The Malta Financial Services Authority (“MFSA”) has issued a position paper setting out its stance on the tokenisation of fund units within Collective Investment Schemes (“CIS”). This initiative aligns with the EU’s broader efforts to regulate emerging technologies in finance, such as the Markets in Crypto-Assets (“MiCA”) Regulation and the Distributed Ledger Technology (“DLT”) Pilot Regime.
At the heart of this initiative is the integration of tokenisation into the fund industry’s transfer agency process, with the aim of increasing efficiency, transparency, and investor accessibility. Tokenisation is defined as the creation of a digital representation of an asset on a shared, trusted, and programmable DLT, enabling it to be securely transferred, stored, or managed on a blockchain.
The MFSA outlined that Tokenisation can occur in various forms; either native tokens which are new tokens issued on a shared, programmable and trusted ledger or else non-native tokens which are digital tokens representing existing assets outside the ledger such as financial assets held by a custodian. In the case of CIS shares/units, tokenisation refers to the transformation of traditional assets such as shares or units, into digital representations or digital assets which can be easily traded, shared or owned in fractional portions on digital platforms.
Importantly, the MFSA clarifies that tokenised CIS units fall outside the scope of MiCA, as they qualify as financial instruments under the Markets in Financial Instruments Directive II (“MiFID II”). Therefore, the marketing and distribution of tokenised fund units require MiFID authorisation and must comply with the conduct of business rules outlined in the MFSA’s Conduct of Business Rulebook.
The MFSA would like to inform stakeholders that tokenisation of CIS shares or units is permitted for:
- Licensed alternative investment funds
- Licenced professional investor funds
- Notified alternative investment funds
- Notified professional investor funds
- UCITS – (as long as the core principles of liquidity, transparency and investor protection are preserved.)
Fund Administrators are key to managing tokenised fund units through blockchain-based registries and smart contracts. These contracts define the fund’s operations (issuance, subscriptions, redemptions), while security tokens represent shares on a DLT-based register. Fund Administrators must also conduct due diligence on wallets and holders.
Although the base currency of a tokenised fund remains fiat, several key regulatory and operation controls must be observed:
a) Competence Requirement
CIS governing bodies and functionaries must understand tokenisation and its technology to fulfil their regulatory responsibilities.
b) Disclosure Requirements
The ability of the CIS shares or units to be in tokenized form will need to be clearly set out in the offering documents which shall include additional disclosures on the risks associated with tokenised shares or units and the creation and operation of digital wallets. Offering documents must clearly disclose:
- AML/KYC requirements and data sharing arrangements;
- Issuance/redemption procedures and timelines;
- Transferability limitations;
- Safekeeping of tokenised units;
- Blockchain and wallet-related risks.
c) Risk Mitigation
Key risks and mitigating strategies include:
- Distribution Ledger Design: Understanding DLT and using secure, standardised smart contracts;
- Key Management: Clear processes for key generation, delivery, and loss prevention;
- Privacy and User Idenity: GDPR compliance and protection of identity-linked data;
- Recovery and Contingency Planning: Tested disaster recovery and business continuity protocols;
- Digital System Failure: Infrastructure redundancy to ensure uninterrupted operation;
- Authentication and Authorisation: Implementation of strong multi-factor authentication (“MFA”) for system access;
- Clear Risk Communication: Clear documentation of roles and responsibilities;
- Third-party Dependence Risk: Defined coordination protocols with intermediaries;
- Governance Risks: Clear governance structure and decision-making protocols.
Conclusion
The MFSA’s position paper marks a pivotal step in the evolution of Malta’s fund services industry. By supporting tokenisation within regulated structures, the Authority aims to harness the benefits of blockchain technology, enhancing operational efficiency, enabling greater market access, and maintaining robust investor safeguards. While the tokenisation of fund units introduces new technological and operational complexities, the MFSA’s framework provides clear guidance for responsible adoption within existing EU financial regulations.
As Malta positions itself at the forefront of digital finance, fund managers, administrators, and stakeholders must embrace both the opportunities and responsibilities that tokenisation brings, ensuring that innovation is matched by compliance, risk awareness, and a commitment to investor protection.
For further information please feel free to follow the link below to access the full article:
MFSA Position Paper – Tokenisation of Fund Units
