A holistic approach to regulating cryptocurrencies and virtual financial assets in Malta

Malta’s Parliament has recently approved three bills surrounding blockchain technology and cryptocurrency. These bills were presented by the government in order to instil legal certainty in the sector as well as to address banks’ concerns in accepting companies working in the industry.

One of the bills is the Virtual Financial Assets Bill, the object of which is to regulate the field of Initial Virtual Financial Asset Offerings and Virtual Financial Assets and to make provision for other matters ancillary or incidental thereto or connected therewith. In essence this Bill provides the regulatory framework for cryptocurrencies and initial coin offerings (ICOs) and in respect of certain service providers which will be involved in activities related to ICOs. The bill will also outline the regulatory regime which will be applicable to cryptocurrency exchanges. Moreover, the bill endows the Malta Financial Services Authority (MFSA) with regulatory and investigatory powers in relation to ICOs or the trading of a Virtual Currency on an exchange.

The second bill is the Malta Digital Innovation Authority Bill. The object of this Bill is to provide for the establishment of an Authority to be known as the Malta Digital Innovation Authority to promote consistent principles for the development of visions, skills, and other qualities relating to technology innovation, and for the exercise by or on behalf of that Authority of regulatory functions regarding innovative technology arrangements including distributed or decentralised ledger technology, and related services. Interestingly, the Authority will have the role of granting formal recognition to innovative technology services providers or arrangements, such as smart contracts, by certifying them. This will undoubtedly give users, as well as service providers, the necessary legal certainty regarding their use of a DLT platform.

The third piece of legislation, entitled the Technology Arrangements and Services Bill, aims to provide for the regulation of designated innovative technology arrangements referred to in the Bill, as well as of designated innovative technology services referred to in the Bill, and for the exercise by or on behalf of the Malta Digital Innovation Authority of regulatory functions with regard thereto. In essence, pursuant to its Schedules, this bill lists the type or class of innovative technology arrangement or service which are eligible for recognition by the aforementioned Authority. Hence this bill introduces the registration of technology service providers and the certification of technology arrangements, such as software and architectures used in designing and delivering DLT, smart contracts as well as concerning system administrators and auditors.

All three bills were presented to the Parliament of Malta for its first reading on 24th April 2018. The next stage is a debate between both sides of the House before they are passed into law possibly before Parliament’s recess (end of June 2018) or once Parliament reconvenes (October 2018).

The advent of these bills as well as the pace at which Malta is addressing the interests and aspects of the DLT industry demonstrates that Malta’s government is committed to welcoming the rapid worldwide interest the country is seeing from ICO issuers and exchanges wishing to establish themselves in Malta and provide services from Malta. These bills highlight the government’s undertaking to strengthen Malta’s position on the DLT front and “solidify its reputation as a blockchain island” by regulating the DLT market in a way to ensure that the three main principles of financial regulation are adhered to and that this will be a market that protects the investor and provides market integrity as well as financial soundness.

Why GVZH Advocates?

As one of the leading ICO firms we provide legal and taxation services as well as a host of ancillary services through our technical affiliates.

If you are looking to launch a DLT product or service in or from Malta, you need to begin by classifying your product or service according to its features. To date, Maltese draft regulations define a DLT Asset as: (a) a Virtual Token, (b) electronic money, (c) a financial instrument or (d) a Virtual Financial Asset. Each one is subject to a different regulatory framework. Therefore, if the features of your offering are akin to the definition of a “virtual token”, you will not require a licence nor the submission of a Whitepaper. On the other hand, if you are providing a product which falls within the definition of a “virtual financial asset” you will need a licence while if your product is classified as a financial instrument this will attract the applicable financial regulations together with various benefits the Maltese framework offers in this regard.

By way of example, the Maltese regime governing the offering of securities could provide opportunities to ICO issuers compared to the private placement regimes of other jurisdictions. Our Prospectus Regulations, unlike other jurisdictions, offer exemptions to issuers of non-transferable securities as well as to a range of structuring options such as “qualified investors”, high denomination securities and others. Our legislation is structured in a way to reduce the offering’s complexity and therefore allow relatively quick completion of offers.

Malta has a lot of offer with regards to raising finance not least in terms of flexibility, low complexity, speed of issue and the availability of immediate secondary market trading.

Finally the above-mentioned classification of your product will undoubtedly also have potential tax implications raising issues of Income Tax, VAT as well as Exemptions.

For further information about how GVZH Advocates can help you with your Electronic Money requirements kindly contact us on finance@gvzh.com.mt.

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