The Financial Instrument Test

The MFSA has today issued its Consultation Paper on the Financial Instrument Test. The Financial Instrument Test is a very important process in determining whether a token falls within the definition of ‘financial instrument’ under the Markets in Financial Instruments Directive (“MiFID”), the proposed Virtual Financial Assets Act to be published soon in Malta or whether it would be exempt from any regulation.

The consultation process highlights several important features which are very innovative and are the reason why Malta is in the spotlight when it comes to crypto-assets and distributed ledger technology (“DLT”). It also analyses each category of financial instruments under MiFID in the light of the less conventional DLT context, which was a much awaited development in the industry. This would make Malta one of the first jurisdictions in the EU to have such a clear categorisation.

We also have an idea of what a virtual token would potentially be defined as, namely as a DLT asset which:

“has no utility, value or application outside of the DLT platform on which it was issued and that cannot be exchanged for funds on such platform or with the issuer of such DLT asset”.

This means that after carrying out the Financial Instrument Test, if a token is classified as a virtual token, the new proposed laws would apply and the operator would not require a licence under MiFID.

The consultation process closes on the 4th May 2018 and therefore we should be expecting the new rules governing the Financial Instruments Test very shortly.