Reflections on the Proposed Blockchain & DLT Regulations.

Introduction

Dr. Wern­er & Part­ner attend­ed a con­fer­ence on Fri­day 2nd March 2018 organ­ised by ‘Blockchain Mal­ta Asso­ci­a­tion’ enti­tled: ‘Reflec­tions on the Pro­posed DLT Reg­u­la­tions’ at Le Meri­di­en Hotel in Bal­lu­ta.

Blockchain Regulation

Par­lia­men­tary Sec­re­tary Sil­vio Schem­bri opened the con­fer­ence and stat­ed that the Gov­ern­ment was ful­ly com­mit­ted to open a new Dig­i­tal Inno­va­tion Author­i­ty (DIA) which will act as the main and sole reg­u­la­tor for ‘Inno­v­a­tive Dig­i­tal Tech­nol­o­gy’. The sec­ond bill, Tech­nol­o­gy Arrange­ments and Ser­vices Bill (com­mon­ly known as: TAS) was also dis­cussed by Dr. Schem­bri and men­tion was also made of the much-antic­i­pat­ed VC Bill (soon to be Vir­tu­al Cur­ren­cy Act). These three bills will even­tu­al­ly form the basis of Malta’s Blockchain and Cryp­tocur­ren­cy Reg­u­la­tion.

Wyoming embracing Blockchain.

Through­out the con­fer­ence, men­tion was made of the State of Wyoming’s pro­posed Blockchain reg­u­la­tion. As Wyoming seeks to reg­u­late Blockchain tech­nol­o­gy, it will empha­size on: zero cor­po­rate income/franchise tax­es whilst ensur­ing that there are strict pri­va­cy laws gov­ern­ing LLCs formed in the state. If the pro­posed laws are adopt­ed, the ‘blockchain tokens exemp­tions bill’ would make Wyoming the first state to allow ini­tial coin offer­ings (ICOs).

ICOs

As pre­vi­ous­ly dis­cussed in oth­er arti­cles, an ICO allows com­pa­nies to offer vir­tu­al coins instead of tra­di­tion­al stock to raise equity/funds. Once the busi­ness reach­es its fundrais­ing goal/full poten­tial, those who would have pur­chased coins would be able to trade in their coins for oth­er prod­ucts.

The Digital Innovation Authority.

The key-note speak­ers not­ed that with the set­ting up of a Dig­i­tal Inno­va­tion Author­i­ty (DIA), this new body would still need to rely on Agen­cies and oth­er author­i­ties to ensure its good gov­er­nance. The pan­el also opined that the idea for an Author­i­ty is not for Mal­ta to intro­duce heavy reg­u­la­tion but rather for Com­pa­nies want­i­ng to sim­ply seek ‘cer­ti­fi­ca­tion’ and ‘reg­is­tra­tion’. In this con­nec­tion, prospec­tive com­pa­nies com­ing to Mal­ta who do not wish to seek any form of reg­u­la­tion what­so­ev­er will not attempt any cer­ti­fi­ca­tion.

On the oth­er hand, those com­pa­nies relo­cat­ing to Mal­ta with the intent of oper­at­ing a DLT plat­form in a coher­ent and reg­u­lat­ed man­ner will obvi­ous­ly seek approval from this new Author­i­ty. Flex­i­bil­i­ty is there­fore extreme­ly impor­tant if Mal­ta wants to attract all sorts of firms/entrepreneurs with dif­fer­ent busi­ness plans.

Legal Personality of the DLT.

Per­haps the most inter­est­ing debate through­out the con­fer­ence was that per­tain­ing to the: Legal per­son­al­i­ty of tech­nol­o­gy arrange­ments. To note that a DLT (Dis­trib­uted Ledger Tech­nol­o­gy) is a form of Soft­ware Plat­form arrange­ment with mul­ti­ple users. Since there are a great amount of con­trac­tu­al rela­tion­ships ema­nat­ing from the DLT Plat­form [and many stake­hold­ers e.g. the Reg­u­la­tor, Insur­ance, Risk, Com­pli­ance etc], could it be safe to say that the DLT is in-itself a legal per­son?

Dr. Max Gana­do argued that the way for­ward is to treat DLTs as being soft­ware arrangements/a spe­cial type of asset which can form the basis of a new type of legal per­son. A cou­ple of key note speak­ers opined that the whole ‘con­text’ which mer­it­ed scruti­ny was not the DLT Plat­form itself but rather ‘Smart con­tracts’. It was argued that DLT is sim­ply a tech­nol­o­gy where decen­tralised activ­i­ty will flour­ish mean­ing that it should not [and can­not] be reg­u­lat­ed per se, nor can it have any form of legal per­son­al­i­ty.

Dr. Ian Gau­ci stat­ed that a sim­i­lar com­par­i­son can be found in Com­pa­ny Law where­by one can dis­tin­guish between the respon­si­bil­i­ty of the share­hold­ers (mem­bers) and the tech­nol­o­gy arrange­ment (which is the smart con­tract). This could lead to a lift­ing of this seg­re­ga­tion (sim­i­lar to lift­ing the cor­po­rate veil under Com­pa­ny Law) and imbue legal per­son­al­i­ty to a tech­nol­o­gy arrange­ment sim­i­lar to legal per­sons under Com­pa­ny Law, also hav­ing some oblig­a­tion to appoint admin­is­tra­tors as with direc­tors under Com­pa­ny Law. In this con­nec­tion, it is worth con­tem­plat­ing a straight­for­ward ques­tion: i.e. who owns the lia­bil­i­ty? and at what stage does the lia­bil­i­ty even­tu­al­ly kick in?

Virtual Currencies.

Final­ly, men­tion was made of the MFSA’s Con­sul­ta­tion Paper on Vir­tu­al Cur­ren­cies [this was also tack­led in a pre­vi­ous arti­cle] and the point was reit­er­at­ed that if a Vir­tu­al Cur­ren­cy or ICO qual­i­fies as a ‘finan­cial instru­ment’ in terms of the MIFID Reg­u­la­tions, it would then entail reg­u­la­tion after pass­ing the Finan­cial instru­ments test.

Ensuring flexible Blockchain Regulation.

To sum up, the crux of the mat­ter is the fol­low­ing: should Mal­ta opt for heavy reg­u­la­tion to cov­er all areas relat­ing to Blockchain and Cryp­tocur­ren­cies or should there be some form of flex­i­bil­i­ty? More­over, should reg­u­la­tion be sub­ject to ‘off-chain’ regulations/equivalence? For how can Mal­ta attempt to reg­u­late Blockchain tech­nol­o­gy if this phe­nom­e­non is both de-cen­tralised and world-wide?

In this con­nec­tion, when one dis­cuss­es ‘Blockchain Reg­u­la­tion’ one needs to appre­ci­ate that this is an extreme­ly high lev­el of reg­u­la­tion. The Mal­tese Gov­ern­ment has an impor­tant choice to make and that is whether it will seek to intro­duce tough Reg­u­la­tion or not. After all, what has always made Mal­ta very attrac­tive is its flex­i­bil­i­ty, so the pro­posed Author­i­ty should cer­tain­ly ensure that there is trans­paren­cy [espe­cial­ly regard­ing: ICOs] in order to guar­an­tee investor pro­tec­tion.

The future seems to be real­ly excit­ing as Mal­ta final­ly ven­tures into the unknown…

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