Financial Instrument Test
The financial instrument test is a key component of the new virtual financial assets regulation that has been passed in Malta and has been introduced by the regulator, the Malta Financial Services Authority to determine if a proposed distributed ledger technology (DLT) asset falls within the definition of a Virtual Financial Asset (VFA) and to determine the licensing route if applicable for that asset. The financial instrument test is several tests that look to establish the core characteristics of the DLT asset and to establish if the DLT asset qualifies as electronic money, a financial instrument, virtual financial asset or a virtual token. The test will be applicable to all ICOs, VFA agents and licence holders.
A virtual token is defined within the Virtual Financial Assets Act as “any form of digital medium recordation that is used as a digital medium exchange, unit of account, or store of value and that is not electronic money, a financial instrument or a virtual token”. If the financial instrument test determines that the DLT asset qualifies as a virtual token under the Virtual Financial Assets Act, then it should be deemed to be outside the scope of the VFAA and thus not have a licencing requirement.
The financial instrument test also seeks to establish if the virtual financial asset could be deemed to be a financial instrument under the relevant MiFID legislation. A DLT asset will be deemed to be a financial instrument falling within the scope of MiFID if it qualifies as a transferable security, a money market instrument, a unit in a collective investment scheme, a financial derivative or an emission allowance. If the virtual financial asset qualifies as a financial instrument under the definitions and rulings of MiFID then it would need to be licenced under a different regulatory regime, the Investment Services Act.
However, if the DLT asset is not deemed to be a financial instrument as outlined above or does not qualify as Electronic Money, then it is likely the virtual financial asset will qualify as a virtual financial asset and within the scope of the Viatual Financial Assets Act.