3rd July | JP Fabri
Parliament approves Crypto & Blockchain legislation: A milestone in Malta’s journey to becoming a ‘Blockchain Island’
It was just over a year ago that the Maltese government claimed that Malta had the potential to ‘trail-blaze’ its way to a blockchain future, breaking rank as a ‘frontline country’ in this innovative space. Last week, Parliament approved three cryptocurrency and blockchain bills which will in a very real sense translate the hype that initially greeted these statements into an exciting reality. The stage is now set for the blockchain revolution to begin.
This article will give an overview of these three pieces of legislation.
The first legal act, the Malta Digital Innovation Authority (MDIA) Act, is key in that it establishes the national regulatory body that will drive the industry forward within a transparent and structured framework. The MDIA will oversee the voluntary certification of innovative Technology Arrangements (TAs), such as smart contracts or cryptocurrency platforms, and the registration of Technology Service Providers (TSPs).
Calls for crypto regulation have continued to increase amid the sector’s explosive growth, the most recent being voiced by the G20 finance ministers at their meeting in Argentina last May. The industry itself also seems to be taking a position that effective regulation is welcome, on the basis that reducing the unknowns that have characterised the sector in the past will better inform their investment strategy while hopefully improving the public perception of, and possibly participation in, the crypto asset market. Malta’s clearly defined regulatory framework is therefore very positive, particularly since it clearly defines a holistic framework that sets it apart from the piecemeal approach adopted so far in so many other jurisdictions. A clear example of this is the provision made in the Act for setting up a Joint Coordination Board, bringing in all other national competent regulators such as the financial services regulator (MFSA) and the gaming regulator (MGA), to join all the regulatory dots while avoiding any duplication or overlap.
The second Act, the Innovative Technology Arrangements and Services (TAS) Act, expands on the regulatory remit of the MDIA and sets out the framework for TSP registration and TA certification. Essentially, this means that DLT platforms and related smart contracts can be registered and receive a seal of compliance from the MDIA. The conditions against which this certification will be granted include qualifications, experience, sufficient technical resources and support as well as whether the service provider is ‘fit and proper’ for the declared provision of services.
This brings us to the third piece of legislation, the Virtual Financial Assets (VFA) Act, which is probably the most eagerly anticipated of them all. This Act creates the basis for the regulation of Initial Coin Offerings (ICOs) and Token Generation Events (TGEs) as well as Exchanges and other intermediary services relating to cryptocurrencies. The VFA Act will cover services such as brokerage, portfolio management, custodian and nominee services, investment advice and the operation of cryptocurrency exchanges. The regulatory yardstick adopted is whether an exchange deals with coins or tokens that are categorised as virtual financial assets. This will be determined through a Financial Instrument Test set up to differentiate between three types of DLT assets:
- Financial Instruments falling under the MIFID II Directive (‘security tokens’) : these fall outside the scope of regulation;
- Virtual Tokens (i.e. not traded on exchanges and without any value outside the DLT platform on which it Is issued): these fall outside the scope of regulation;
- Virtual Financial Assets: used as instruments of payment and therefore regulated under the VFA Act.
In defining this new category of Virtual Financial Assets, ‘instruments of payment’, the Act is carving out a niche area that is to date unregulated under MIFID and which can therefore be regulated through the Act. The determining factor applied in identifying these assets is that the token needs to have a payment function for a service or a good and must not establish a claim on the issuer. Further details on the Test should be revealed in a rule book that the MFSA is expected to issue in the coming months.
The unanimous parliamentary approval of these three Acts, which in a uniquely integrated fashion provide the legal certainty that the industry has been seeking, is a milestone in Malta’s reinvention as a leading blockchain and crypto hub. The fact that in the same week the Government announced the appointment of the MDIA’s first CEO indicates that it has every intention of maintaining the momentum by getting the regulator fully operational as soon as possible. The coming months should see a number of key actions taken in this regard.