Financial Instrument Test

Financial Instrument Test | Papilio Services Limited

Financial Instrument Test

The Maltese Virtual Financial Assets Act (VFAA) requires Issuers, VFA Agents and Licence Holders to determine whether a DLT Asset qualifies as electronic money, a financial instrument, a virtual financial asset or a virtual token.

This initial test must be carried out prior to the submission of a whitepaper (in connection with an initial VFA Offering, commonly referred to as an ICO) to the MFSA or the provision of a VFA Service in relation to DLT Assets who have yet to be classified in accordance with a Financial Instrument Test (eg DLT Assets issued outside Malta).

An Issuer is any legal person which issues or proposes to issue virtual financial assets in or from within Malta. A VFA Agent is a person registered with the Malta Financial Services Authority (MFSA) and authorised to exercise certain functions in terms of the VFAA. A Licence Holder is a person holding a licence under the VFAA.

In the case of an Issuer, the Financial Instrument Test must be approved by its board of administration and endorsed by its VFA Agent.

The requirement to test is ongoing, in that it needs to be undertaken if any features of a DLT Asset changes during its lifecycle.

There are three stages to the test:

1. The User and DLT Asset Details

The User (ie the person completing the test) must input his/her own details and that of the DLT Asset.

2. The DLT Asset Determination

The test includes a sequential process in order to determine the particular type of DLT Asset as either a Virtual Token, a Financial Instrument, Transferable Security, Money-Market Instrument, Unit in a Collective Investment Scheme, Financial Derivative, Asset as an Emission Allowance, Electronic Money or a VFA.

Virtual Token

In order to determine whether a DLT Asset qualifies as a Virtual Token, Users will have to consider criteria including exchangeability, convertibility and purpose. An Asset which is intended to be listed or admitted on a DLT Exchange, either locally or abroad, will normally not qualify as a Virtual Token.

Transferable Securities

In order to determine whether a DLT Asset qualifies as a Transferable Security, Users will have to consider criteria including exchangeability, maturity, rights attached to the Asset and whether it can be considered an instrument of payment. Instruments of payment cannot be classified as a Transferable Security (but can potentially be Electronic Money).

Money-Market Instrument

In order to determine whether a DLT Asset qualifies as a Money-Market Instrument, Users will have to consider criteria including maturity, rights attached to the Asset, accurate valuation method and whether it can be considered an instrument of payment. Instruments of payment cannot be classified as a Money-Market Instrument (but can potentially be Electronic Money).

Unit in a Collective Investment Scheme (CIS)

In order to determine whether a DLT Asset qualifies as a Unit in a CIS, Users will have to consider criteria including purpose and arrangements.

Financial Derivatives

In order to determine whether a DLT Asset has features of derivative contracts, Users will have to consider not only the DLT Asset but also any underlying contract in relation thereto and criteria including contract type, underlying assets and settlement. A determination must also be made with regard to what type of Financial Instrument/Currency (in relation to MiFID) the derivative relates to.

Emissions Allowance

In order to determine whether a DLT Asset qualifies as an Emissions Allowance, Users will have to consider criteria including the Issuer and Directive 2003/87/EC.

Electronic Money

In order to determine whether a DLT Asset qualifies as Electronic Money, Users will have to consider criteria including issuance and redemption, claim on the issuer and purpose.

3. The Declarations

The Declarations are the determinations made as a result of the test. These must be signed by the VFA Agent in case of Issuers, the Compliance Officer in case of Licence Holders or the VFA Agent or Legal Advisor in case of unlicensed persons.

The MFSA has adopted a substance-over-form approach with regards to the test and the focus will be on the characteristics of the Asset rather than on the designation/s used.

The test must be submitted to the MFSA in soft copy (.xlsm and .pdf formats) and in original, duly signed.

For more information or help to complete a Financial Instrument Test, please contact us on info@papilioservices.com