The past decade has seen Malta embark on a journey of technological evolution and increased connectivity with the rest of the world through which we have seen a boom in the sector known as ‘Fintech’ (short for ‘Financial Technology’). Malta has gained a solid reputation as a prime European financial services hub for funds and fund managers. Following this, the question is: how does Malta Internet Law regulate, or seek to regulate the most prominent sectors of the ever-growing Fintech industry? These sectors include Payment Services, Electronic Money Institutions, Bitcoin Businesses, and Crowdfunding.
Malta Payment Services Sector
The number of Payment Services Providers in Malta has reached significant growth over the last few years and Malta has become a destination of choice for the set-up of Payment Service Providers. Activities which fall within the scope of a PSP are: execution of payment transactions, issuing and/or acquiring of payment instruments, and money remittance. Contrastingly, it is not allowed to receive deposits or other repayable funds from the public and must use funds exclusively to provide payment services.
- Payment Services Directive (PSD 1)
The Payment Services Directive is a European Directive which came into force in 2009, and it regulates payment services and payment providers throughout the EU and EEA. This directive aims to guarantee the same rules all over the EU, clear information on payments, fast payments, consumer protection, and a wide choice of payment services. It covers all types of electronic and non-cash payments, including credit transfers, direct debits, card payments, and mobile and online payments. It introduces a new category of payment service providers other than banks – ‘payment services’. Moreover, a single payment area allows citizens and businesses make cross-border payments as easily and safely as they would in their own countries, and further to this, cross-border payments are subject to the same charges as domestic payments.
- Payment Services Directive 2 (PSD 2)
In 2015, the EU adopted a new directive on payment services which will become applicable across all member states in 2018. PSD 2 seeks to improve the existing rules and take new digital payment services into account. It includes provisions to make the use of internet payment services easier and safer, to better protect consumers against fraud, abuse, and payment problems, to promote innovative mobile and internet payment services, to strengthen consumer rights, and strengthen the role of the European Banking Authority (EBA) to coordinate supervisory authorities and draft technical standards.
The Malta Financial Institutions Act transposes the Payment Services Directive, and licence holders and authorised by the Malta Financial Services Authority (MFSA), a strict regulator that requires adherence to high European standards. At the same time, the MFSA retains an open mind to new ideas and prides itself in being approachable.
In order to obtain a Payment Services Licence, one needs to pass a “fit and proper test”; shareholders, directors, and senior staff members must demonstrate solvency, competence, and integrity in all their dealings. Application criteria include the completion of application documents, settling the initial licence application fee of €3,500, and a capital requirement of €50K-€125K (depending on the services provided).
Moreover, there is also a requirement of local presence: there must be a minimum of 3 directors, amongst which one must be Maltese, and there must be a minimum of 2 local operational staff members, a local MRLO and Compliance Officer. Eventual office space in Malta is also a requirement.
There are numerous factors which have contributed to the growth of this industry in Malta, the main being an approachable regulator (MFSA) that has rapidly built a sound understanding of the industry, low operational costs and a competitive fiscal environment, skilled English speaking professionals, sound ICT infrastructure, and the ability to offer payment services cross border throughout the EU on the basis of a Malta payment services licence without the need of further licences or authorisations.
How can we help? Our firm has a dedicated financial services regulatory team that has assisted a number of Malta payment services operators with their local set up procedures. We provide assistance with the preparation of all application documents, manage correspondence with the local regulator, and advise on regulatory, tax and corporate matters.
Interested in setting up as a PSP? Let us give you a call
Malta Electronic Money Institutions
Malta, with its state-of-the-art telecoms infrastructure, as well as over 250 I-gaming companies established in Malta which require payment services and e-wallet institutions, has naturally attracted a number of Electronic Money Institutions. These include either established operations in Malta or passported to Malta from other EU member states.
One question remains: what makes Malta so attractive? The Malta licence for e-Money Institutions allows such institutions to start operations with a lower capital requirement when compared to a full banking licence.
EMIs in Malta are regulated under the Malta Financial Institutions Act which transposes the Electronic Money Directive.
In assessing an application for the obtainment of an Electronic Money Institutions, the MFSA carries out a “fit and proper” test on the applicant. For the purpose of this test, the shareholders, directors and senior staff members must demonstrate solvency, competence and integrity in all their dealings. Furthermore, the MFSA sets out criteria for the application of an e-money institution in Malta, including completion of application documents, settling the initial application fee of €3,500, and a capital requirement of €50K-€100K for small EMIs and a minimum of €350K for regular EMIs.
There are numerous benefits to setting up such an institution in Malta. Malta offers highly effective corporate and personal tax rates as well as the opportunity to provide an EU wide service through the passporting regime (excl. small EMIs). Ultimately, the cost of setting up and running a business in Malta is considered to be amongst the most effective in Europe, not to mention that due to its stable financial services sector, it is an apt domicile setting for Electronic Money Institutions.
Let us help you set up your EMI. Contact us here.
Malta Bitcoin Businesses
Bitcoin is a digital currency which makes use of peer-to-peer technology to operate without a central authority. It is a technology which enables functions not possible when using other payment systems. The management of transactions and the issue of bitcoins is carried out collectively by the network. Based on both common and new technologies, Bitcoin is an extension to traditional currency and is the fastest growing currency in the world, with the equivalent of over $800million in circulation.
The Bitcoin currency operates through a system known as “blockchain” which resembles a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly. Participants make use of technology based on peer to peer verification and hold complete records of all transactions. This creates a de-centralised clearing house, with the disintermediation of banks, financial institutions, verification authorities and so on.
Since the Blockchain system, and more specifically, the Bitcoin currency is increasingly growing in use and popularity, there is now a much greater need to regularise this sector through specific legislation. This is exactly what the Maltese government is currently aiming for - In April 2017, Malta’s Prime Minister revealed that cabinet has approved the first draft of a national strategy to promote blockchain, the Malta Blockchain Strategy. Blockchain is the technology underlying the Bitcoin crypto currency and other fintech solutions. This Malta blockchain plan has the single purpose of making Malta one of the first countries in the world to embrace blockchain. The strategy does not focus merely on cryptocurrencies but also encompasses blockchain technology implemented in the Lands Registry and the national health registries. The draft strategy will soon be forwarded for public consultation.
Malta seeks to pioneer a change at EU level, with the ultimate aim of transforming the EU into a ‘Bitcoin continent’. Currently, various proposals are underway. A blockchain committee was set up which will formulate a strategy geared towards addressing this emerging technology. Additionally, the Malta Gaming Authority is making plans to introduce cryptocurrency technology to Malta’s already thriving iGaming sector, and plans to set up a national betting exchange where bets can be hedged. The Maltese government is committing itself to developing the most appropriate regulatory framework, the right tax system and the best infrastructure to support this ambition.
Blockchain is the next big thing. Contact us to see how it can benefit your business.
Malta Crowdfunding
What is Crowdfunding? Crowdfunding is the raising of finance for the development of a product or the carrying out of an endeavour. This is done through a large group of small contributors (‘the crowd’) usually via a web platform and it permits entrepreneurs to promote their projects to the public. The economic rationale is to channel finance towards small, innovative start-ups that may be perceived as too risky by financial institutions.
There are four major recognized business models:
- Donation based: people give money to activities or products they want to support
- Rewards based: people give money to receive a reward, service or product (e.g. a limited edition version of the video-game they are backing)
- Loan based: people lend money to individuals or businesses in the expectation of a return in the form of interest and capital repayments
- Investment/Equity based: people invest directly or indirectly in new or established businesses by acquiring shares or debt securities, or units in a collective investment scheme
Upon analysing the relevant legislation related to financial services, one would think that Crowdfunding would be regulated by the Financial Services Act and the Investment Services Act. However, both these sets of legislation pre-date crowdfunding as a viable source of finance and do not adequately address the specific concerns raised by the sector. There is thus an evident lacuna, which needs to be addressed through a rule book which deals with specific concerns and challenges being raised by this new phenomenon.
Nonetheless, the Crowdfunding Business Model is burdened with a number of key concerns:
- Suitability and appropriateness: financial regulation requires operators to assess the suitability and appropriateness of financial products to the needs of investors. The rulebook will need to identify ways in which the market can remain accessible to the retail investors that are the backbone of the service while protecting such investors from taking imprudent risks with their money. What could prove efficient in this context is to limit on the portion of their net worth that inexperienced investors may invest via crowdfunding.
- Public offer of securities: the offering of securities (such as shares and bonds) to the public is an activity which is subject to stringent regulation. While such regulation is healthy and necessary, it may not be proportionate to the circumstances of businesses seeking to raise finance through crowdfunding platforms. Our law already provides for a number of exemptions from the rules associated with a public offer of securities; any further flexibility would be welcome and helpful in this context.
- Investee due diligence: reputable crowdfunding operators already seek to carry out due diligence on investees that are promoted on their platform in order to protect their reputation. Sensible regulation should seek to formalize this market practice, but without raising the bar so high that crowdfunding becomes inaccessible to the technology start-up niche that is most in need of it.
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An Overview
All in all, Malta Internet Law seems to be evolving and adapting to the fast-paced innovations in the Fintech industry. Malta is compliant to the relevant directives when it comes to Payment Services and Electronic Money Institutions through its strict but approachable regulator MFSA. The Maltese government also aims to be a pioneer as regards the Blockchain phenomenon with its proposed blockchain strategy which shall regulate this industry in the most efficient and comprehensive manner possible. The next logical step is to develop a rulebook addressing the concerns raised by crowdfunding and the current lacunas in the legislation. Our firm is dedicated towards providing assistance both in the setting up of these institutions and to provide the latest knowledge on any legislative progress.
