Following the publication of the Consultation Document of the proposed regulations last Monday the Malta Financial Services Authority (“MFSA”) published the feedback statement highlighting the major issues raised by the major stakeholders and its final position on these issues. The areas addressed in this feedback statement are the following:
1. Legal Framework
The MFSA revisited its position and now the additional requirements pertaining to Professional Investor Funds (“PIFs”) investing in Virtual Currencies (“VCs”) would not be contained in a standalone rulebook but will be inserted as supplementary license conditions applicable to such collective investment schemes (“CISs”).
The framework will be applicable to all CISs investing in any way in VCs, irrespective of the extent of exposure, and investments in VCs made directly or indirectly through trading companies or special purpose vehicles. Any other type of indirect investment will be falling outside the scope of this framework, including investment in units of CISs which in turn invest in VCs.
3. Extension of Scope
The MFSA is considering and is inclined to extend the scope of this framework to also allow Alternative Investment Funds (“AIFs”) and Notified AIFs to invest in VCs.
The MFSA in its feedback statement makes reference on numerous occasions to the Discussion Paper on ICOs, VCs and related Service Providers (the “Discussion Paper”) published on the 30th November 2017. The feedback statement makes it clear that the MFSA will use the Financial Instrument Test and the definitions of VCs laid down in the proposed framework in the Discussion Paper to determine under which circumstances a VC would be classified as a financial instrument. The definition of VCs will include tokens offered through Initial Coin Offerings (“ICOs”) and will reiterate the FATF’s definition of cryptocurrency as a sub-category of VCs. The updated definition of Qualifying Investor will be applicable to PIFs investing in VCs as one of the supplementary conditions applicable to such schemes until the proposed revisions to the fund rulebooks are published.
Any VC-related definition laid down in the Discussion Paper will not be inserted into the PIF rulebook but will probably be inserted in the proposed Virtual Currencies Act. Moreover, CISs trading in VCs on a speculative basis are captured by the regulatory framework while VCs investing in the underlying technologies of VCs would fall under the traditional definition of private equity funds, and therefore no further classification is needed.
5. Legal Structures allowed
The legal structures which will be allowed for any CIS investing in VCs are limited to SICAV and INVCO structures and to limited partnerships and unit trusts. Moreover, cellular structures such as ICC, ICs and RICCs, will be available.
6. Who may invest?
Only Qualifying Investors will be allowed to invest in CISs investing in VCs due to the specific risks associated with VCs and their underlying technologies. Moreover, credit and financial institutions will only be allowed to deal in VCs on behalf of their clients and subject to the conditions stipulated and insurance companies and retirement pension schemes are prohibited from dealing in VCs.
Regarding the requirement of service providers having sufficient knowledge and expertise in the field of IT, VCs and their underlying technology, the MFSA will adopt a holistic approach. Such competence requirement should also extend to the Board of Directors, MLRO, Compliance Officer and Auditors of the scheme.
8. Quality Assessment
The Investment Manager is required to carry out appropriate research to assess the quality of the VCs being invested into. This process shall take place prior to investing in the VC. This shall not apply to CIS investing in the underlying technology of VCs since this fall outside the scope of the regulatory framework and is regulated by the regulatory framework of private equity funds.
9. Risk Spreading
On the basis of the feedback received, the MFSA has decided to maintain the existing rationale under the existing PIF regime that the principle of risk spreading shall remain optional for PIFs investing in VCs.
10. Safekeeping and Custody
The best practice for safekeeping of VCs is through a multi-signature wallet, where the Investment Manager is expected to be the first signatory and the Custodian the second signatory.
11. Governing Body and Service Providers
Service Providers of PIFs investing in VCs should have sufficient financial resources and liquidity at their disposal. Auditors are still expected to perform assessments for verification as part of their required audit procedures, even if these carry out ‘real-time’ financial audits.
The MFSA thinks that since not all VCs can be considered as liquid they shall not be termed as ‘high liquid assets’. Therefore, the Investment Manager shall use appropriate liquidity management tools, such as side pockets and redemptions in specie.
The requirement to establish a pre-approved in-house investment committee shall still apply even if it is a third-party Investment Manager. The only exemption from the prior approval of such investment committee is in the case the Investment Manager is authorised in a EU/EEA state or a Recognised Jurisdiction, who shall only submit a declaration of existence of an in-house investment committee.
The Risk Management function shall be taken by the Investment Manager and the MFSA will issue further guidance in due course.
Valuation policies and procedures applicable to other asset classes should be adopted to the valuation of VCs exposures and calculation of net asset value of the scheme. The MFSA will issue further guidance in this regard in due course. Moreover, listing on regulated markets will be available to PIFs investing in VCs but units created through an ICO will be regulated by the end result emanating from the Discussion Paper and not by this feedback statement. Further guidance will be published by the MFSA in due course also on the reporting obligations of schemes investing in VCs.