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7.2.2018

Maltese Parliament approves World First DLT Legislation

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Summary

The Maltese Parliament has unanimously approved three bills which shall regulate cryptocurrencies and blockchain/DLT regulation in what can be considered the World First DLT Legislation which is fully comprehensive. One can expect these bills to become law soon.

cONTINUE rEADING

This week, the Maltese Parliament made history when it unanimously approved three bills regulating cryptocurrencies, related service providers and initial coin offerings at second reading. Unanimous approval shows that both the Government and Opposition are convergent on salient issues which marks an important milestone in the reality of Malta as the Blockchain Island and also represents a world first in DLT legislation. Moreover, the unanimous agreement allows us to positively assume that there shall be no undue delays in the bills’ journey to become Law. 

World 1st Fully Comprehensive DLT Legislation 

The momentum gained by Cryptocurrency and DLT/Blockchain technology is now in full swing, yet few countries have taken the leap to provide a legal framework within which enterprises and investors can feel safe operating in. In the race among various jurisdictions to become the first to regulate such disruptive technologies, Malta stands out as the first country globally to draft an in-depth legal framework which seeks to put an end to a legal vacuum that has held back several investors from seriously considering cryptocurrencies and initial coin offerings (also known as ICOs or token generating events) as potential investment options. 

Malta stands as a trailblazer in this sector, surpassing even Germany and Switzerland in this regard. Although other jurisdictions such as the Isle of Man have already promulgated legislation, no other country apart from Malta has delved into detail and attempted to tackle some of the most controversial aspects of these disruptive technologies which reaffirms Malta’s determination to become the hub of choice for anyone seeking to set up a Blockchain or Cryptocurrency related business. The Maltese legislator, together with the Malta Financial Services Authority (MFSA), are often praised for their ability to create a framework within which businesses can thrive because innovation is not stifled, but at the same time, they operate within a fully regulated framework which is fully compliant with EU law.

 

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The Three Bills on Cryptocurrencies & Blockchain 

Malta Digital Innovation Authority Act - CEO announced

Malta has indeed taken on the challenge head first and is currently in the process of establishing the Malta Digital Innovation Authority (MDIA) by virtue of the Malta Digital Innovation Bill, one of the three bills currently in Parliament. Parliamentary Secretary for Digital Innovation Silvio Schembri has also announced that Mr Stephen McCarthy shall be taking on the role of CEO at the MDIA. The Authority will be responsible for ensuring that the highest industry standards are respected and business in Malta shall be conducted as honestly and transparently as possible. The MDIA will also be responsible for the certification of technology arrangements and the registration of Technology Service Providers.

Innovative Technology Arrangements & Services Act

The legislator has also felt the need to set out a regime for the registration of Technology Service Providers and the certification of Technology Arrangements. This was done through the Innovative Technology Arrangements and Services Bill. 

The Virtual Financial Assets Act

The third bill, entitled The Virtual Financial Assets Bill has drawn significant interest since it shall regulate the issuing of ICOs and cryptocurrencies in general. Besides taking into account their volatility in the market, cryptocurrencies have also caused significant confusion among practitioners due to the fact that there are no straightforward definitions for a token or a cryptocurrency because different tokens or cryptocurrencies will have differing properties that makes them particularly difficult to categorise. The lack of categorisation becomes even more poignant considering the fact that several tokens or cryptocurrencies have the properties of financial instruments and would be circumventing the proper legislation under the guise of their virtual nature. Indeed, several investors and enterprises remain hesitant to start operating due to the fear of non-compliance.

The Financial Instruments Test

Malta has sought to give clarity on the matter through its Virtual Financial Assets Act by creating the Financial Instruments Test (the 'Test'). This Test defines all cryptocurrencies and tokens as DLT assets and classifies them into three categories: virtual tokens, financial instruments and virtual financial assets.

Firstly, the Test will determine whether the DLT asset can be considered as a virtual token and would fall outside the scope of regulation. A virtual token is a token which does not have any value outside of its platform and thus cannot be traded or exchanged outside of its platform. A ‘utility token’ would generally be considered as a virtual token. 

Secondly, the Test will enquire whether the DLT asset qualifies as a financial instrument under MiFID and the local Investment Services Act. A ‘security token’ would generally be captured under the aforementioned legislation. 

Thirdly, if a DLT asset cannot be classified as a virtual token or as a financial instrument, it will be captured by the new Virtual Financial Assets Act once it becomes law and will be considered a Virtual Financial Asset. 

 

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Our Fintech Practice

Our lawyers and financial services specialists at Chetcuti Cauchi Advocates provide bespoke solutions to clients by combining the traditional legal fabric with new technologies. Our Fintech Practice strives to assist clients in this burgeoning and evolving sector of law, which is set to reshape the financial services sector as we know it.

If you would like more information as to how the Financial Instruments Test may impact your business once you set up in Malta, or are interested in the setting up of a DLT company, an ICO, a cryptocurrency exchange, or alternatively, would like to set up a Crypto Fund in Malta, we welcome you to get in touch with our specialists

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