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On 26th June 2018 Malta passed a package of three rules aimed at regulating blockchain technology on a global basis, ranging from the launch of ICOs (Initial Coin Offerings) to cryptocurrency exchanges. It could be said that giving a legal framework to blockchain technology and the economic ecosystem that surrounds it is a pioneering initiative. The objective is to build a regulatory framework which offers legal security to those already operating and those who intend to operate in this field, fostering investments and the development of a new economy.

Of the three rules, in this article we intend to briefly analyze the Maltese Law on Virtual Financial Assets (VFA) as a form of interpreting the regulation of activities related to this type of assets.

The law defines virtual financial assets (VFA) broadly and by contrast:  any form of digital registration means, which is used as a medium of exchange, unit of account, store of value and which is NOT:

a) electronic money

b) a financial instrument

c) an electronic token, also known as a “token”

On the other hand, and for the purposes of separating VFA from other digital assets, it classifies Distributed Ledger Technology – DLT-  Assets into the following categories:

a) virtual tokens

b) a virtual financial asset

c) electronic money (understood as the monetary value magnetically stored, for the payment of transactions, accepted by persons different to the institutions which issue them)

d) a financial instrument

Malta has opted for establishing a control system prior to the launch of public offers of VFAs or their trading on DLT exchange markets. Therefore, it is not a matter of a system limited to the mere supervision on the part of the authorities, but a genuine prior authorisation.

We must point out that when dealing with operations with “e-money” the issuer must comply with financial legislation and shall not be subject to said virtual financial assets law.  In this way, the law distinguishes between the nature of e-money and cryptocurrencies, whereas the first case refers its regulation to the legislation of financial institutions when considering it an expression of fiat currency, cryptocurrencies are interpreted to be an VFA and their launch is subject to the rules set forth in this law.

One of the initial principal practical applications of this law shall be in relation to the issue of ICOs. Both in this case and in the case of the launch of other VFAs, it shall be necessary for the applicant to file before the competent authority a document clearly explaining the keys to the offer, in a standardised format, so that potential investors may know what the offer consists of, the inherent risks, the identity of the issuer and the nature of the offered VFA.

That said, the launch of a VFA may not be carried out directly by an issuer, the law also makes it obligatory to hire a VFA agent, duly recognised and registered as such in a special, public registry, and they may be lawyers, auditors, accountants or other corporate service providers, who are registered either in Malta or in another country. The trading of VFA or DLT without complying with the requisites of this regulation is prohibited, which restricts and filters the possibility of launching VFA offers, due to the cost of the agent and the time dedicated to the preparation of the documentation required before the launch.

Likewise, the Government shall control the identity and access of the issuers from the outset, given that the law shall not allow just any individual to present themselves as a VFA service provider  unless they are in possession of an administrative licence. The application for a licence must be made only through a VFA Agent.

Likewise, the holders of licences to operate with VFA in the market must observe the rules of management, have security systems, liability insurance policies, sufficient capital and adequate financial resources in place, etc. Finally, the licence is reversible and implies the annual payment of certain taxes.

An administrative organ will always ensure compliance with the rules, it may withdraw licences, initiate proceedings, fine offenders and even take control of the issuer of the VFAs and suspend or withdraw the assets themselves from the market.

As a control measure, the licence holder must appoint an auditor, responsible for reporting to the competent authority regarding any deviation from the regulations or circumstances, which, in their opinion puts continuity as an operator at risk.

Malta’s legislative effort cannot be denied, but we must ask ourselves whether this is going to help the VFA industry to flourish. The doubts lie in the exhaustive nature of the regulations and the rigidity of the authorisation system, far from the essential spirit and nature of the VFAs, and its promotors. On the other hand, the obligatory intervention of agents and auditors brings the model more in line with the issue of IPOs and conventional financial assets, in such a way that it ends up perpetuating the existence of financial intermediaries and puts this new market in the hands of the large traditional operators, who benefit from the financial and human resources to comply with the legal requirements, which is not the case with the new entrepreneurs, who are excluded from the circuit or who must place themselves in the hands of third parties in order to take their initiatives forward.

In summary, the existence of a regulatory authority may have beneficial effects on and offer guarantees to investors, because of their control and policing functions, but the down side of the legislative initiative is the large number of charges and conditions for launching VFA offers, as well as the obligatory participation of financial intermediaries. The treatment seems to us to be over-regulated, costly and slow, little in keeping with the current dynamics of the market, which may prevent a sound and diversified development of VFA offers.

13th July 2018

Eduardo Vilá

For more information, please contact va@vila.es

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