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Thursday, 15 February 2018

Malta's Proposals On Regulating Virtual Currencies, ICOs etc - Updated

The Malta Financial Services Authority, like other regulators, is in the process of consulting on the policy it proposes to adopt for regulating virtual currencies, the process of issuing them ("Initial Coin Offerings" or "ICOs") and the service providers involved. The MFSA has proposed new legislation that would extend create an additional regime beyond the scope of existing securities and investment regulation, to cover virtual currencies that are not deemed to be financial instruments and therefore already caught by existing laws.

The MFSA published a “Discussion Paper On Initial Coin Offerings, Virtual Currencies And Related Service Providers” in November 2017 and consultation ended on 18 January 2018. The MFSA is yet to finalise its policy or any proposed statute.

The MFSA clearly wishes to support innovation and new technologies for financial services, while ensuring effective investor protection, market integrity and financial stability.  

It’s proposed approach to classifying types of “digital currency” reflects the Blockchain Policy Initiative Report of July 2017 and an European Securities and Markets Authority statement from November 2017.  This contrasts “virtual currency” with “E-money” which is the digital representation of a fiat currency; and defines three types of virtual currency (any of which might also be cryptographic currencies operating on distributed ledger technology or DLT): 
  • “utility tokens” (providing only platform or application utility rights or access rights);
  • “securitised tokens” (embedding an underlying asset/commodity or rights, like quasi-shares or bonds); and
  • “Coins” (that are intended to be, or have become, a means of payment). 
The MFSA is proposing to seek the adoption by the Maltese Parliament of a Virtual Currencies Act to regulate virtual currencies:
  • that constitute “financial instruments” (under a test to be devised), by confirming they are subject to existing EU and national financial services regulation; and
  • those that do not qualify as financials instruments, by making them subject to new “similar high level regulatory principles on transparency and merit-based regulation as those currently applicable to securities seeking a listing on a regulated market” – although they will be deemed “complex instruments” so their regulatory treatment will be akin to how such instruments are regulated under MiFID. 

Persons involved in activities related to virtual currencies would need to be "'fit and proper', have the competence, sufficient knowledge and expertise, experience, business organisation and systems necessary in the field of information technology, VCs and their underlying technologies, including but not limited to DLT."

Providers of investment services will need a separate licence to provide services in support ICOs etc in relation to virtual currencies that do not qualify as financial instruments under existing laws; and will need to set up a dedicated subsidiary for that purpose. 

All persons subject to the Act would also be subject to anti-money laundering requirements. 

There are specific proposals to regulate issuers, exchanges and investment funds (and other collective investment schemes) that deal in virtual currencies that do not qualify as financial instruments. 

Banks and payment service providers would be permitted to extend their activities to such virtual currencies, but only for clients and under a separate subsidiary licensed under the Act. 

But reinsurers, insurers and pension schemes would still be prohibited from dealing in virtual currencies for their clients or their own account. 

Update 22.02.18: The Maltese government has published a further consultation in response to submissions received on the MFSA discussion paper, which "presents a conceptual framework through which DLT Platforms can be subject to certification in Malta" which will extend to issuers of ICOs and certain service provides dealing in virtual currencies. Consultation responses are due by 9 March 2018.

Three new pieces of legislation are proposed:
  • The MDIA Bill will provide for the establishment of an Authority to be known as the Malta Digital Innovation Authority.
  • The TAS Bill will set out the regime for the registration of Technology Service Providers and the certification of Technology Arrangements.
  • The VC Bill will set out the framework for ICOs and the regulatory regime on to the provision of certain services in relation to VCs. The intermediaries subject to the VC Bill include brokers, exchanges, wallet providers, asset managers, investment advisors and market makers dealing in VCs.