On the 1 November 2018, Malta has enacted the three laws establishing the regulatory framework governing Distributed Ledger Technology (the “DLT”), Blockchain Technology (the “Blockchain”) and Cryptocurrencies, making Malta the first country in the world to regulate this sector and providing legal certainty of operations within the Blockchain space. The Maltese Parliament unanimously approved the three cryptocurrency and Blockchain bills which subsequently has provided the operators with the necessary regulated mechanisms to operate in this vast and innovative sector.
This Newsletter is a continuation to the Newsletter published in October 2018 analysing the laws in Switzerland, the European Union and Malta in relation to cryptocurrencies however this Newsletter is solely based on the laws of Malta, now that already two months passed since their enactment. This Newsletter will provide you with more detailed information on the enacted laws on crypto-currency in Malta and where we stand today.
Introduction
After Consultation between Parliament and the Maltese Government, Malta has enacted the three cryptocurrency and Blockchain friendly bills. The three bills, all having different purposes, as further delved into hereunder, together create a legislative framework providing for the establishment of cryptocurrencies and blockchain technology within the Islands of Malta. Globally, cryptocurrency exchanges have consistently expressed the willingness to work with governments to ensure a regulated eco-system. Whilst other countries have taken a stricter approach towards these areas, Malta embraced the development of technology and subsequently became the first country to
provide for the treatment of cryptocurrencies.
The Blockchain
Blockchain was originally created to feature as an operational platform for digital currencies. Blockchain technology allows information to be distributed however not copied, which has revolutionised the internet.
Some of the main features of the Blockchain are:
- it cannot be controlled by any single entity;
- it has a no point of failure;
- transparency data is embedded within the network; and
it is not possible to alter any unit of information stored on it.
Information held on the Blockchain is not held isolated, it is not stored in one location, it keeps records public and easily verifiable therefore leaving no room for hacker corruption of any documents.
Blockchain and Bitcoin have revolutionised the world, they have offered a new perspective on how we see things. Although Blockchain was primarily created as an operational platform for cryptocurrencies such as Bitcoin, Blockchain has been the foundation of new concepts such as smart contracts, eliminating any intermediaries from taking part in any transactions.
The introduction of Blockchain into the Maltese legislation has opened opportunities for businesses and private individuals to establish their entities within a regularised jurisdiction and have the facility of being in conformity with the governing law. This eliminates the risk of having an unregulated entity established in a jurisdiction which has not yet provided any certainty on the standpoint of view in relation to the Blockchain and Bitcoin space.
The Malta Digital Innovation Authority Act
The Malta Digital Innovation Authority Act (the “Act”), is one of the three main legislations which were passed in November 2018. The main purpose of this Act has been to establish the Malta Digital Innovation Authority (the “Authority”), whilst empowering the Authority to bear the responsibility of the Maltese innovative technology sector and ensuring that the innovative technology sector in Malta is given the opportunity to further flourish. The Act works hand in hand with the Innovation Technology Arrangements and Services Act (the “ITAS Act”), because the Authority is responsible of providing recognition to innovative technology as listed in the ITAS.
The Act has a main principle that of providing the necessary protection for consumers and investors whilst ensuring that technology innovation efforts and potential are not hindered in any manner. Furthermore, the Act provides protection for the integrity of the market and the interest of the general public.
Manifestly, through this Act Malta ensured that consumer and investor protection are a top priority by promoting and enforcing ethical behaviour, transparency and audibility in the use of innovative technology arrangements.
The Innovation Technology Arrangements and Services Act
The ITAS Act provides for the regime applicable for the certification of technology arrangements and the registration of technology service providers. The ITAS Act allows for further development of innovative technology as well as offers the necessary means to support regulated technology.
Innovative Technology Arrangements (“ITA”) include software and architectures which are used in designing and delivering Distributed Ledger Technology (“DLT”), smart contracts and related applications, and any other innovative technology arrangement which may be designated by the Minister from time to time.
Innovative Technology Services (“ITS”) on the other hand refer to the review services with reference to innovative technology arrangements provided by system auditors as well as technical administration services with reference to innovative technology arrangements provided by technical administrators.
The ITAS Act, which is divided into two Schedules being the ITA and ITS, gives wide interpretations and evidently has been drafted to allow further innovative technology arrangements and services to be included in the near future.
The Virtual Financial Assets Act
The Virtual Financial Assets Act (the “VFAA”) seeks to establish a regulatory regime governing Initial coin Offerings (“ICOs”), cryptocurrency exchanges, wallet providers, Virtual Financial Asset (the “VFA”), VFA Exchanges etc. Out of all the three crypto currency laws enacted by the Maltese Parliament, the VFAA has been the most sought after.
The regime of the VFAA falls under the competency of the Malta Financial Services Authority (the “MFSA”), who has already set out high standards for the application of licenses as established by the VFAA. The MFSA is ensuring that every application is in line with the legislation, leaving no leeway for any fraudulent behaviour or misconduct.
The VFAA establishes the Virtual Financial Assets Agent (the “Agent”), which is a required licensed agent who will guide any applicant through the application and licensing process with the MFSA. The Agent will serve as a person of trust ensuring regulatory practice with legal formalities as well as an intermediary to ensure proper communication, reporting and monitoring.
Why Malta?
Malta has always been a front runner in introducing legislative frameworks for different sectors ahead of other countries. In fact, in 2004 Malta became the first EU Member State to enact comprehensive legislation on remote gaming, since then Malta has been considered one of the tried and tested jurisdictions and earning the title of the Blockchain Island hasn’t been any different.
Malta has been working hard to earn this title, since 2016 the Maltese government and Parliament have been working hard to establish the three cryptocurrency bills. All three were drafted with utter precision, to ensure that no provision is contradicting or drafted in such a manner as to impede the further development of this sector.
The lack of regulation has created an instability in the relation amongst businesses. Businesses were not ready to fully commit themselves to a sector which could possibly put them in breach at a point in time. Malta has stepped in to provide for stability and subsequently open its doors for businesses to establish their entities within the Islands of Malta, and has since then become the Blockchain Island.
The Malta Financial Servicers Authority
The MFSA played an important role in developing the framework which underlies the three cryptocurrency bills. Since the beginning, the MFSA has issued consultation papers to gather stakeholders’ opinions to ensure that stakeholders are very well informed on the licensing processes. As a regulatory authority, the MFSA is responsible for the VFA framework, therefore VFA operators have to first endure a licensing process with the MFSA to obtain a license prior to commencement of business.
The MFSA has been working continuously on the VFA framework, as a matter of fact it has also dedicated a whole section on their official website with the regards to the VFA framework. Some of the main features include a legislative and regulatory framework section; containing all the relevant laws applicable to VFA, and the online VFA applications for authorisations; through which a VFA Agent would be able to apply for a license for and on behalf of the client.
The three cryptocurrency laws have now provided the MFSA with the necessary tools to carry out enforcement within the field, to ensure that the market is regulated at all times.
Conclusion
The scope of cryptocurrencies and DLTs was to create a decentralised ecosystem that is not tied with traditionally centralised institutions. Malta stroke a balance between implementing a legislative framework within which businesses could operate whilst safeguarding consumer protection, market integrity and financial stability.
The three cryptocurrency bills have delved into detail to provide a clear framework for anyone who wants to establish their business in Malta. Since the enactment of the three bills, many companies have been establishing their business in Malta.
The introduction of Blockchain, cryptocurrencies and DLT technology, has and will keep on revolutionising the world as we know it today. The Junior Minister for Financial Services, Digital Economy and Innovation, Mr. Silvio Schembri, during the Blockchain Summit has remarkably noted that the passing of the new laws in Malta marks an important milestone in which companies will be provided with the necessary tools to operate in a regulated environment. From that day on, Malta shall keep on striving to be at the top of the game within the industry, and will keep its doors open for further development.
