngs of crowds in the streets of Havana. With a new regime in place, the balance of power had shifted, and the paradigm of society had changed forever. A phrase which has been immortalised and enshrined in history is reinventing itself in this new and glorious era where Fintech and Distributed Ledger Technology seem to be weaving themselves in the fabric of this new and fascinating digital society.
In an ever-cautious world where Cryptocurrencies are for the time-being feared, rather than respected, tiny Malta has embarked on a journey towards not only accepting the ‘status’ of Cryptocurrencies but has essentially provided legal certainty and governance to this spectrum. This was done by promulgating three laws which are certainly bound to raise a couple of eyebrows across the financial world.
Three ingenious Bills.
Three Bills were recently published which are bound to get investors up and running towards the tiny Mediterranean island. The Virtual Financial Assets Act, The Technology Arrangements and Services Act & the Malta Digital Innovation Authority Act are avant-garde and revolutionary; innovative and pioneering.
In this connection, the Maltese Government has committed itself to certainly setting the bar in terms of (though not exhaustively) Blockchain Technology, Initial Coin Offering (ICO) and Smart Contract Arrangements. The Bills are tantamount to the Government’s initial pledge to ‘rebrand’ Malta as: ‘Blockchain Island’. The birthplace of this tailor-made legislation will ensure that entrepreneurs will be setting up shop and relocating to the island….and not to sample Malta’s sun or beaches! Big things are happening on this island….and everyone will be wanting a slice of the action.
The Virtual Financial Assets Act.
The most anticipated Bill which was instantly met with exuberance and fascination is undoubtedly the Virtual Financial Assets Act. Offering a plethora of definitions and clarifications, the main crux of this legislation pertains to Crowdfunding initiatives (henceforth termed: Initial Virtual Financial Asset Offerings), the White Paper requirements for a successful ICO and the introduction of a Financial Instruments test.
Without going into too much detail, the first stage of this latter innovative ‘test’ would effectively determine whether a Virtual Financial Asset (any form of digital medium that is a medium of exchange and is not: electronic money, a financial instrument or a virtual token) qualifies as a financial instrument in terms of existing legislation (Maltese and/or EU) (e.g. MIFID regulations).
The second stage would determine whether the Virtual Financial Asset qualifies as an ‘asset’ under the proposed VFA Act. It should be clarified that, in case of an affirmative determination during the first stage, the person undertaking the ‘Financial Instruments Test’ would not be required to proceed to the second stage. The respective classification resulting from the ‘Financial Instruments Test’ would need to be verified by an external independent professional reviewer.
The White Paper requirements pertaining to the ICO are an exhaustive list of points needed to satisfy the ‘Competent Authority’s (in this case the Malta Financial Services Authority) so called ‘checklist’. Established with the intention of attracting young entrepreneurs and businessmen, the whitepaper will allow ‘investors to make an informed assessment of (i) the prospects of the issuer (e.g. a Company) (ii) the proposed project and of (iii) the features of the virtual financial asset.’ [LINK: C:\Users\Stefanie Mallmann\Desktop\Blockchain and Cryptocurrencies\Virtual Financial Assets Act, 2018.pdf] Once approved, the White Paper will be valid for a period of 6 months for offers to the public.
The MDIA Act
An interesting regulation will certainly be the Malta Digital Innovation Authority (MDIA) Act. Inherently, this Law will seek to formulate rules governing Distributed Ledger Technology (DLT) Arrangements and Crowd-funding set ups. The Act establishes the roles and responsibilities of the Authority including the ‘fostering, promotion and facilitation of advancement and utilisation of innovative technology arrangements and their design’ [LINK: C:\Users\Stefanie Mallmann\Desktop\Blockchain and Cryptocurrencies\Malta Digital Innovation Authority Act, 2018.pdf] and to protect users of Innovative Technology Arrangements including consumers and the public in general to ensure minimum standards which meet their legitimate expectations.
The TAS Act
Finally, the Technology Arrangements and Services Act will seek to provide for the regulation of designated technology arrangements (e.g. Smart contracts or any software which uses Distributed Ledger Technology as a platform for the execution of said covenant) and for the exercise by or on behalf of the MDIA of regulatory functions pertaining to said agreements. The Act prescribes certain conditions which would need to be adhered to for an ‘Innovative Technology Arrangement’ to be fully recognised (e.g. rules pertaining to software and compliance standards] and certified by the Authority accordingly [though it must be stated that certification and approval is entirely voluntary).
Whether tiny Malta can cause an earthquake in the Crypto/Blockchain world remains to be seen. That the tremor has been felt by most of the world is undeniable. The question remains as to whether the laws drawn up and presented by the Government will hit the nail on the head and catapult Malta into unchartered but immensely exciting waters. Whilst Financial Regulators and Credit Institutions have been rather coy and modest in their reception of the Bills (and Banks have not particularly welcomed the usage of Virtual Currencies with open arms), the issue remains as to whether trust and acceptance will eventually be built thanks to legal certainty.
What can safely be concluded is that a revolution has begun, and tiny Malta is setting the spark. Whether the Crypto-flames will ignite into a world-wide phenomenon is the next chapter which is yet to be written.
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.
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- The Role of the VFA Agent (Malta). - 22. June 2018
- Three Bills Published aimed at Regulating the Blockchain and Cryptocurrency Sector. - 31. May 2018