An overview of the Digital Financial Instrument

The worldwide interest in Distributed Ledger Technology (“DLT”) is one of the main drivinig elements in the field of crypto. The local Maltese regulatory framework has served to further feed this interest in Malta. The Virtual Financial Assets Act (“VFA Act”), which is the foundation of the regulatory framework in Malta for cryptos, categorises DLT assets as either: virtual tokens, financial instruments, electronic money or Virtual Financial Assets (“VFAs”).

Parallel to the regulatory developments in Malta, we have witnessed an increased interest in Digital Financial Instruments, being those DLT assets which fall under the definition of financial instruments, as defined in MiFID II.

There are several financial instruments which are regulated. For instance, for a financial instrument to be categorised as a transferable security, it must fall under the definition provided in article 4(44) of MiFID II, which describes transferable securities as

“those classes of securities which are negotiable on the capital market, with the exception of instruments of payment, such as:

  1. shares in companies and other securities equivalent to shares in companies, partnerships or other entities, and depositary receipts in respect of shares;
  1. bonds or other forms of securitised debt, including depositary receipts in respect of such securities;
  1. any other securities giving the right to acquire or sell any such transferable securities or giving rise to a cash settlement determined by reference to transferable securities, currencies, interest rates or yields, commodities or other indices or measures.”

By referring to the various definitions of financial instruments provided in the MiFID II Directive, one can determine the under which specific class of financial instrument a digital financial instrument would be classified. Through DLT, financial instruments are being digitalised, nonetheless, the underlying notion remains that these Digital Financial Instruments are regulated by the traditional EU and Maltese legislations relating to financial instruments.

Do not hesitate to contact us should you require any further information or assistance on the above.