Questions and Answers for the Application for Service Provider Licence

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 1Licence 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 2Licence Hold­er autho­rised to pro­vide any VFA ser­vice; may hold or con­trol clients’ assets or mon­ey in con­junc­tion with the pro­vi­sion of the VFA ser­viceNot autho­rised to oper­ate a VFA exchange or deal for their own account
VFAA Class 3Licence Hold­er autho­rised to pro­vide any VFA ser­vice; may hold or con­trol clients’ assets or mon­ey in con­junc­tion with the pro­vi­sion of a VFA ser­viceNot autho­rised to oper­ate a VFA Exchange 
VFAA Class 4Licence 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 LicenceIni­tial Cap­i­tal Require­ment (EUR)
Class 1(i)50,000OR
(ii)25,000 and PII
Class 2125,000
Class 3730,000
Class 4730,000

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.

About Rebecca Mifsud

Dr Rebec­ca Mif­sud, born 6th May 1994, attend­ed the Uni­ver­si­ty of Mal­ta and is an LLB Hon­ours grad­u­ate. She also grad­u­at­ed in the Mas­ters in Advo­ca­cy and will be sit­ting for her Mal­ta War­rant Exam in 2019. She suc­cess­ful­ly defend­ed her dis­ser­ta­tion enti­tled: ‘Imput­ing respon­si­bil­i­ty for foot­ball injuries inflict­ed by minors in the Mal­tese sce­nario,’ in 2017.

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