On the 6th September 2022, the Malta Financial Services Authority (“MFSA”) issued a circular on Article 6 of the European Market Infrastructure Regulation (“EMIR”) which states the following: “ESMA shall establish, maintain and keep up t Read more
As a law firm based in Malta, we take pride in noticing Malta as being one of the first EU countries to holistically regulate blockchain and Distributed Ledger Technology (DLT). In fact, Malta has enacted three new legislative frameworks which are the following:
The Virtual Financial Assets Act (VFA Act) – which creates legal certainty as to the classification of every DLT asset, provides a licensing regime, and a regulated environment to firms providing services in relation to DLT assets which are classified as Virtual Financial Assets (VFAs), and enforces investor protection by requiring entities offering DLT assets classified as VFAs to register a whitepaper with the MFSA which shall contain minimum stipulated information;
The Innovative Technology Arrangement and Services Act (ITAS Act) – which regulates the recognition and certification of DLT platforms and smart contracts, providing a tangible proof of quality and standards maintained by the relevant DLT platforms. The ITAS Act also regulates service providers in relation to these technology arrangements, such as system auditors and technical administrators; and
The Malta Digital Innovation Authority Act (MDIA Act) – which establishes a new central authority, the MDIA, responsible for the certification of technology arrangements and for the registration of their service providers and for the promotion and oversight of utilisation of DLT.
The VFA Act refers to all forms of cryptocurrencies as DLT assets and allows every DLT asset to be classified as either a virtual token, financial instrument, electronic money, or alternatively a VFA.
Before commencing the provision of any service in relation to DLT assets or before issuing DLT assets in or from within Malta, such issuer or service provider must determine the classification of the DLT assets in question. Should the DLT asset be classified as a VFA, the VFA Act shall apply to such issuance or services provided.
A VFA is defined in the VFA Act as “any form of digital medium recordation that is used as a digital medium of exchange, unit of account, or store of value and that is not an electronic money, a financial instrument, or a virtual token.” By elimination, where the DLT asset in question does not fall under the other definitions, then the DLT asset is considered a VFA, assuming that such DLT asset may be used as a digital medium of exchange, unit of account, or store of value.
Should you intend to issue DLT assets falling under the definition of VFAs, set-up a crypto-exchange, or provide any other service in relation to VFAs, we can help you by providing:
Structuring, legal and regulatory advice;
Assisting with the entire licensing process for the applicable VFA Licence;
Drafting of all internal rules, internal policies, and internal procedures;
Assisting with the token classification test to determine the classification of the DLT asset in question;
Reviewing and/or drafting of offering documentation, or whitepaper of the VFA issuance;
Liaising with the competent Maltese authorities on an ongoing basis;
Assisting with the company incorporation; and
Advising to ensure compliance with all the Anti-Money Laundering (AML) requirements and establishing effective KYC procedures.
The activity of a VFA advisor refers to the activity where a person or entity provides personal recommendation to investors in relation to VFAs, unless such recommendation is issued exclusively through distribution channels or to the public. Such recommendation relates to the buying, selling, subscription, exchange, redemption or holding of VFAs, or a recommendation on whether the investor should exercise or not any right conferred by a particular VFA. Where a person or entity intends to provide investment advice in relation to VFAs, such activity would be licensable under the VFA Act and requires a Class 1 VFA Licence.
A Class 1 VFA Licence is subject to minimum initial share capital of EUR 50,000 or EUR 25,000 if the licence holder holds a professional indemnity insurance. An application for a Class 1 VFA Licence is subject to a one-time official application fee of EUR 6,000.
A popular service provided in relation to DLT assets is that of providing e-wallet services. Depending on the business model of the applicant, such service might result in the service provider holding or controlling clients’ money or assets, including VFAs.
Where the service provider acts as custodian or nominee holder of VFAs, or where the service provider holds VFAs as nominee on behalf of another service provider or on behalf of a client, a Class 2 VFA Licence is required. A Class 2 VFA Licence is subject to minimum initial share capital of EUR 125,000 and a one-time official application fee of EUR 10,000.
Brokerage services in relation to VFAs may take several forms and accordingly the applicable licence varies depending on the form of services provided. Where the broker intends to provide brokerage services and as a result of such activity, the broker will be holding on controlling clients’ money or assets, the broker would be required to hold a Class 2 VFA Licence. If the broker will be dealing on own account, such activity would require a Class 3 VFA Licence.
Class 2 VFA Licence is subject to minimum initial share capital of EUR 125,000 and a one-time official application fee of EUR 10,000. On the other hand, a Class 3 VFA Licence is subject to minimum initial share capital of EUR 730,000 and a one-time official application fee of EUR 14,000.
Where the broker will provide brokerage services restricted to reception and transmission of orders of VFAs and will not be holding or controlling clients’ money or assets, then a Class 1 VFA Licence would suffice. A Class 1 VFA Licence is subject to minimum initial share capital of EUR 50,000, or EUR 25,000 if the licence holder holds a professional indemnity insurance, and a one-time application fee of EUR 6,000.
Initial VFA Offerings
DLT assets issued through an ICO are subject to different requirements, laws, and regulations depending on the classification of the DLT assets issued. VFA issues in or from within Malta are referred to in the VFA Act as ‘Initial VFA Offerings’ which are subject to the provisions and requirements laid thereunder.
An issuer of VFAs is required to draw a whitepaper which shall be registered with the MFSA within ten working days before its circulation and which shall comply with the requirements set out in the VFA Act.
The VFA Act requires the whitepaper of any Initial VFA Offering to be dated, to include a statement by the board of administration of the issuer that it complies with the VFA Act, and to include the minimum required contents specified in the VFA Act. Such whitepaper should be endorsed by a VFA Agent confirming its compliance with the VFA Act. The VFA Agent will only endorse a whitepaper if it is satisfied that it contains the necessary information for investors to make an informed decision and if it is satisfied that it can rely on the board of administration of the issuer to provide and publish sufficient information.
The whitepaper is deemed to include sufficient information to enable investors to make an informed decision if it includes details on the prospects of the issuer, the proposed project, and the salient features of the VFA. To this end, the whitepaper shall contain, amongst others, the following information:
Non-technical summary on the essential elements of the VFA;
Identification of the persons responsible for the whitepaper;
Information on the offer to the public;
Details of the issuer;
Details of the issuer’s principal activities;
Details of the board of administration; and
Details of the issuer’s financial track record.
Moreover, the VFA Act also lays down requirements on how advertisement relating to the Initial VFA Offering is made, and requires the disclosure by the issuer in a prominent place that a whitepaper has been published. The information contained in any advertisement must be accurate and not misleading and must always be consistent with the whitepaper.
The VFA Act also requires an issuer of VFAs to appoint and have in place at all times a VFA Agent who is registered with the MFSA.
One of the services listed in the VFA Act is that of ‘operation of a VFA Exchange’, which requires a licence issued in terms of the VFA Act for such service to be provided in or from within Malta.
With Crypto Exchanges becoming increasingly appealing as a business opportunity, it is important to note that technically the term Crypto Exchange includes all forms of trading platforms or trading exchanges which allow trading of DLT assets. On the other hand, the term VFA Exchange refers to those Crypto Exchanges which only allow the trading of DLT assets which fall under the definition of VFAs.
A VFA Exchange is a trading platform which facilitates the buying and selling of DLT assets which are classified as VFAs in a system. In fact, the VFA Act defines a VFA Exchange as “a DLT exchange operating in or from within Malta, on which only VFAs may be transacted in accordance with the rules of the platform or facility, which is licensed by the MFSA under the VFA Act to provide such services”.
Where a person operates a VFA Exchange in or from within Malta which facilitates the buying and selling of VFAs, a Class 4 VFA Licence is required. Class 4 VFA Licence is subject to minimum initial share capital of EUR 730,000 and a one-time official application fee of EUR 24,000.
An application for any VFA Licence under the VFA Act shall be made solely through a VFA agent which is duly registered in terms of article 14 of the VFA Act.
PIFs Investing in VFAs
In Malta it is also possible for collective investment schemes established as Professional Investor Funds (PIFs) to invest in VFAs. The Investment Services Act (Cap. 370 of the laws of Malta) regulates this flexible investment vehicle, where the PIFs investing in VFAs may be only constituted in the form of (i) an investment company, generally in the form of investment company with variable share capital (SICAV), limited partnership, or unit trusts.
Such PIFs may only be promoted to individuals or entities which are classified as Qualifying Investors, and investors need to maintain a minimum investment amount of EUR 100,000 at all times. In order to set-up a PIF investing in VFAs, a licence from the Malta Financial Services Authority (“MFSA”) is required.
The governing body, officials of the scheme, and service providers are required to possess relevant knowledge and experience in the field of information technology and DLT assets. Furthermore, applicants must also include adequate risk warnings associated with both direct and indirect investment in VFAs.
The MFSA has recently enacted a ‘Regulatory Sandbox’, which will provide the opportunity for its participants to test the commercial and regulatory viability of their innovations for a specified period of time, and in a fully functional financial services environment. The MFSA will constantly monitor these participants who will operate under a set of conditions and limitations, in order to contain any risks to the said consumers and the financial system.
Such Regulatory Sandboxes have already been established recently in a number of jurisdictions including the UK, and results were very favourable according to the respective national competent authorities. Some advantages of the sandbox include the facilitation of innovation, ensuring effective investor and consumer protection, enhancing the firm’s understanding of regulatory expectations as well as knowledge sharing.
The sandbox is useful for both established incumbent financial services providers and new entrants, including start-ups, scale ups, and technology firms. In order to be admitted for testing within the Regulatory Sandbox, applicants must ensure that their proposed solution satisfies a set of eligibility criteria.